Ready For Retirement
Ready For Retirement
When is the Best Time to Realize Gains in my Investment Account?
If you’re sitting on large investment gains in a brokerage account and wondering whether it’s worth taking the tax hit, this episode is for you. I walk through a clear framework I use with clients to help them decide when—and if—it makes sense to realize those gains.
I also explain several strategies that can potentially reduce or even eliminate the taxes you might owe, including how to take advantage of the 0% long-term capital gains tax bracket, gifting appreciated assets, and tax-loss harvesting. Whether you're approaching retirement or just looking to be more intentional with your investments, these tools can help you make more informed decisions.
Toward the end, I also point to a related video where I explain how a separately managed account may benefit high-income investors with significant brokerage assets.
Questions answered:
1. When does it make sense to realize investment gains in a taxable brokerage account—and when should you hold off?
2. What strategies can help reduce or eliminate the taxes owed on long-term capital gains?
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Timestamps:
0:00 - When not to sell
2:40 - Understand risks on both sides
5:54 - Tax strategies
8:55 - Gifting stocks to charities
11:14 - Gifting to family
12:44 - Understanding step-up in basis
14:18 - Capital losses offset capital gains
15:11 - Wrap-up
Create Your Custom Strategy ⬇️
Are you worried about taking the tax hit on your investment gains and unsure what to do? Well, in today's episode, I'm going to share a very simple framework that will show you when, or even if, you should realize those gains and the way you should go about doing it. This is another episode of Ready for Retirement. I'm your host, james Canole, and I'm here to teach you how to get the most out of life with your money. And now on to the episode. As part of this episode, I'm going to share with you simple ways that you can pay nothing in taxes on some of these gains. This is from Simple Things like taking full advantage of the 0% long-term capital gain tax bracket. Creative ways to gift money to charity to offset the tax impact. Gifting money to children so they can realize some of the gains at their tax bracket. Understanding when you get a step-up in basis on your unrealized gains. And also understanding how tax loss harvesting can help to offset some of this. So I'll talk about some of those, but before I do so, I want to go through the general framework of how you should even think about the gains that you have in your portfolio. You've invested in something, it's grown, and now you're stuck wondering what do I do? Do I take the tax hit or do I keep it going to avoid taxes and maintain the same investment exposure that I already have? And just in case it's not already obvious, what I'm talking about specifically is gains in a brokerage account, not an IRA, a Roth IRA, a 401k. All of those gains are either tax free or tax deferred. I am talking about gains on things held in a brokerage account, where anything that you realize, any gain that you realize, is potentially subject to taxes. So, to start, let's go through the framework of when should you hold onto your investment and avoid paying gains, versus when should you sell your investment and pay taxes on those gains. And we'll do this framework, or we'll go through this framework, before going to some of the ways that you can creatively pay nothing in taxes, potentially, depending on your situation.
Speaker 1:So let's start by looking at an example. Let's assume that you put money into an investment and you've put a total of $100,000 into this investment. It's now worth $500,000. There's $400,000 of unrealized gains here, and if you sell this, those gains are going to be taxable. How do you determine what you should do here? Well, number one, let's start with. When shouldn't you sell that investment? There's not always a case to sell and pay taxes if we can avoid doing so or if there's no need to do so, if that $500,000 investment, so that investment that has 400% gains in it, if you have that investment and you look at your portfolio and you know what your portfolio needs to do for you and you understand or you see that this specific investment is a critical part of that portfolio, there's not necessarily a need to sell If that gain is there and this is still a core part of your portfolio and you're not overweight.
Speaker 1:So, for example, the instance I see quite a bit is people who have invested in large tech stocks. This could be a fund, whether an ETF or a mutual fund, that invests in large cap growth stocks, which tend to be technology stocks, or it could be individual holdings. Maybe you purchased Amazon or Tesla or Microsoft or any of these investments that have done quite well over the past 5, 10, 15 plus years and you have a significant gain in them. If you look at that specific investment and you say this investment plays a critical role in my portfolio and I have a well-diversified portfolio designed to meet my needs and this investment plays a critical role in it, maybe you don't necessarily need to realize those gains. However, if you look at this investment and say it is significantly overweight or it does not play a role in my portfolio, that's where you have to understand the risk of both action and inaction. So what do I mean by that? Well, the risk of action, in this case, selling. So, for example, maybe you have all of your money to use an extreme example in one single stock. I don't care how well that stock is done. It is incredibly risky if all of your net worth is in one single stock or all of your portfolio is in one single stock, specifically as you approach retirement.
