Question: I'm 58 and just sold some stock to lock in gains and reduce risk. I made a killing, but I know I'll have a huge tax bill. What's my next move?
Answer: Despite a steep market decline that occurred in April on the heels of President Donald Trump’s tariff announcement, it would be fair to say that the typical investor is probably quite pleased with their portfolio’s year-to-date performance. Many people have been sitting on significant gains since January.
You might, however, be looking to capture some of those portfolio gains before the market takes a turn for the worse — something it’s historically done in September. Shedding risk in your portfolio is something you might also be inclined to do if you’re nearing retirement and seeking peace of mind.
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Given the year the market has had, if you’re 58, selling off some stocks ahead of the typical September slump isn’t a bad idea.
The problem? It could result in a huge capital gains tax bill.
If that’s something you’re worried about, here’s your game plan.
Focus on tax-advantaged accounts
While it may be a good time to capture some gains in your portfolio, you may not relish a huge IRS bill to follow. If so, Aaron Brask, a financial planner at Aaron Brask Capital, advises that when rebalancing a portfolio and shedding risk, focus on tax-advantaged accounts first.
“Reducing stock positions within an IRA or Roth IRA would not trigger any taxes,” he explains, since gains are either tax-deferred or tax-free.
Hold for the long term
Short-term capital gains, which are taxed as ordinary income, can deal you a huge tax blow. That’s why Mark R. Parthemer, chief wealth strategist at Glenmede Trust Company, says anyone looking to unload risk and capture gains should make sure they’ve held investments for at least a year and a day.
“Waiting more than one year converts short-term gains taxed as ordinary income into long-term gains at preferential 0%, 15% or 20% rates,” he explains. “Today’s [long-term capital gains] rates are far below the 37% top ordinary income tax rate. For many pre-retirees, that means selling appreciated stock is taxed more lightly than earning the same amount as salary or interest.”
Be strategic with income
Generally speaking, Parthemer advises people to defer gains into years with less taxable income rather than stack them on top of high-income years.
If your asset allocation is making you nervous and you want to grab some gains given where the market is today, one thing you can do is try to control the timing of other income.
For example, says Parthemer, if you’re taking gains in your portfolio, it might not be a good year for a Roth IRA conversion. If you’re self-employed, you can also try deferring some income to 2026.
Harvest losses
Tax loss harvesting is a well-established strategy for minimizing capital gains taxes, and it’s one that both Parthemer and Brask suggest in a situation such as this.
That said, tax loss harvesting is easier to do when the market is down. When it’s up, it can be challenging to pick out those losses.
Brask recommends maintaining a portfolio that doesn’t just consist of pooled investments, such as mutual funds and ETFs. Instead, he says, hold at least some individual stock positions directly in case taking losses becomes a priority.
“If you are holding a handful of stock funds, and each of those funds holds 50, 100 or more stocks, then those funds are likely to have significant gains … [and] they will generally have high correlations with the overall stock market, which has performed well in recent years,” he explains.
“On the other hand, if you stripped away the funds and held the same stocks directly, you would very likely be able to find some stocks that had gone down.”
Unload risk if you need peace of mind
It’s never pleasant to be staring down a huge IRS bill. But both Parthemer and Brask insist that your peace of mind should trump the hassle of having to pay some taxes on your gains.
“I typically advise my clients not to let the tax tail wag the dog,” says Brask. “That is, do not let taxes stop them from allocating their portfolio the way they want.”
“In the end, paying some tax may be the price of real financial security, and that’s often a bargain compared to the risk of being overexposed in retirement," Parthemer says.
As Parthemer explains, being too heavily invested in stocks puts retirees at risk of having to sell off positions to generate needed cash when the market is down. That’s not a fun situation to be in.
In the near term, he says, “triggering the tax may be the right step.”
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