6 Top Tips for Selling Taxable Assets: Christine Benz

Investors who are freshly retired are facing a “triple-whammy” of lower stock prices, lower bond prices and higher inflation, says Christine Benz, Morningstar’s director of personal finance.

The current market environment is demonstrating in no uncertain terms the paramount importance of addressing sequence of returns risk, she said Tuesday in a phone interview.

Benz spoke with ThinkAdvisor about the ongoing impacts of market volatility on retirement investors and the significant opportunities afforded by tax-efficient spending strategies.

“If you are a retiree or near-retiree right now and you haven’t prepared your portfolio to weather this moment, you are in a difficult position,” Benz says. “Ideally, you would have already set up a portfolio strategy such that you can draw on a bucket of liquid assets today without having to sell securities at this point in the market.”

For those clients who find themselves fully exposed to sequence of returns risk, Benz says, one thing they can do is try to reduce expenses and withdrawals as a temporary solution, in the hope that markets will bounce back relatively quickly. This is obviously not an ideal solution, and for many clients it will in fact not be viable.

“Unfortunately, the impacts of inflation make cutting back all that much harder,” Benz says, noting that this is a teachable moment for advisors with younger and middle-age clients. “There are different approaches out there for helping younger clients prepare for moments like this in the future, and it is important to talk about them early on. I am an enthusiast of the bucket approach, for example.”

Benz says investors tend to respond favorably to the bucket strategy, because it helps them keep losses in the growth side of the portfolio in context.

“If people have their short-term cash flow needs taken care of, then they tend to have that important peace of mind about market volatility,” Benz says.

Benz has also found that a bucketing approach — in which investors hold perhaps one or two years in liquid, safe assets, complemented by two other buckets dedicated to middle-term and longer-term wealth accumulation — helps people feel confident to spend more than they otherwise might.

“A bucketed strategy gets them off of this mindset where they are just obsessed with subsisting on current dividends and income,” she notes. “Especially when rates were so low, people would construct odder and odder portfolios in the pursuit of yield, simply because they didn’t want to spend principal.”

Benz says one silver lining of the higher inflation environment is that the growth of interest rates, while damaging to bond prices in the short term, presents a good opportunity to lock in higher yields. She says the current environment puts a further spotlight on the need to make tax-efficient decisions when selling assets to fund spending.

In that vein, Benz shared her top tips for selling taxable assets in an efficient manner. See the slideshow to read her key insights.

1. Use specific share identification cost basis information to exert the greatest control over the tax bill upon asset sale.

As Benz explains, the term “cost basis” simply refers to what a client paid for an investment, including all brokerage fees and any other trading cost. This information matters because the capital gain or loss realized in a specific securities sale will be the difference between the cost basis and the price at which one sells their securities.

As an investor participates in the equity markets, each block of shares he or she purchases is likely to have a different cost and holding period, Benz explains. When it comes to the sale of securities, in turn, the investor can pick and choose among the high- or low-cost shares — and among the long- or short-term shares — with the goal of minimizing capital gains taxes.

Depending on the specifics of the situation, an investor can realize substantial tax savings by strategically managing which shares they are selling at a given moment. Doing so successfully will require careful recordkeeping and monitoring on the part of the investor and their advisor.

As Benz points out, one tricky aspect of this approach is the fact that, if the client uses mutual funds and has previously used the “cost averaging” method when selling, they will likely need to stick with that strategy. This approach is far simpler to utilize, but it will likely result in tax inefficiency.

(Image: Shutterstock)

2. Make decisions about which tax lots to sell on a year-to-year basis based on the client’s personal tax situation.

According to Benz, in a high-tax year for a given client, selling high-cost-basis shares can make a lot of sense. In lower tax years, on the other hand, selling low-basis lots can be a better fit.

“Broadly speaking, if someone is in the decumulation phase of retirement planning, this strategy should help to dictate which assets they choose to sell,” Benz says.

As Benz points out, in a low-tax year, one in which the client earns less than normal or happens to have a lot of deductions that are not expected to recur, it can make a lot of sense to prioritize sales of assets from tax-deferred accounts.

In all cases, to achieve tax efficient asset sales, Benz says, it is important for advisory professionals to be communicating and collaborating with the tax professionals who are also serving their clients.

(Image: Shutterstock)

3. Keep estate goals in mind.

Generally speaking, Benz says, highly appreciated taxable assets can be excellent for heirs to inherit due to “step-up.”