Speaker 1:If you are that individual in that example, we have to understand what is your maximum downside by selling and realizing all of your gains. Well, the maximum downside is you pay full taxes on the gains. Depending on what state you're in, that's going to be different At the federal level. There is a 0%, a 15% and a 20% long-term capital gain tax bracket, as well as a net investment income tax when your income exceeds certain thresholds. So at the federal level, if we're just looking at federal long-term capital gain tax rates, the maximum impact is 20%. 20% haircut, not on the entirety of what you sell, but on the gains.
Speaker 1:So if we use another example, maybe you purchase something for $60,000 and it's now worth $100,000. If you sell it all, that's a big gain. That's a 67% appreciation from the 60,000 that you had, growing to $100,000. But you're not paying 20% taxes on everything. You're paying 20% taxes on the gains, at the maximum, potentially 15% if you're not in the max tax bracket there. So in this example, a 20% tax on those $40,000 of gains would be $8,000. So if you sell your investment, if you sold all of it, that would turn from $100,000 into $92,000 in this case. So that's not fun. That's not fun to know that you're going to lock in a loss.
Speaker 1:But let's look at the alternative. What if this $100,000 is in one single stock and that single stock has a lot of gains in it and that prevents you from selling? You don't want to have to pay any of the taxes. Well, now, all of a sudden, that stock declines 40%, 50%, 60%, 70%. The good news is you probably no longer have a tax liability. The bad news is you've lost 70% of your investment in that extreme case. So when you look at potential outcomes.
Speaker 1:What we have to understand is that sometimes I see people avoiding selling an investment because they're avoiding that tax hit. That tax hit is very tangible. They know it exists. They know what they're going to pay. What they're not quite taking into account is what's the risk of not doing this? The risk of not doing this in many cases is significantly greater than the tax liability the tax that they're going to pay and so keep that in mind. Start with understanding what are the real risks here.
Speaker 1:Just because you have a long-term gain doesn't mean you have to sell. In many cases, it's a great strategy to keep that investment, keep that fund as part of your overall portfolio and avoid gains. But if this begins to make up too much of your portfolio or you're heavily, overly concentrated, there's tremendous risk there, and we can't lose sight of the fact that a downturn will be far more detrimental to you in that case than simply realizing some of the taxes would be. So that's a basic framework of how should you think about this. Now let's look at some specific strategies that could eliminate this tax bill altogether. The first strategy is fully utilizing the 0% long-term capital gain threshold, the long-term capital gain tax bracket.
Speaker 1:A lot of people think long-term capital gains, I'm either paying taxes at 15% or 20%, and for a lot of people that. But if your taxable income is under certain thresholds, you have a 0% tax bracket that you can take advantage of to realize long-term capital gains and qualified dividends. Now, qualified dividends I'm going to set aside because you can't control the timing of when you receive these dividends, but you can control the timing of when you realize a long-term gain. For 2025, if your taxable income is under $96,700, you are in a 0% long-term capital gain tax bracket, meaning any long-term capital gain you realize up until that threshold is taxed at 0%. Anything above that threshold is then taxed at 15, and then there's another threshold where anything above that is taxed at 20%. If you are single, those numbers are exactly half above that is taxed at 20%. If you are single, those numbers are exactly half. $48,350 is the taxable income threshold under which you pay 0% federal taxes on long-term capital gains. Now, be mindful of what I'm saying here Taxable income, not adjusted gross income, but your taxable income.
Speaker 1:The difference is if you start with your adjusted gross income and then you take a deduction, either. Your standard deduction, which are 2025, is 15,000 if you're single, 30,000. If you're married, filing jointly, even more. If you're 65 or older. What you do is you take your adjusted gross income, remove or deduct your deduction and then what you're left with is your taxable income. So this is actually good news If you're married, filing jointly, and have the standard deduction, your adjusted gross income and there's some nuance here and there's some details that definitely could change this. I'm just saying this for some perspective, not to say this is a hard and fast number that you should use because there are some details that impact this but an adjusted gross income of $126,700 or less.
