How to deal with taxable holdings with large gains

[Bruno]

With my wife still working I am able to fund my ROTH $8000 each year. Can I call Fido and use those funds with a lot of LTCG and tranfer the shares to my Roth?

 

[Texas Proud]

The big question would be how much in in the 22% bracket.... if a lot is there then maybe not as much you can do about it...

I would think about getting rid of as much as possible using the ROTH as that is saving 22% on all withdrawals... but if your regular IRA is huge then RMDs will hurt you in the future...

 

[BubbaChris]

disneysteve, I'm not particularly well educated on this, but we have similar issues. One idea to consider is being 'lumpy' with either selling your shares that have big gains, or with making contributions to a Donor Advised Fund. To me being 'lumpy' means strategically not having each year similar to the last or next year.

Going big one year on the sales would likely put your ACA costs into 8.5% of your income. Likely way more in premiums than possible, but maybe you can free up an extra year or two's cash.

Going big one year on DAF contributions could make itemizing worthwhile.

Kind regards,
Chris

 

[SevenUp]

With my wife still working I am able to fund my ROTH $8000 each year. Can I call Fido and use those funds with a lot of LTCG and tranfer the shares to my Roth?

No. Roth contributions have to be in cash.

 

[SevenUp]

I could sell like 10K worth of shares each year and have about 4.5K in LTCG as a result. That wouldn't be enough extra income to have any significant impact on things overall (ACA subsidy, etc.). I would set aside 15% of the gain for taxes and use the rest for spending.

Probably need to set aside more than 15% if the ACA premium tax credit is affected. Roth Conversion and Capital Gains On ACA Health Insurance is a good resource.

 

[rmcelwee]

How do I best approach starting to sell off some of those holdings? For example, we own one fund that is worth about 198K of which around 90K is gains if we were to sell it all today.

Do I just start selling it off gradually to not take too big a tax hit in any one year?

You didn't say what your spending requirement was or if you had any other income. If you can live off that $198K, just sell the entire fund for a $0 federal tax. Pretty easy stuff. We are trying to build a house so we have a huge income requirement. I'm leaving all my big LTCG stocks (we have a ton at 3300% profit) for future years where selling that will be my only income (with zero tax). Don't forget about state tax when you do this. I got hit for late fees one year because I screwed that up.

 

[disneysteve]

If you can live off that $198K, just sell the entire fund for a $0 federal tax. Pretty easy stuff.

How could I have zero tax on $90,000 in capital gains?

 

[rmcelwee]

How could I have zero tax on $90,000 in capital g

Search for zero LTCG. There are a ton of articles on it that explain much better than I can. Here is an example: https://www.cnbc.com/2023/11/14/how...d-still-pay-0percent-capital-gains-taxes.html

 

[USGrant1962]

How could I have zero tax on $90,000 in capital gains?

There is a 0% LTCG bracket up to $89,250 for MFJ. Add on the $29,200 standard deduction and you have zero tax on $118,450 of LTCG, assuming no other income.

 

[disneysteve]

There is a 0% LTCG bracket up to $89,250 for MFJ. Add on the $29,200 standard deduction and you have zero tax on $118,450 of LTCG, assuming no other income.

I have heard about that but never looked into the details. Thanks. The hard part is there's no way to know what our CGs will be for the year until late December when funds pay out their distributions. I guess once that happens, I'd have a few days to sell anything I want to and still be under that limit.

We have other taxable income so I'd have to balance that all out. And the final numbers aren't known until the end of the year.

 

[jollystomper]

I have heard about that but never looked into the details. Thanks. The hard part is there's no way to know what our CGs will be for the year until late December when funds pay out their distributions. I guess once that happens, I'd have a few days to sell anything I want to and still be under that limit.

We have other taxable income so I'd have to balance that all out. And the final numbers aren't known until the end of the year.

Starting usually in October, many fund companies start providing estimates of what they will be paying out in CGs later in the year. That might give you a few more months of planning time to see the impact and then decide what the appropriate action will be. We usually have threads here that pop up in October on that topic, and there is another site referenced by these threads, which I am too lazy to search for now, that tracks all companies releasing that information.

 

[rmcelwee]

Starting usually in October, many fund companies start providing estimates of what they will be paying out in CGs later in the year. That might give you a few more months of planning time to see the impact and then decide what the appropriate action will be. We usually have threads here that pop up in October on that topic, and there is another site referenced by these threads, which I am too lazy to search for now, that tracks all companies releasing that information.

Go to the link below. VERY helpful to me when quickly figuring out taxes. IRS & State Tax Calculator | 2005 -- 2024

 

[TheWizard]

I have heard about that but never looked into the details. Thanks. The hard part is there's no way to know what our CGs will be for the year until late December when funds pay out their distributions. I guess once that happens, I'd have a few days to sell anything I want to and still be under that limit.

We have other taxable income so I'd have to balance that all out. And the final numbers aren't known until the end of the year.

Looks like you're talking about Capital Gains Distributions (CGDs).
These generally come from managed funds, not index funds.

