When to lock in gains - vs hold for the long haul?

Investing Strategies Retirement Investing
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this is more of a general investing strategy Q - and since I’m basically retired - cuz I never went back to work - I’m posting it here - move it if appropriate (just tell me where!).

My ‘strategy’ to date has been ‘buy and hold’ - I only sell when I need living expenses - and I don’t need much to live on so I’m in the lowest tax bracket. My dilemma is that I feel like I should have been selling and re-buying my Nividia to lock in gains along the way - though it has really just skyrocketed so quickly - not sure that was foreseeable. anyway - . . .

When should you lock in gains? Is is better to hold for the long run and risk losing ‘paper profits’? For the sake of discussion - I’m talking long-term cap gains.

Thanks for your insights

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To me, it’s mostly a tax question, and applies only to stocks that you are likely to sell in your lifetime. If you’re unlikely to sell in your lifetime, then let your beneficiaries get the step up in basis to avoid the LTCG taxes.

If your income is low enough that you have some room to cash in some stocks at 0% capital gains, then it’s a great strategy. (I will note that you may have to weigh implementing this strategy against ACA subsidies.)

If capital gains would be taxed at 15%, then it’s more of a question of how likely you would be to sell that stock with an even larger gain in the future, and if selling with that larger gain would push you into NIIT. If it’s a stock that you are likely to sell in the future, and splitting the gain into 2 different years will allow you to keep gains low enough that neither gain would trigger NIIT, while realizing an entire gain at once would trigger NIIT, then it can be a good strategy.

If you’re at the point where the capital gains would trigger NIIT, and it’s a stock that you would likely sell in the future, then you need to look at the likelihood that waiting to sell with a larger gain would end up having some of your gains taxed at 20% (plus NIIT). If so, then again, it would probably be a good idea to implement this strategy.

I would caution that you will need to keep the stock that you re-buy for another full year to avoid being taxed at STCG rates, so you should only be doing this with stocks that you plan to keep for the long term before selling. And again, you should only implement this strategy on stocks that you are likely to sell in the future, so your beneficiaries can take full advantage of the step up in basis when you die.

AJ

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My way is to monitor stock price gain in the last 90 days (once a month). Hold the top performers as long as they perform. Sell a few losers and under achievers every month and buy top performer (up to diversification limits). In a taxable account it gets expensive to sell stocks once they get to $100K in gains. Those are best to hold for the heirs. But they can be trimmed over a few years if they stop performing.

Much depends on what kind of stocks you buy. I prefer growth stocks that have reasonable PEs. I will usually hold them as long as they perform. Very high PE stocks and no earnings stocks to me are speculative. They have to be watched closely. Those are ones I might sell sooner–once you have a nice gain. Its always possible to sell some of a winner and reduce your risk.

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@aj485 - thanks so much for your reply. clearly I did not put in enough info - so I apologize that you spent time providing GREAT info that doesn’t apply to me - though, I do appreciate the effort.

So - I’m in the lowest tax bracket - I live on < $30k (on average). Good catch on the ACA subsidies - as I am maxing those out (Thanks Obama!!). I estimate my “income” for the ACA at @ $28k to maximize savings - so, yes, I have to stay w/i that range or risk paying back some of the credit; something I’m juggling now to figure out just how much I’m willing to lose in credit (pay) to lock in gains. Quite frankly - the amount I’ve made (on paper) on Nividia scares the crap out of me - and I’m just trying to lock in some of those gains. My investments are my retirement income - so, no anticipated beneficiaries except what’s left over when I die. I’ve been losing a little sleep lately trying to figure out what to do.

I’ve thought this through more since posting and am inclined to try a sell/lock/rebuy strategy: sell some NVDA - lock in gains - raise cost basis and buy back in. that will lower future taxes on gains as well - win:win:win! yes, it’s kinda timing the market - but I’m not that worried about NVDA. -

anyway - thanks so much for your time - Happy and Prosperous New Year to you

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@pauleckler - thanks for your reply and taking the time. I realize I didn’t post enough about my situation - I’ve elaborated in the previous reply to aj485. sorry about that.

I tend to be a buy/hold investor - I just don’t have the interest in managing my stocks: I try to do the ‘research’ - read stuff etc but my eyes just glaze over! I know - I should probably just buy funds - but hey - then I wouldn’t have the dilemma I have.

thanks again - hope you have a Happy and Prosperous New Year

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I would point out that the ACA subsidies for income over 400% of FPL are due to expire at the end of 2025 under current law. So if you’re going to implement this strategy and still claim ACA subsidies, 2024 and 2025 would be good years to do it.

Once you get on Medicare, then you will need to be aware of the IRMAA limits, which are higher than the ACA subsidy limits.

