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: 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.
By Liz Weston
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.
By Liz Weston
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.
By Liz Weston
Dear Liz: I have a retirement account at work and a stock portfolio. Both are down significantly this year and I’m tired of losing money. What are the safest options now?
Answer: Before the “what” you need to think about the “why” and the “when.” Why are you investing in the first place? And when will you need this money?
If you’re investing for retirement, you may not need the money for years or decades. Even when you’re retired, you’ll likely need to keep a portion of your money in stocks if you want to keep ahead of inflation. The price for that inflation-beating power is suffering through occasional downturns.
You won’t suffer those downturns in “safer” investments such as U.S. Treasuries or FDIC-insured savings accounts, but you also won’t achieve the growth you likely need to meet your retirement goals. In fact, you may be losing money after inflation and taxes are factored in.
Also keep in mind that if you sell during downturns, you’ve locked in your losses. Any money that’s not invested won’t be able to participate in the inevitable rebounds after downturns. Plus, you may be generating a tax bill, since a stock that’s down for the year may still be worth more than when you bought it. (You don’t have to worry about taxes with most retirement accounts until you withdraw the money, but selling stocks in other accounts can generate capital gains.)
The exception to all this is if you have money in stocks that you’re likely to need within five years. If that’s the case, the money should be moved to investments that preserve principal so the cash will be there when you need it.
By Liz Weston
Dear Liz: Your recent column about proprietary funds confused me. You mentioned that selling these funds can trigger capital gains tax. Is it not true we can move investments directly from one money manager to another and not take a capital gain as long as the funds remain invested?
Answer: If you can move a fund from one investment company to another, then it likely is not a proprietary fund. For example, Schwab, Fidelity, Vanguard and many other firms create funds that bear their names, but these investments can be bought and sold at other brokerages.
Proprietary funds, by contrast, typically lock customers into investments that can’t be transferred to another firm. To get your money out, you have to sell the fund, which can trigger a tax bill. This is a significant downside and one investors should understand before committing their money to this type of fund.