Get smart with your money
Dear Liz: Just moving your holdings from one broker to another should not trigger any capital gains implications if you journal over your stocks, bonds and mutual fund holdings without liquidating anything. Right?
Answer: Right, unless you’ve been sold a proprietary investment that can’t be moved to a competitor. Some brokerages create their own funds that have to be liquidated before the money can be transferred.
Dear Liz: I read in a recent column that you mentioned qualified longevity annuity contracts (QLAC). I have heard about them before but don’t know the pros and cons about them. Is that something that you could write about in a future column?
Answer: QLACs are complicated enough to be beyond the scope of this column, but you can read an excellent summary by Morningstar’s Christine Benz at https://www.morningstar.
QLACs are deferred, fixed-income annuities that pay out guaranteed income once you’ve reached a certain age (up to age 85). You can buy them with IRA money, up to a certain lifetime limit ($210,000 per individual in 2026). The amount you put into the annuity is excluded from required minimum distribution calculations until payouts begin.
Guaranteed income and reduced RMDs are definite “pros,” but buying one of these annuities is typically an irrevocable decision — you can’t get your money back if you need it for something else. Fixed-income annuities are also vulnerable to inflation, and it’s important to find a strong insurer, since you’re essentially buying a promise of future payments. Ideally, you’d hire a fiduciary, fee-only advisor to review the contract and your situation to make sure it’s a good fit before you buy.
Dear Liz: We are in our 70s and have owned a home in the San Francisco Bay Area for 30 years, so as you might imagine we have a sizable capital gains issue. We are starting to think about a “next step.” While I understand we would have a $500,000 exclusion and can “back out” any improvements, we would still be looking at a pretty hefty number.
We’ve had some people tell us that we would be able to take advantage of a one-time exclusion for the whole gain, but I certainly haven’t been able to find anything about this. I know if we purchase another home in California, we can keep our existing property tax basis, but in the scheme of things, that’s not a major benefit.
Any idea what these folks might be talking about?
Answer: They’re talking about an option that disappeared not long after you purchased your home. Some people are under the illusion that the old tax break still exists, because versions of this question seem to hit my inbox at least once a year.
Before Congress changed the law in 1997, homeowners could defer taxes on home sales by purchasing another house of equal or greater value. Those 55 and older could take a one-time exemption of $125,000.
That was replaced by rules allowing homeowners to exempt up to $250,000 each (or $500,000 for a married couple), limits that haven’t been updated since.
When the law was passed, few home sellers had enough capital gains to worry about exceeding the exemptions. Consider that the median home sale price in the Bay Area was just under $300,000 in 1997. Last year, the median was about $1.2 million.
A sizable capital gain doesn’t just deliver a painful tax bill. Your Medicare premiums may also temporarily increase, thanks to IRMAA, the income-related monthly adjustment amounts.
One more thing: please don’t dismiss the value of California’s Proposition 19, which allows homeowners aged 55 and over to transfer their property tax basis to a new home.
Your property tax bill is dramatically lower than what you’d pay if you were buying into your neighborhood today. That’s thanks to California’s earlier Proposition 13, which limits annual property tax increases.
A home purchased for $300,000 30 years ago probably has an annual property tax bill today of around $7,000. That same house, if purchased now for $1.2 million, would generate a tax bill of around $15,000.
Your ability to transfer your tax basis means you can save thousands of dollars annually for the rest of your life. That would be a huge benefit in most people’s scheme of things.
Dear Liz: This is concerning the couple in their 70s who were persuaded to move their nearly $2-million retirement portfolio to a different broker, resulting in a capital gain of $184,000 and a capital gain tax bill for $50,000.
The question I wonder is whether the $184,000 capital gain also kicked them into a higher Medicare premium bracket (which you frequently warn your readers about) or whether they were already in the higher bracket for other reasons (i.e. the amount of their annual required minimum distribution, plus the size of their Social Security or pension benefits).
The problem with their new broker is that this couple seem surprised to learn they would have a capital gain and a sizable capital gain tax bill by transferring their portfolio from their existing broker to the new broker. Shouldn’t the new broker, with its “fiduciary” duty, have warned them that they would incur a huge capital gain and a sizable capital gain tax bill and also checked to see what the influence of the capital gain would be on this couple’s Medicare premium (if any)?
Answer: The couple did not say they were surprised by the tax bill. They said their accountant was not pleased, which apparently caused them to question their decision.
Let’s define some terms. “Broker” in this context typically refers to a stockbroker. Stockbrokers normally aren’t fiduciaries, meaning they’re not required to put their clients’ best interests first. Instead, stockbrokers are usually held to a lower “suitability” standard, which means they can recommend investments that aren’t the best option for their clients as long as those investments aren’t actually unsuitable.
Registered investment advisors, on the other hand, are fiduciaries. This couple’s new RIA should have explained why the investment sales were necessary and detailed the costs, including the tax bill and any affect on Medicare premiums. The RIA should have explored other options as well, such as leaving the portfolio alone or extending the investment sales over multiple years. The RIA would have recommended a course of action, but would execute whatever plan the couple ultimately chose.
Dear Liz: My wife and I are blessed to have a very significant income from real estate holdings that will provide us with almost enough money to live on very well for the rest of our lives. That leaves retirement accounts and Social Security as mostly discretionary or extra income.
Currently, we have 90% of our retirement accounts and Roth accounts in stock. I figured that, given our situation, we can afford the risk. We have the other 10% in an annuity. Just curious to know what you think of our aggressive position. Is it foolish, and should we be more conservative, such as having a portion in bonds?
Answer: Another question to ask is, “If I don’t need to take this risk, why should I?”
Most people need the growth that stocks offer to achieve their long-term goals, such as a comfortable retirement. Even in retirement, people typically need at least some exposure to stocks to offset inflation. To get that growth, investors must endure the inevitable downturns when markets slide. But why take on more risk than you need?
Also consider that real estate income isn’t typically guaranteed. While real estate and stocks aren’t closely correlated in the long run, both can be affected by economic crises. It might be painful to see your main source of income drop along with your stock portfolio.
A balanced portfolio likely would offer more modest returns but sounder sleep the next time the stock market swoons. This would be a great topic to discuss with a fee-only, fiduciary financial planner.
Dear Liz: I read your column about qualified charitable distributions, where you can send a required minimum distribution to a charity so the RMD won’t be taxed. I have a donor-advised fund and would like to know if I can put my RMD into that, rather than send it directly to a charity. The funds in my donor-advised fund eventually get distributed to charities.
Answer: Sorry, but qualified charitable distributions can’t be made to a donor-advised fund. The RMD must go directly from your IRA to a qualifying charity to avoid taxation.
To recap, QCDs are available to people 70½ who can contribute IRA funds to charity (up to $111,000 in 2026). The distribution is not included in the donor’s taxable income and can count toward any required minimum distributions.