Speaker 1:Generally speaking, you're going to be in that 0% federal tax bracket, not a 0% tax bracket for ordinary income. So things like interest that you receive, ira distributions, part of your social security, that's all taxed at ordinary income rates. This is specifically for long-term capital gains. So can you utilize that? Can you leverage that? Can you take advantage of being in that tax bracket? And something that most people do, or many people do, is they might have gains that exceed that limit. So they say, ok, I have $100,000 of gains in my investment account. I am maybe, let's say, for simple math, $50,000 under that threshold. Well, if I realize all 100,000 of these gains this year, 50,000 of them will be tax free, but the other 50,000 will be taxed at the 15% rate. Great, do you realize half of the gains this year and do you realize the other half of the gains the following year? How can you be strategic about the timing of when you realize those gains so that, even if you have some pretty significant gains, can you potentially pay 0% taxes on those by utilizing the 0% tax brackets?
Speaker 1:Another thing that you can do to offset some of the taxes you would owe on a long term capital gain and keep in mind, everything I'm talking about in this episode is a long term capital gain. Short term capital gains those are taxed to ordinary income rates and some of these strategies don't work with short term capital gains. But if you have investment gains, let's assume you purchased Apple stock for $1,000 and it's now worth $10,000 and you want to gift $10,000 to a charity what you could do is you could gift $10,000 cash to that charity, and that's great, that's wonderful. But what might've been better is what if you instead look to gift that Apple stock? Let's assume for a second you're in the 20% tax bracket federally and you're in a state like California and I'm going to round your tax bracket to 10% for easy math. You're in a 30% combined tax bracket, and that's before factoring things like net investment income tax. So 30% might actually be conservative in this case.
Speaker 1:If you're in a 30% tax bracket and you sell an investment with $9,000 in gains, $2,700 of those gains are going to be paid in taxes, so that $10,000 investment doesn't really represent $10,000 to you. It represents doesn't really represent $10,000 to you. It represents, or it's the equivalent of $7,300 to you in terms of its after-tax value. So what if, in this case, instead of gifting $10,000 in cash, what if you gifted that $10,000 in Apple stock or any investment stock? Well, what that does is you don't pay any taxes on the gains, you get the full tax deduction of the $10,000 gift and the charity doesn't pay any taxes on the gains either. So they get the full $10,000 and something that to you was worth $7,300 after taxes now becomes worth the full $10,000.
Speaker 1:To take this a step further, if you say, well, I really like that Apple stock and this is not a recommendation for owning Apple stock, I'm just using this as an example If you say, well, I don't want to get rid of that. Take the $10,000 of cash you otherwise would have gifted to charity and repurchase Apple stock. You now own the same exact number of shares, except now you've stepped up your cost basis. Now the basis on those shares is $10,000, meaning any future sale you do of that stock, you're only paying taxes on the gains above $10,000, no longer paying gains on the gains above $1,000, which was the original cost basis. So if you do any type of charitable giving, it very often makes sense to gift appreciated shares of stock as opposed to gifting cash.
Speaker 1:Another thing you can do is you can gift to family. So let's assume that you're in a position where you want to help children with a home down payment, or you want to give them funds for something, or you want to do something. Well, you could gift cash, like we talked about in the previous example. But what if there's a huge discrepancy between your tax bracket and your child's tax bracket? Well, if, instead of gifting, let's say, $20,000 to your child in cash, what if you gifted highly appreciated securities, knowing that they're in a much lower tax bracket, potentially even the 0% tax bracket? Well, if you gift shares of an investment, whatever your cost basis is assuming there's a gain on those shares you're gifting or they're getting, the recipient is getting the same cost basis.
Speaker 1:So let's use that Apple example again and let's just double the values. You want to give $20,000,. You purchase $2,000 of Apple stock. It's now worth $20,000. Well, if you gift that to your child, they still have that cost basis of $2,000 and they now have the full value, or they still have the same fair market value of $20,000. Well, your tax bracket and again I'm assuming a pretty significant variance between what your tax rate is and what your child's tax rate is. But if you were to sell that, you might be paying 20, 25, 30% total taxes on those gains versus your child. They might potentially be in the 0% tax bracket. They might potentially be even in the 15% tax bracket. So that at least, is a way of selling at a lower tax bracket than yours.