For most people, it's best to hold only index funds in your taxable account. If you want to hold managed funds, hold them in tax-deferred and Roth accounts.

In that situation, with no CGDs in taxable, you can do Tax Gain Harvesting at any point during the year, typically around the time indices are pushing all time highs.

Hope this helps...

 

[disneysteve]

Looks like you're talking about Capital Gains Distributions (CGDs).
These generally come from managed funds, not index funds.

For most people, it's best to hold only index funds in your taxable account. If you want to hold managed funds, hold them in tax-deferred and Roth accounts.

In that situation, with no CGDs in taxable, you can do Tax Gain Harvesting at any point during the year, typically around the time indices are pushing all time highs.

Hope this helps...

I understand that but 30+ years ago when we started investing index funds weren’t nearly as prevalent as they are today and ETFs weren’t around at all. We’ve got 6 figures in managed funds in taxable accounts. We haven’t added to them for many years as we shifted to index funds but we still own them.

 

[disneysteve]

Starting usually in October, many fund companies start providing estimates of what they will be paying out in CGs later in the year. That might give you a few more months of planning time to see the impact and then decide what the appropriate action will be. We usually have threads here that pop up in October on that topic, and there is another site referenced by these threads, which I am too lazy to search for now, that tracks all companies releasing that information.

Yep. I have followed those threads. They are helpful but not 100% plus we have other income. I won’t know my exact year-end eBay income, for example, until midnight on 12/31. I’d be fine with a close enough estimate though.

 

[audreyh1]

Looks like you're talking about Capital Gains Distributions (CGDs).
These generally come from managed funds, not index funds.

For most people, it's best to hold only index funds in your taxable account. If you want to hold managed funds, hold them in tax-deferred and Roth accounts.

In that situation, with no CGDs in taxable, you can do Tax Gain Harvesting at any point during the year, typically around the time indices are pushing all time highs.

Hope this helps...

Index funds still pay out dividends (mostly qualified), usually a very small percentage, so these contribute to your AGI and reduce the amount for capital gains to stay within the 0% cap gains tax threshold.

I understand that but 30+ years ago when we started investing index funds weren’t nearly as prevalent as they are today and ETFs weren’t around at all. We’ve got 6 figures in managed funds in taxable accounts. We haven’t added to them for many years as we shifted to index funds but we still own them.

Over many years I’ve been reducing the managed funds in our taxable account as opportunities arise.

 

[Al18]

I would start selling some of your actively managed funds in a brokerage account. Especially if there’s room in the 0% LTCG bracket - no taxes!

 

[kgtest]

If you don't need the money leave it to heirs and they will get a stepped up basis at death.

Bingo. Optimize the best you can, but beyond avoiding income reporting requirements, you will never report 0 for the ole LTCG coming out of your taxable. Maybe part of the "home of the brave" part of the song?

 

[disneysteve]

Over many years I’ve been reducing the managed funds in our taxable account as opportunities arise.

I file this under the "If I knew then what I know now" category.

 

[audreyh1]

I file this under the "If I knew then what I know now" category.

Well you still can, bit by bit.

 

[disneysteve]

Well you still can, bit by bit.

That’s the plan.

 

[Marc]

I have about 500K in QQQ with a basis of $50K. In Texas when one spouse dies the other gets stepped up basis at that time. So, our plan is to not touch this until the first dies. The other option is to figure out a year (or maybe multiple years) prior to RMD where we do not need more than 100K of living expenses to sell this when we can get 0% capital gains. Currently our income needs put us in 24% tax bracket so way too high for 0% capital gains. I guess my wife is going to get a fair bit of tax free income when I die.

 

[Bruno]

I have about 500K in QQQ with a basis of $50K. In Texas when one spouse dies the other gets stepped up basis at that time. So, our plan is to not touch this until the first dies.

When one dies WHO does the step up basis? Is something Fido, Schwab or VG does after they are notified?

 

[SecondCor521]

When one dies WHO does the step up basis? Is something Fido, Schwab or VG does after they are notified?

The custodian will adjust their basis records once you notify them of the death (usually with a copy of the death certificate). They need to know the date of death (and the residence states of the couple, I suppose) to do the step up properly.

Technically, the beneficiary taxpayers could do it themselves, but nowadays most people rely on the custodian to track and report the basis properly for them.

Note that the step up in basis at death behaves differently between community property states and non-community property states, and of course how the assets are titled, and possibly some other esoteric details.

 

[disneysteve]

Search for zero LTCG. There are a ton of articles on it that explain much better than I can. Here is an example: https://www.cnbc.com/2023/11/14/how...d-still-pay-0percent-capital-gains-taxes.html

Just to be clear, this is based on taxable income and not adjusted gross income, correct? If the former, that's good news. Our taxable income for 2023 was just under 105K and will definitely be lower for 2024 since I'm retiring in a few weeks. We should be able to stay under $94,050. It would be great if we could sell off a chunk of taxable holdings without triggering Federal capital gains tax. We'd still have state taxes to deal with but that's a lot better than Fed and state.