At What Point Should I Take the Tax Hit on Unrealized Gains?

Benjamin, nearing retirement at 65, faces a familiar dilemma with his taxable account housing expensive mutual funds. Despite their underperformance, converting to low-cost index funds entails a significant tax hit due to long-held appreciable value.
James explains weighing the immediate tax consequences against the risk of holding onto underperforming assets. He also provides a framework for assessing risk, identifying options, and making decisions based on personal financial goals.
Questions Answered:
How can you decide whether to sell underperforming mutual funds or continue holding onto them?
What factors should you consider in determining whether converting to low-cost index funds aligns with your financial goals and risk tolerance?
=======================
Learn the tips & strategies to get the most out of life with your money.
Get started today → www.rootfinancialpartners.com/
Get access to the retirement software I use in this video and more → retirement-planning-academy.m...
🔔 Make sure to subscribe here to be notified for future videos!
/ @rootfp
_ _
👥 Make sure to connect with us on all socials below → beacons.ai/rootfinancialpartners
⏱Timestamps:⏱
0:00 - Listener question from Benjamin
2:17 - Tail wagging dog?
3:52 - Benjamin’s situation
5:31 - WCS of selling vs not selling
11:17 - Be careful about tax drag
12:47 - Rethinking the break-even point
14:11 - Consider your goal for the money
17:17 - Identify the bigger risk
19:26 - Make your decision
20:26 - Will your tax situation change?
24:20 - Consider staggering sales
28:21 - Summary
Other videos we think you'll like:
About Root: • Financial advisors wit...
Worried about retirement?
Start here: • Worried About Retireme...

[@blueberryma]

As always, rather than telling what to do, James tells us how to think it through. One key point I think is to know what you are going to do with the money you raise by selling the equities. That greatly affects your decision. I also appreciate how James points out the hidden costs of holding a high expense fund.

[@daveschmarder-1950]

I spent several years slowly realizing gains on long held mutual funds. Last year, I sold my last one I wanted to sell. I kept my tax bracket low because I was thoughtful enough to change investment seats without tipping the tax boat. I have one fund left, but I like that one, even if it throws off a lot of taxable distributions. Now I'm doing Roth conversions.

[@chrislastname3167]

Excellent reminder on how to frame the situation.

[@dforrest4503]

Nice video. I’ve been thinking about this as well.

[@FIRE_DrNinjaTurtle]

Thank you so much. This is perfect timing as I had this question about my Aunt’s investment account

[@RootFP]

Glad it was helpful!

[@steveking8548]

WHO uses the Wilshire 3000 as a measuring stick??? The S&P 500 is ALWAYS the measuring stick!

[@philshelleyruch1033]

Another consideration is that window of opportunity between retiring and collecting SS to do Roth conversions-which is of greater value? Gain harvesting or Roth conversion??

[@keithmachado-pp6fv]

I have had a brokerage account for 40+ years and never recognized $1 of capital gain, although I do get regular qualified dividends that I reinvest mostly taxed at zero and I take my $3k per year loss against ordinary income. Although I have a large unrealized gain, I also have a high basis, therefore by selling high cost shares will allow me to withdraw some of the shares with minimum gain and the rest will go to my heirs with a step up in basis.

[@bradsalz4084]

Taking $1M over multiple tax years to stay under tax bracket thresholds could require 10 - 20 years to completely liquidate the position. Maybe OK for a diversified mutal fund/ETF, especially if it's a low-cost index ETF. But if it's a single stock, the volatility could result in a sale with a lower after tax net gain than selling all at once and paying the the tax at one go. I have this exact situation with a position in NVDA I've held since 2011. Over 99% of the sale will be taxable and the stock has a high beta. Just fell 5% today. Wouldn't take many such days for my losses to equate to the entire tax liability. Then again, it has had several 50% drops peak-to-trough during the time I've owned it. . There's no right answer that doesn't require a crystal ball, only expectations and probabilities.

[@jameswitte5676]

Long term capital gains do not push you into the next tax bracket. Don’t forget the 3.8% net investment tax and IRMAA if you’re 63 and over.

[@cashflow68]

As usual, a very helpful video. Im 68 and retired and been using the "gain harvesting" in my brokerage account. I make sure Im under the threshold. Thank you for your videos.

[@markb8515]

James, thanks for another very informative video. The video was perfect timing because I'm in a similar situation with one stock that I own.

[@RootFP]

Glad it was helpful!

[@markbernhardt6281]

I believe if you leave stocks to your heirs they will get them at face value with no tax owed because the cost basis is reset. It's a very old tax loophole. I learned about this because my aunt had an annuity with a cost basis of 32% and nobody could take advantage of the loophole. Takeaway: don't get an annuity if you have no intention of spending any of the money.

[@sbs5130]

There are a few stretch annuities that allow for part-gains and part-cost-basis distributions.

[@boba.1801]

Great video as always, but the camera was shaking too much in this video. I was getting dizzy. LOL

[@josephroberts7374]

How would age affect a person's decision, in regards to step up basis, when you die and your beneficiaries inherit?