Speaker 1:If you already have the intention of gifting funds to family, so that's another potentially creative use of your long-term capital gain investments if you have the intention of gifting to family. So the next thing that you need to keep in mind is this concept of a step up in basis If these are assets that you intend to pass on to children or grandchildren or other relatives or friends or anyone, there will be a step up on these assets upon your passing. So if we use an extreme example, if you're 89 years old and you know you're probably not going to live past 90 and you've got a lot of money invested and there's a lot of gains, almost never would it make a ton of sense for you to sell all those gains. It might. It probably in many cases makes more sense for you to say, as long as I don't need these funds, I'm not going to sell them, because upon my passing there will be a step up in basis, meaning wherever the fair market value of these securities is on the date of my death, that becomes a new cost basis. So now that becomes tax-free, those assets become tax-free to my heirs.
Speaker 1:And I'm specifically talking here again, just as a reminder, about non-retirement accounts. This could be business interest, this could be property, this could be stocks, this could be any other types of investments that aren't held in IRAs, roth IRAs, 401ks, et cetera. But keep that in mind. Now, in other states, in community property states, if one spouse dies and assets are jointly titled meaning you own a trust account where both of you are grantors and trustees, or you own a joint investment account, a joint account with rights of survivorship. If one spouse passes away, the surviving spouse gets a full step up in basis on the entirety of that. Now, this will vary depending on whether you live in a community property state or a common law state. Every state can be a little bit different here, but there'll be some type of a step up in basis. So really understand how that works in the specific state that you live in.
Speaker 1:And then, finally, the last thing to know here is that long-term capital gains can be fully offset by capital losses. So maybe you have a significant gain in one investment and you know this investment is not a good core piece of your portfolio. You want to diversify out of it. There's a lot of gains, but you have other investments that have losses in them. Can you sell some of those investments that have losses? Wait over 31 days to repurchase those assets so you don't violate the wash sale rules? And then what you're doing is you're realizing those losses to offset these gains.
Speaker 1:This is actually where the concept of a separately managed account can be quite useful if you are the highest tax bracket and if you're anticipating significant gains from the sale of property, real estate, stock investments, etc. I'll actually link out to another video that I did at the end of this that shows if you are in those highest tax brackets and have significant brokerage assets. I did a value to show you the value of a separately managed account and how that can tie into all this. But as we go through this, that's the basic framework that I would look at. To start with, understand the downside of selling and realizing losses, but compare that to the potential downside of not selling if it's the wrong investment, and understanding the loss that could be associated with that. So know how this fits in your plan, understand what you want to do with these assets long-term and then start to see are there strategic things we can do? Whether it's taking advantage of long term capital gain, 0% tax rates, whether it's tax loss harvesting, whether it's gifting, whether it's charitable giving, whether it's any of these things that you can do to diminish or even potentially eliminate some of the long-term capital gain taxes you might owe. Now I mentioned just a minute ago that I'm going to link to a video. Here's a video right here, and in this video I talk about the value of a separately managed account, where, if you're that individual that's in the highest tax bracket and if you're an individual that has pretty significant brokerage assets, business assets, real estate assets, this video is for you and you can see how you can potentially save lots and lots of money in taxes utilizing some of the advanced tax management strategies that are associated with the right separately managed account.
Speaker 1:Root Financial has not provided any compensation for and has not influenced the content of any testimonials and endorsements shown. Any testimonials and endorsements shown have been invited, have been shared with each individual's permission and are not necessarily representative of the experience of other clients. To our knowledge, no other conflicts of interest exist regarding these testimonials and endorsements. Hey everyone, it's me again for the disclaimer. Please be smart about this. Before doing anything, please be sure to consult with your tax planner or financial planner.
Speaker 1:Nothing in this podcast should be construed as investment tax, legal or other financial advice. It is for informational purposes only. Thank you for listening to another episode of the Ready for Retirement podcast. If you want to see how Root Financial can help you implement the techniques I discussed in this podcast, then go to rootfinancialpartnerscom and click start here, where you can schedule a call with one of our advisors. We work with clients all over the country and we love the opportunity to speak with you about your goals and how we might be able to help. And please remember nothing we discuss in this podcast is intended to serve as advice. You should always consult a financial, legal or tax professional who's familiar with your unique circumstances before making any financial decisions.
