Money Talks: Taxable events - a closer look

William F. Hague

Well, as yet another season here in paradise comes to an end; certainly the weather has not been the only subject of interest. Many retired investors anxiously watch the stock market to see just how far the Trump effect will carry them.

Many are aware that gains can come and go within an IRA without a taxable event until the funds are withdrawn. However with non IRA accounts, at some point many will feel compelled to exercise one of two options within their portfolio; the first would entail moving to a cash position which would entail selling the holdings, which, given the record territory with The Dow Jones average, is quite likely to generate some type of taxable event.


The other option would be to simply sit idle and await the inevitable stock market correction and let the cards fall where they may. A massive market selloff is one way to eliminate those pesky gains. Far too many retired investors own stock positions with the feeling that they are handcuffed to the holding due to taxable consequences in their non-IRA accounts.

For many, this will have a familiar sound as the concept of holding an investment for a minimum  of 12 months in order to take advantage of the reduced capital gains rates rules the day. It is ironic as we sit back and recollect back to 2006-2007 when many real estate investors were more concerned with capturing a greater gain than simply recognizing a short term gain and moving on that the concept of holding for 12 months left many with massive losses in the wake of the real estate market meltdown. (See real estate bubble.) Yes, many were so concerned with the taxable event that their concerns often lead to significant losses all in the name of capital gains taxes. A closer look indeed.

With the current tax system, many long term gains will fall into the category of roughly 15 percent according to taxrate.com. For those who realize gains within the short term gains bracket could face a taxable event in the 25% to 35% range for gains outside of an IRA. Now, certainly tax concerns should always be a piece of the overall strategy when buying and selling investments. However, the reality is that many investors over the years and decades have endured losses by holding an asset too long. With tax day upon us and retired investors all but overwhelmed by the media blitz that is the daily headline with stocks reaching all-time highs every other week, many retired investors simply sit idle.

There are no clear cut rules for profit as to the timing of buying or selling a stock. However, when we step back and consider the big picture, for many the revelation may be that selling while one is ahead may be the best strategy. In other words, gains taxes aside, simply liquidating and recognizing the gains for many is a better option than waiting for the gains to evaporate in the event of a stock market correction.

Of course, there are other options and investing strategies which can eliminate, or at least reduce, the severity of the taxable event. One strategy would fall under the category of tax deferred insured index strategies. These accounts have unlimited contribution levels and grow the assets tax deferred just like an IRA. Yes, this actually allows non IRA assets to grow and enjoy tax favored status while invested and growing. Combined with their ability to avoid any and all market based losses, this certainly is a powerful tax favored option for a percentage of the portfolio.

Speaking of powerful options, we would be remiss if we did not include the power of managed futures to potentially outpace stocks while reducing risk along the way. Managed futures also offer tax favored treatment of gains by using a combined tax rate.  Managed Futures enjoy a split tax rate with 60 percent taxed at the long term rate while the remaining 40 percent is taxed at the short term rate. This allows for a roughly 30 percent tax savings which certainly leads to the life of a SWAN, Sleep well At Night.

William F. Hague is a managing partner of Hague Wealth Management; 239-389-1999 or WFHague@earthlink.net. The opinions and observations stated above are those of the columnist.