The concept of step-up refers to the fact that, if a person upon their death owns taxable assets that have appreciated meaningfully since purchase, and if the persons’ heirs inherit them, the cost basis of the assets will be effectively reset to the value of the security upon the asset owner’s date of death.

As an example, Benz points to an example where a client owns some $100,000 in Alphabet shares, which they had originally purchased for $10,000. Upon the original asset owner’s death and the inheriting of the assets by the next generation, the tax burden associated with that $90,000 in appreciation essentially washes out.

“So, as you can see, this can be a really tax-efficient means of transferring wealth to the next generation, if the cash value of the assets is not needed during the client’s lifetime,” Benz says. “Ultimately, it is worth thinking about long-range plans for the assets when deciding whether and when to sell taxable assets. This strategy can be so advantageous from a tax standpoint.”

(Image: Adobe Stock)

4. Take advantage of tax-loss selling in depressed markets.

Benz says another important topic to understand is “tax selling” or “tax-loss selling,” which refers to a type of sale in which an investor sells an asset with a capital loss. The goal is to lower or even entirely eliminate the capital gain realized by other investments, for income tax purposes.

While tax-loss selling can but a powerful tool, Benz says, it is important to understand that it actually depresses the cost basis of owning a specific security, assuming the investor makes new purchases of the asset in question in order to maintain their portfolio allocation.

“This strategy is highly relevant right now, considering where the markets have moved this year,” Benz says. “Tax selling is a silver lining in a declining market, but as noted, it is not a free lunch.”

(Image: Adobe Stock)

5. Consider taxable assets as part of the charitable giving strategy.

According to Benz, taxable assets can form an important part of a client’s plans for charitable giving, thanks to the same cost-basis reset mechanism that benefits heirs in an inheritance event.

In this setting, Benz says, donor-advised funds are a “terrific” avenue for charitable giving, supplying clients with tax reduction opportunities on several fronts.

“For example, if your client donates securities that have appreciated, the gain associated with those securities is washed out, and the client won’t owe taxes on the gains,” Benz says. “In fact, they may even be able to receive a deduction for the amount they give to the donor-advised fund, depending on the circumstances.”

Benz says this is a great tool for dealing with relatively illiquid securities, for example sizable holdings in employer stock that have appreciated meaningfully in value over a long period of time.

(Image: Shutterstock)

6. Consider tax gain harvesting.

Benz notes that, if a client has strongly performing securities in their portfolio, conventional wisdom says to delay collecting the capital gains as long as possible.

Generally, this allows clients to defer payment of capital gains taxes if they find themselves in a lower tax bracket when they do sell, which is often the case.

However, as Benz says, this rule of thumb is not universally applicable. By strategically selling some high-performing investments, a client could actually help reduce future taxes and create a more balanced portfolio.

(Image: Shutterstock)

6 Top Tips for Selling Taxable Assets: Christine Benz

John Manganaro

Managing Tax-Efficient Withdrawal Strategies for Retirement

More on this topic

At Schwab-Linked DAF Provider, Grants Surge 31% in 2024

6 Traits of People Passing Down Wealth in Next Decade

5 Secrets for Reaching Affluent ‘Legacy Leavers’

After 25 Years, Schwab Charitable Has a New Name

1. Use specific share identification cost basis information to exert the greatest control over the tax bill upon asset sale.

2. Make decisions about which tax lots to sell on a year-to-year basis based on the client’s personal tax situation.

3. Keep estate goals in mind.

4. Take advantage of tax-loss selling in depressed markets.

5. Consider taxable assets as part of the charitable giving strategy.

6. Consider tax gain harvesting.

6 Traits of People Passing Down Wealth in Next Decade

7 Surprising Facts About Giving From Donor-Advised Funds

12 Most Expensive Retirement Towns

15 Countries With the Most Millionaires: 2024

Featured Resources

Unlocking the Value of Financial Planning

The Cash Opportunity for Advisors

Selling a Major Business Asset & Achieving Philanthropic Business Objectives at the Same Time

All About MYGAs: Primer for RIAs

6 Top Tips for Selling Taxable Assets: Christine Benz

Share with Email

Thank you for sharing!

More on this topic

1. Use specific share identification cost basis information to exert the greatest control over the tax bill upon asset sale.

2. Make decisions about which tax lots to sell on a year-to-year basis based on the client’s personal tax situation.

3. Keep estate goals in mind.

4. Take advantage of tax-loss selling in depressed markets.

5. Consider taxable assets as part of the charitable giving strategy.

6. Consider tax gain harvesting.

Featured Resources

Connect with ThinkAdvisor