[@RB-hl3ux]

😊lookin Good😊 Great video

[@Robert-wb9tx]

The worse case scenario for holding on to the funds I believe is a none issue. He stated that he would want to move the money to index funds that would have similar returns. So that worse case scenario would most likely apply to those funds as well. Given that he is in the 20% cap gains bracket he subject to the 3.8% NIIT. Also given his tax bracket I’d have to believe that he has a significant portfolio outside of these four funds. So he is probably not relying on these funds to be his main source of retirement income. So I doubt that he would be able to get down into the zero percent bracket upon retirement. I feel that you were tossing in a lot of irrelevant variables into this analysis for his situation.

[@John-hq6em]

The tax drag you mention around 11:40 is IMO is by far the worst problem with mutual funds, forcing you to pay capital gains every year rather than allowing you to choose when to recognize the gains. But it makes me wonder if Benjamin’s information on his cost basis is actually correct. If he’s been paying capital gains on these actively managed funds every year due to significant portfolio turnover, I find it hard to believe he’s really still sitting on a $750k gain, since much of the gain was already recognized in previous years. If he’s held these funds for 25 years, before funds were required by the IRS to track/report cost bases, I would want to carefully reconfirm the cost bases. The remaining gain could be much less than $750k.

[@russlavalle]

Always enjoy your videos! Question on the video's scenario: While this person's tax bracket is 20% today, wouldn't it be way higher if they realize the $750k in gains? IE, wouldn't the gains be included in their income for tax determination? Thanks! Russ

[@philshelleyruch1033]

Under current tax law(maybe different after 2025) maximum capital gains tax rate is 20% .

[@Sylvan_dB]

It works the other way - Cap gains are stacked on ordinary income. Long-term cap gains tax rates are different than ordinary income rates. In other words, cap gains won't change your bracket for ordinary income, but ordinary income changes your cap gains bracket.

[@adamfrost9048]

Short term capital gains yes, long term capital gains no because 20% is already the highest.

[@Jl-620]

It’s not really 20% LTCG as to get to that CG tax bracket you already pay NIIT so at least that is already 23.8%. If you add to that losing credits, if any, and potentially AMT, the tax hit is even more. Depending on his situation would need to check if okay to do at once, or partially sell each year, and maybe after retirement when some of it can be at lower CG tax brackets.

[@adamfrost9048]

In the hypothetical situation that you were moving this to an index fund that would have the same gains in the future (he mentioned similar past performance to indexes), you would miss out on the gains of the 20% paid now in taxes that would no longer be invested. Let's say both double over 10 years. If you you pay $180k in taxes now, you are missing out on $180k gains in 10 years. However, you saved 1.3% in fees which was 13k now but by year 10 closer to $26k, so probably in the ballpark of the $180k total. If the funds don't double in 10 years, then taking the tax hit now and going to index funds is the way to go.

[@gabesmith9171]

This is crazy was just thinking about this with my portfolio. Way over performed with a few stocks but don’t know about selling to put in index fund

[@williamperez9827]

Great video ... have you ever considered adding some levity? I think it would go a long way. Probably what makes Ramit so good.

[@dhmagicman]

If it was a million in aapl, nvdia, google would that change your answer?

[@johnj4094]

@RootFP. Hey James was the question from Benjamin’s…… was that Benjamin Graham testing you? On your knowledge or personal opinion advice ? lol

[@RootFP]

😂

[@johnj4094]

Ok now that I had you laugh...Can you please do a More indepth dedicated program about Tax treatment for RSU and also Stock Options exercised? Question: 1) Why would employer hold back and sell The Vests & same day Granted RSU shares to pay taxes when ....then still show on Payroll that also shows Payroll taxes taken out. I thought Reason they held back some shares was to pay payroll Taxes? 2) Exercised Options.. Pay only tax on th Capital Gains? Since employee paid for the shares , so only the gains is taxable ? Thanks @@RootFP

[@johnj4094]

Ok let me try this again... Since had you laugh...Can you please do a More indepth dedicated program about Tax treatment for RSU and also Stock Options exercised? Question: 1) Why would employer although they Held back some shares to pay taxes for Vested & granted RSU ....then still show on Payroll that also shows Payroll taxes taken out. We thought Reason they held back some shares was to pay payroll Taxes? then why again showing o payroll notice taxes ...being taken out or is that just a notice? They show $0.0 deposited however since shares were not yet sold. 2) On Options when Exercised .. Pay only tax on the Capital Gains? Since employee paid for the shares , so only the gains is taxable ? Thanks @RootFP @@RootFP

[@steveking8548]

I would like to see where you're at after 20 years of paying the author of this video 1% of your assets PER YEAR to sweet talk you. Of course, by that time, he's charged your 20% and invested it in his own account (and he's wearing a tee shirt).

[@ChrisKSP]

You've got some sort of wobble going on with your background.