Adam M. Grossman | September 6, 2020
TWO WEEKS AGO, I described how to scour your portfolio for holdings that no longer fit your financial plan. At a high level, these investments fail at least one of two tests: Risk. Some investments are just inherently unsuitable or excessively risky. Alternatively, an investment might be perfectly fine, but it represents a big risk simply because you own so much of it. You might have an investment that has chronically underperformed, charges excessive fees or generates large tax bills.
These investments may not be especially risky in the short term, but over time they could erode your financial security. If you hold an investment like this in a retirement account, the solution is easy: You can sell it without tax consequences. But what if it’s in a taxable account, where a sale would trigger a taxable gain? There’s no one-size-fits-all solution.
But here are five strategies that’ll allow you to unload the investment without unleashing a tax bill:
1. Do nothing. While this might not seem like much of a strategy, it’s an option to consider. That’s because—at least under current law—there’s the step-up in basis at death. That means that, when your heirs inherit your assets, they won’t pay any tax on your unrealized gains. While that is hopefully many years down the road, it’s worth keeping in mind.
Here’s why: If you sell an investment at a gain today, you’ll owe some amount of tax. That means it will necessarily take time to break even. Depending on how long that breakeven period is, you might decide it’s worth holding the investment for the long term. This will, of course, depend on the specifics of the investment, your tax situation and other variables. To help weigh these factors, I recommend this free online spreadsheet.
2. Donate it. If you have charitable intentions, there’s no better solution for an appreciated asset. You’ll get a tax deduction. Better yet, you’ll never pay tax on the unrealized gain—that is, the difference between the price you paid and the price on the day you donate it. The best way to do this, in my view, is with a donor-advised fund, which combines tax efficiency, flexibility and simplicity.
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Source: Eyeing the Exit – HumbleDollar
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