Podcast Summary: Ready For Retirement – "When is the Best Time to Realize Gains in my Investment Account?"

Release Date: April 22, 2025
Host: James Conole, CFP®

Introduction to Realizing Investment Gains

In the episode titled "When is the Best Time to Realize Gains in my Investment Account?" James Conole delves into the complexities of managing investment gains within brokerage accounts. Recognizing that navigating tax implications can be overwhelming, Conole provides listeners with a clear framework and actionable strategies to optimize their investment decisions and minimize tax liabilities.

Framework for Deciding When to Realize Gains

Conole begins by distinguishing between different types of investment accounts, emphasizing that his discussion pertains specifically to brokerage accounts, where realized gains are subject to taxes, unlike tax-advantaged accounts like IRAs or 401(k)s.

Example Scenario:

• Investment Growth: An initial investment of $100,000 grows to $500,000, resulting in $400,000 of unrealized gains.
• Decision Point: Should the investor sell to realize the gains and incur taxes, or retain the investment to avoid immediate tax consequences?

Key Considerations:

1. Portfolio Diversification: If the appreciating asset remains a critical component of a well-diversified portfolio without being overweight, there may be no immediate need to sell.
2. Risk Assessment: Overconcentration in a single asset increases risk. Conole warns, "The risk of not selling can be significantly greater than the tax liability" (10:45).

Tax Impact Example:

• Selling an investment with a 67% appreciation ($40,000 gain) at a 20% federal tax rate results in an $8,000 tax liability, reducing the investment's value to $92,000 post-tax.
• Conversely, maintaining the investment exposes the investor to potential losses exceeding the tax liability savings.

Strategies to Minimize or Avoid Taxes on Gains

Conole outlines several strategies to manage and potentially eliminate taxes on realized gains:

1. Utilizing the 0% Long-Term Capital Gain Tax Bracket

Conole highlights the importance of understanding and leveraging the 0% long-term capital gains tax bracket available to those with taxable incomes below certain thresholds.

• 2025 Thresholds:
  • Individuals: Taxable income under $48,350 qualifies for 0% tax on long-term capital gains.
  • Married Filing Jointly: Taxable income under $96,700 qualifies for the same benefit.

"For 2025, if your taxable income is under $96,700, you are in a 0% long-term capital gain tax bracket," Conole explains (05:30).

Strategy:

• Tax Planning: Realize gains progressively over multiple years to stay within the 0% tax bracket, thereby minimizing tax liability.
• Example: An investor with $100,000 in gains could realize $50,000 each year to benefit from the 0% rate on half of the gains.

2. Charitable Giving with Appreciated Stocks

Gifting appreciated securities instead of cash to charities can provide dual benefits: avoiding capital gains taxes and receiving a full charitable deduction.

*"If you gift appreciated stock, you don't pay any taxes on the gains, and the charity receives the full value of the gift," Conole advises (15:20).

Advantages:

• Tax Efficiency: Eliminates the capital gains tax that would arise from selling the stock.
• Maximized Charity Impact: Charities receive the full market value of the appreciated asset without taxes reducing the gift's size.

3. Gifting to Family Members in Lower Tax Brackets

Conole discusses the potential benefits of gifting appreciated securities to family members who are in lower tax brackets, thereby reducing the overall tax burden on realized gains.

"By gifting appreciated securities to your children who are in a lower tax bracket, you can potentially save significantly on taxes," he notes (20:45).

Implementation:

• Gifting Strategy: Transfer appreciated stocks to family members who can sell the assets at a lower tax rate.
• Outcome: The donor avoids higher tax rates, and the recipient may pay little to no tax on the gains, depending on their tax bracket.

4. Understanding Step-Up in Basis

The step-up in basis provision allows heirs to receive inherited assets at their current market value, effectively eliminating capital gains taxes on appreciation that occurred during the original owner's lifetime.

"If you hold onto your appreciated assets until your passing, your heirs receive a step-up in basis, making those gains tax-free," Conole explains (25:10).

Key Points:

• Tax-Free Inheritance: Heirs are not liable for capital gains taxes on the appreciation up to the date of inheritance.
• Strategic Holding: Especially beneficial for individuals approaching retirement or advanced in age, where the likelihood of passing assets to heirs is higher.

5. Tax Loss Harvesting

Conole introduces tax loss harvesting as a method to offset realized gains with capital losses, thereby reducing overall tax liability.

"By strategically selling underperforming assets, you can offset your capital gains and reduce your tax bill," he states (28:50).

Steps:

1. Identify Losses: Locate investments within the portfolio that have declined in value.
2. Sell Assets: Realize these losses by selling the underperforming investments.
3. Offset Gains: Apply the realized losses to offset the gains, reducing taxable income.

Advanced Strategy: Separately Managed Accounts

For high-net-worth individuals in the highest tax brackets, Conole recommends considering separately managed accounts (SMAs) to implement advanced tax management strategies.

"A separately managed account can help you save significant amounts in taxes through tailored investment strategies," Conole suggests (30:15).

Benefits:

• Customization: SMAs offer personalized investment strategies aligned with individual tax situations.
• Tax Optimization: Professional management can effectively apply techniques like tax loss harvesting and asset location to minimize tax liabilities.

Considerations and Conclusions

Conole emphasizes the importance of aligning investment decisions with long-term financial goals and the overall retirement strategy. He advises listeners to:

• Assess Portfolio Structure: Ensure that high-gain investments do not overly dominate the portfolio, increasing risk.
• Weigh Risks and Benefits: Consider both the immediate tax costs of realizing gains and the potential long-term risks of maintaining concentrated positions.
• Consult Professionals: Always seek advice from financial, tax, or legal professionals before making significant financial decisions.

"Start with understanding the downside of selling and realizing losses, but compare that to the potential downside of not selling," Conole concludes (35:00).

By implementing the discussed strategies—utilizing tax brackets, charitable and family gifting, understanding step-up in basis, and tax loss harvesting—investors can make informed decisions to optimize their investment portfolios and work towards a secure, tax-efficient retirement.

Note: The timestamps provided are illustrative and correspond to sections within the transcript.