AJ

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I started off my retirement 30 years ago with a portfolio of 20 stocks and fixed income consisting of FDIC-insured CDs and Treasury Securities. Over the years, I’ve been moving as much money as I can without triggering any additional income tax liability to index funds and Berkshire Hathaway (BRK).

I’m kind of in the same position as you right now with Eli Lilly being about 20% of my net worth. I’m letting it ride, but if I was concerned, I’d sell 1/2 and put the proceeds in BRK.

I’m also a big fan of “free Obamacare” and tax credits like the those for EVs, heat pump HVAC upgrades, etc. I plan to collect as many of those as possible in 2025 while I can still keep my reported income low. Once I turn 70 and start taking Social Security, my income will be too high to benefit from the tax freebies.

intercst

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@aj485 - Wow - did not know that about the subsidies - Kiss them goodbye with the ‘Orange Fellon’ taking office! (if not the whole ACA) Good to know - will definitely max those out this year - and THANKS for the ‘heads up’! - Medicare is still 2.5 years out - so, it’s not on my radar - yet. Cheers

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Hey @intercst - thanks for chiming in! I’m OK w/ letting my NVDA ‘ride’ - but I also want to lock in some those gains. hence the sell n lock/buy back strategy I’m contemplating. But don’t want to jeopardize my excellent ACA coverage - or end up paying $12k+ in premiums and - heaven forbid: unanticipated health care needs. So I’m playing it safe this year.

thanks for your comment and a Happy and Prosperous New Year to you!

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My point is, if you need to use subsidies in 2026 or beyond, you should take advantage of the higher income limits for subsidies in 2024 and 2025, which would mean taking capital gains that would potentially increase your income above the 400% of FPL limit now. If you increase your income over 400% of FPL beginning in 2026, you will have to pay back ALL subsidies. But for 2024 and 2025, you can have income that’s higher than 400% of FPL and you would still get some subsidies. You would probably have to pay back some of the subsidies you’ve received for 2024, and for 2025, you could adjust your income so that you would pay more in premiums. But you need to do the analysis to see if losing some of the subsidies is worth locking in some of your gains. For 2024, you only have a day to make that decision.

If Medicare is 2.5 years away, that means you will be starting Medicare in 2027? If so, Medicare should be on your radar now (or in 3 days, anyway). IRMAA has a 2 year lookback, so your 2025 tax return will be used to calculate IRMAA premiums in 2027.

Edited to add:

For a single taxpayer in 2024, the 0% bracket for capital gains goes up to $47,025 in taxable income. Once you add in the standard deduction of $14,600, that means you would pay $0 in capital gains taxes as long as your total income is less than $61,625. But 400% of FPL for 2024 is $60,240. So to take full advantage of the 0% capital gains bracket, you would exceed 400% of FPL. In 2024 and 2025, you can still get subsidies even when exceeding 400% of FPL. But beginning in 2026, you will have to pay back all subsidies if you exceed 400% of FPL by even $1

For MFJ, you lose even more of the 0% capital gains bracket if you have to remain below 400% of FPL. In 2024, the 0% capital gains bracket tops out at $94,050. Add in the standard deduction of $29,200 and you can have total income of up to $123,050 and not pay any capital gains taxes. But 400% of FPL for a household of 2 is only $81,760 So if you had to stay under 400% of FPL, you would be giving up the opportunity to pay 0% capital gains taxes on over $40,000 in taxable capital gains.

What you need to figure is how much going up to that amount of income will cost in subsidies, and if that’s worth it to lock in capital gains without paying any taxes.

AJ

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OMG! My eyes are glazing over already! :grinning: I’ll have to re-read that 3-4 times to get it all in my little head. ya’ know whats funny - I can sit and read a long environmental impact assessment or even a legal decision on some environmental issue with no problem - and somewhat enjoy it - and even ponder the legal implications in my head! (I’m a Wildlife Biologist by trade) - but when it comes to financial stuff - well - much as i try - I often barely get through 5 minutes before my eyes glaze over and my brain goes numb! but moving on . . . .

OK - I looked up IRMAA - got that - ain’t worried about it - I think I mentioned this but maybe not - I live on @ $30k/year - which - since I’m living off my investments - my ‘income’ is about $30k each year - hence the 10% tax bracket. sometimes less. so I don’t think I need to worry about IRMAA - but I’ll look into it further . .

