Frederick Fisher: Taxes and investing | TheUnion.com
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Frederick Fisher: Taxes and investing

As a full-service financial planning firm, we address many issues regarding our clients’ finances.

Over the years we have advised many clients on how best to manage the tax ramifications of repositioning a taxable portfolio. Unlike making changes in qualified retirement plans and IRA’s, recommending changes in taxable accounts, can be complicated when significant gains and or losses are involved.

Investors need to weigh the costs and benefits of the transaction. When a gain is involved the main benefit is realization of the gain and possible protection of that gain, with the ability to reinvest or spend some of the money that is freed up by the sale.



The cost however is the taxes that will need to be paid on that gain.

The good news is the tax is based on the gain on the sale and not on the total proceeds. In addition the rate on capital gains is generally lower than the rate on other types of income, such as salary which is taxed at ordinary tax rates.




To illustrate, we will take the hypothetical case of George and Gina Stewart. They are in their early 60s and in the final push for retirement.

George currently has stock from his previous employer that he obtained through options that were granted him. He was able to buy 5,000 shares of stock at $5 per share and now 10 years later they are worth $80 per share.

Up until now they had resisted selling any stock, because, they were both still working and did not need the income and wanted to defer paying taxes on any gains until they needed the money during retirement. Now that retirement was nearing, they wanted to come up with a plan to turn those appreciated shares into cash, while minimizing the tax ramifications.

Our first step was to calculate what the gain would be should we sell any stock today. Currently that would be $75 per share of stock sold.

Second we charted out cash flow needs over the next five years, when they would be eligible for Social Security and other pensions. The issue now was when to sell. If we sold all now, we would have an enormous gain of $375,000 and a potential tax bill of $75,000.

They however would still net $325, a nice return on a $25,000 investment. We still liked the stock and saw no need to sell it all now. However we were not guaranteed that the stock would continue to grow and worried about the stock falling sometime within the next five years.

Upon review of their other holdings, we noticed that some smaller positions had losses. Since you can offset gains with losses, we looked at possibly selling just enough shares to take advantage of the losses and minimize the capital gains taxes. We also discussed putting upper and lower limits on the stock price where we would sell some to lock in gains and minimize losses.

In the end we came up with a plan to trim the stock over the next five years, which would give them the cash they need during retirement, and minimize the tax effects of the sale.

When it comes to investing, one must always consider taxes when evaluating a taxable portfolio, and come up with a strategy to mitigate them. However protecting gains by selling high, may gain you more money than selling when the stock falls.

George and Gina are a fictitious couple. Example and figures used as hypothetical illustration only, not indicative of any particular investment experience and may not be representative of the experience of clients. Actual results will vary.

Investing involves rick including the potential loss of principal. No investment strategy can guarantee a profit or protect against a loss in periods of declining value. Investment in stocks will fluctuate with changes in market conditions.

The opinions voiced are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by NPC. To determine which investments may be appropriate for you, consult with you financial professional.

Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk. NPC does not provide tax or legal advice.

Frederick Fisher is a Certified Financial Planning Practitioner, and Insurance Agent with Ostrofe Financial Consultants, Inc. For questions or suggestions, contact Rick Fisher at 530-273-4425, or rick.fisher@natplan.com, or visit ostrofefinancial.com. Branch address: 565 Brunswick Road, Ste. 15, Grass Valley.


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