Personal Finance

I'm 58, and investing in stocks since the 90s has led me to have over $4 million in my portfolio - which path should I venture down next?

John Seetoo

Published: November 29, 2024 8:43 am

One of the drawbacks of a F.I.R.E. (Financial Independence, Retire Early) high-growth portfolio strategy is the tax ramifications. Capital gains taxes, early withdrawal penalties, passive income taxes, and similar levies from Federal and Municipal governments all take a substantial bite from one’s F.I.R.E. retirement funds upon withdrawal if in a retirement account, or at the end of the year as capital gains taxes if in a standard account. The tax basis can be especially high if the investor has been active from an early age. 

A Nice Problem to Have

Having to deal with handling potentially high capital gains can be considered a “nice” problem to have, since it means one has a large sum in hand, vs. the lack of one. Nevertheless, there is no law that requires one to pay more than the minimum legal tax, so prudent and strategic portfolio management is key to accomplishing that end.

A 58-year-old Reddit poster faced this scenario and identified 3 potential strategies while requesting suggestions from others. A stock investor since 1999, he and his wife are debt free, home renters, with a fully paid-for college student kid who was 2 years away from being independent. Living in the Bay Area, their expenses are $100,000 per year, and he has a self-owned business adjacent to the financial industry.  With a $1.5 million IRA and $3 million in various stocks, he calculates that they have 45x expenses at a 2.2% annual withdrawal rate, but is concerned about taxes. His 3 identified scenarios were:

1. Take a chance that his portfolio, which includes Amazon, Apple, and Netflix, among others, will continue to grow, and just let it ride.
2. Take the Federal and California Long Term Capital Gains Hit of over 30% and just convert everything to index funds. However, he thinks that he can minimize the Capital Gains tax and render the Net Income Investment Tax (approximately 3.8%) to zero by taking $100k expenses and filing jointly.
3. Switch the stocks into a customized exchange fund from Cache, which tracks the NASDAQ, for added diversification. 

Inside and Outside the Box Strategies

As far as the portfolio is concerned, the poster may wish to entertain some of these following tweaks on his above scenarios:

• Rather than liquidating his entire holdings for an index fund, perhaps find an index fund that he likes and then model the ratios of his current portfolio to match, especially since his stocks are commonly held in a majority of growth oriented index funds. The excess funds can then be invested in other asset classes, like fixed income bonds or funds, real estate, precious metals, or international funds. This would be conducted gradually, to minimize capital gains taxes.
• Selling out of the money covered calls on a monthly or quarterly schedule can lower the cost basis of the stocks without liquidating them, and limit taxes to the 1099 income from the option premiums. 
• Start transferring stock allocations he wishes to retain as contributions into the IRA, while using investable excess cash for diversification into other asset classes.

Some of the strategies that stand apart from the portfolio itself, but could be worth consideration, although consulting with a tax specialist for California is advised, would be:

• Since the poster owns his own business, he might want to consider using some of the stock sales proceeds to purchase property, like a condo, from which he can also set up a home office. He could then take substantial deductions against the capital gains to reduce or even eliminate the tax basis for that year. He could likely afford a larger down payment, thus making a mortgage qualification easier.
• Subsequent mortgage deductions can potentially offset future capital gains from any additional stock sales.
• Additionally, owning real estate would give him home equity for retirement, which affords other financing options in retirement, if ever needed.
• If he needs an additional major deduction to offset future capital gains, a new car purchase for his business may also be worth a consideration, along with the amortization deductions that could be used against future capital gains.

This article is intended to be informational only. A professional tax accountant should be consulted for more in-depth advice. Take this quiz to see if you are on track to retire. ^(Sponsored)