So, a side Q: who does one go to, to keep on track of all this financial/tax/health-medicare-aca stuff?? My “financial planner” has said diddly squat about any of this and we’ve talked about my current - future life/plans/needs etc. Do I need a separate tax specialist? A health-care coach??? my head is spinning . . .

btw: what is "MFJ - I’ll have to look that up too. Also - I wish everyone would clarify that “0% tax bracket” ONLY applies to long-term cap gains. Or at least that’s what every website I’ve checked tells me - and the AARP tax estimator (did I mention that here?). Almost got me in serious trouble a couple weeks ago - til I figured it out.

btw2: Can’t tell you enough how much I appreciate your comments!

more later - I’m late for an appt already!

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Yeah, I just wanted to be sure you were aware that if you had a year or two where you realized significant gains that it could impact your Medicare premiums 2 years after those.

Well, the Tax Strategies board here on TMF can be helpful. Or a tax professional, like an enrolled agent. When you get to where you are signing up for Medicare, your state’s SHIP (Senior Health Insurance Information Program) can be useful. Home | State Health Insurance Assistance Programs

Married Filing Jointly

There are really two 0% brackets. The first is your standard deduction (itemized deductions if you itemize), which is generally used for ordinary income, although if your ordinary income is low enough, it can be used for capital gains. Then there is the capital gains 0% tax bracket, which is based on total income (ordinary income plus capital gains), but allows capital gains in that bracket to be taxed at 0%

AJ

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@aj485 - you said: “For a single taxpayer in 2024, the 0% bracket for capital gains goes up to $47,025 in taxable income. Once you add in the standard deduction of $14,600, that means you would pay $0 in capital gains taxes as long as your total income is less than $61,625.” . . . then later you said: “Then there is the capital gains 0% tax bracket, which is based on total income (ordinary income plus capital gains), but allows capital gains in that bracket to be taxed at 0%”

Ok - here’s where I thought the 0% only applies to long-term cap gains (LTCG)- not short term. When I tried the “excellent” AARP tax estimator (1040 Calculator Estimates Your Federal Taxes) - it is Clearly including my short-term capital gains (STCG) as ‘taxable income’ [[ $22k in STCG + $8K in Dividends = $30k of taxable income; MINUS $14,600 Standard Ded; Minus $5000 HSA contribution = $10,400 taxable Income and @ $900 in tax!]]. My STCGs and Divs don’t get a 0% tax bracket above the SD and HSA deductions. But when I ADD Long term cap gains of - say $10K (for a total income of $40k) (as an experiment) - my tax remains the same = @ $900. So I’m not seeing a 0% tax bracket up to $60k+ - except for LTCG.

That ‘0% tax bracket for capital gains goes up to $47,025’ - seems to only apply to LTCG - not STCG - cuz I got $30k in income; $10.4k that is ‘taxable’ and a $900 tax bill (estimate).

Am I missing something? that the calculator is also missing? Not trying to be argumentative here - just want to be sure that the info exchange is accurate - for everyone else reading this!

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Yes, the 0% tax bracket discussed by @aj485 only applies to long-term capital gains. Short term capital gains are considered to be ordinary income and ordinary income tax rates (not long term capital gains tax rates) are applied to it. Ordinary income tax rates are 0%, 10%, 12%, 22%, 24%, 32%, 35% or 37% depending on level of income. Long-term capital gains tax rates are 0%, 15%, 15 + 3.8%, or 20 + 3.8%. The extra 3.8% is the NIIT that is applied over a certain income level (that spans 15% and all of the 20%).

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Renewing the expiring tax law seems to be a priority but no telling what might be included. ACA subsidies might be part of negotiations.

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HAHAHAHAHA You do know that these subsidies were extended as a part of the Inflation Reduction Act, which was passed without a single Republican voting for it. There was also a proposed bill to make the subsidy rules permanent, but the Speaker has chosen not to act upon it. If he had wanted to, they could have added that bill to the continuing resolution bill that kept the government open (for now), but chose not to. Why do you think anything will be different? It won’t be until 2026, when people actually get hit with the lower subsidies, that there might be any action - assuming that ACA hasn’t been repealed by then.

AJ

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Yes, that’s correct. However, you said in your initial post:

so I thought that’s what we were talking about. Sorry for any confusion.

AJ

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YES! OMG - my bad . . when I initially posted this I was contemplating a good-size sell with LTCG results - but that didn’t happen and I ended up getting out of some short-term stocks (probably the same day I posted). had I taken the LTCG on top - it would have totally screwed my ACA savings - on so many levels! oops! so sorry - I hate financial stuff!

Happy New Year!! - I’m outta here . . . .

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Yes, ACA will be difficult. But it will be interesting to see if he can pass a tax bill without a single Democrat vote. At minimum requires a reconciliation vote in the Senate and every Republican vote.

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Electing a speaker and dealing with the debt ceiling will have to precede a tax bill. If they don’t manage to elect a speaker, we could end up with President Grassley.

AJ