Ask Liz Weston

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Investing

Q&A: Can a brokerage sell your stocks without warning?

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Dear Liz: How can I get help after my brokerage’s margin team illegally sold my Tesla and Palantir stock, citing market volatility and not notifying me?

Answer: Just because you don’t like the result doesn’t mean the brokerage acted illegally.

If you took out a margin loan using your portfolio as collateral, the agreement you signed allows the brokerage to sell investments if your account equity falls below a minimum level known as the maintenance requirement.

The firm generally doesn’t have to notify you in advance or let you choose what gets sold. Even if you’re given a deadline to make up the deficiency, the firm can liquidate your investments sooner if it decides waiting creates too much risk.

That’s not all. Brokerages can typically change their maintenance requirements at any time, without notice.

You may have heard the term “margin call” to describe the situation when an account’s equity falls below the maintenance requirement. Some people misunderstand that to mean that the brokerage actually calls you or otherwise gives you warning. That’s not the case.

Carefully read the margin agreement you signed. You can also ask the brokerage to explain in writing what triggered the liquidation.

If you believe there are discrepancies between what the agreement allows and what happened, you can complain to the firm’s compliance department, file a complaint with FINRA or the Securities and Exchange Commission and consult a securities attorney.

Q&A: Should grandparents open their own 529 plans?

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Dear Liz: My two grandchildren are in middle school and are expected to attend college. I’d like to contribute to 529 plans for them, possibly making five years’ worth of contributions at once. Should I contribute to the plans their parents have established, or open separate 529s so I can maintain control? I’m 86 and live in California; my grandchildren live in Oregon. What would you suggest?

Answer: As you know, 529 college savings plans allow you to contribute up to five times the annual gift tax exclusion limit in one year and treat the contribution as if it were made over five years. Since the annual limit in 2026 is $19,000, you could contribute up to $95,000 per child this year without reducing your lifetime gift-and-estate tax exemption. This “superfunding” is allowed whether you set up the accounts yourself or contribute directly to the already-established ones.

To be clear, the five-year rule doesn’t offer a direct tax break to you. But if you’re concerned about estate taxes, the five-year election can get a chunk of money out of your estate. Keep in mind that most people don’t have to worry about estate taxes, as the current lifetime limit is $15 million per person.

You’ll need to file IRS Form 709 to make this election. If you make other financial gifts to the grandkids during the five-year period, you must file gift tax returns to report those amounts to the IRS. And if you die before the end of the five-year period, the portion of the 529 contributions attributable to the years after your death will be added back to your estate. Your estate planning attorney can offer further advice.

If you’re not worried about estate taxes but you’re certain you won’t need the money yourself, you might still make a large contribution now to get the money growing tax-free for your grandchildren’s educations. Or you can simply make annual contributions and either keep them under the annual gift tax exclusion limit or be ready to file gift tax returns if you go over the limit. You won’t owe any gift taxes until your gifts over the annual exclusion exceed that massive lifetime limit.

Now, on to the question of whether to open your own accounts or contribute to the existing ones. Opening your own accounts for the grandkids means you’ll get to maintain control over the funds until they’re needed, plus the money isn’t considered in federal financial aid calculations. Only 529s owned by parents or students have to be reported in the Free Application for Federal Student Aid (FAFSA), although some colleges may use other formulas when awarding their own aid.

Contributing the money directly to the plans already established means the parents will control the funds. On the plus side, that relieves you of the burden of administering the accounts.

Oregon does offer an income-based tax credit for contributions that maxes out at $190 for single filers and $380 for married people filing jointly. Only Oregon taxpayers making the contribution to Oregon educational plans can get the credit, however. If you give the money to the parents rather than directly to the 529 plan, you’ll need to keep gift tax rules in mind since any gift over $19,000 per recipient would need to be reported.

Q&A: Is switching brokerages a taxable event?

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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.

Q&A: What you can expect from a fiduciary advisor

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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.

Q&A: How to track down lost savings bonds

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Dear Liz: My mother passed away two years ago. She left a small mountain of paperwork which my brother, sister and I have finally started to sort through. Among the surprises that we have found is a receipt from a bank for the purchase of $4,500 of U.S. government savings bonds. The date of purchase is one month after the birth of her grandson in March 1992. We suspect that the bond was intended as a gift for the grandson. Is there a way to track down these bonds? Would a receipt from a bank be sufficient to satisfy the Treasury that the bond purchases were valid?

Answer: Savings bonds purchased in 1992 would have already matured and are no longer paying interest. If your mom didn’t cash in these bonds, you may be able to find them through the U.S. Treasury Department’s Treasury Hunt tool. You can find it at https://www.treasurydirect.gov/savings-bonds/treasury-hunt/.

Q&A: How to finance a remodeling project

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Dear Liz: I am doing a small remodeling job to my home that will cost $80,000. I have enough in my investments to withdraw the $80,000. Is it better, tax wise, to get a home equity loan to pay for it?

Answer: Like so many tax questions, the answer depends on your circumstances. How your investments would be taxed depends in part on what account they’re in. Withdrawals from most retirement accounts are taxed as income, and can incur penalties if you take the money out too early.

Withdrawals from regular brokerage accounts also can be taxed as income if you’ve held the investments less than one year. If the investments have been held for more than one year, you can qualify for more beneficial capital gains tax rates. The amount of tax you would pay depends on how much the investments appreciated in value since you bought them as well as your income tax bracket. Most people pay a federal capital gains rate of 15%, although lower income taxpayers can qualify for a 0% rate while higher earners pay 20%.

You may have the opportunity to engage in what’s known as “tax loss harvesting.” That means selling investments that have lost value since you bought them, and using that loss to offset the gains on other investments you’ve sold.

Interest on home equity borrowing, meanwhile, may be deductible if the proceeds are used to improve your home and the combined total of your mortgage debt doesn’t exceed $750,000 for a married couple filing jointly or $375,000 for singles.

To deduct the interest, though, you must itemize your deductions. The vast majority of taxpayers now take the standard deduction of $31,500 for married couples or $15,750 for singles. People 65 and older can take an additional $1,600 per qualifying spouse or $2,000 if single. In addition, people 65 and over can take an additional $6,000 bonus deduction if their income is under certain limits. The bonus begins to phase out for single filers with modified adjusted gross income over $75,000, and for joint filers over $150,000.

That’s the long answer. The shorter answer is that the taxes you’ll pay cashing in your investments are likely to be less, and perhaps significantly less, than the interest you’d pay on the loan. But you’ll need to do your own math, or ask a tax pro for help.