Any tips on “cost basis methods” when withdrawing from taxable accounts?

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  • #85494 Reply

      I’m not at the point where I’m withdrawing funds from my taxable accounts but I want to better understand that process now.

      Any tips on “cost basis methods” when withdrawing from taxable accounts? The default setting on my account is Average Cost, but there’s also Minimum Tax, First In First Out, Highest In First Out, and Specific Identification.

       Numerical examples are always appreciated.

      Thank you!

      #85495 Reply

        You typically want SpecID. This lets you choose the specific shares, to specifically control the gains and losses.

        Minimum tax will try to pair up losses and gains to minimize your tax liability – this can be good, but can make loss harvesting elsewhere difficult if you do that.

        Average cost does what you expect – the average cost basis is used.

        Fifo sells the first shares you bought this usually but not always maximizes tax liability).

        Highest in first out I’m unfamiliar with, but probably sells the highest basis first, which may result in large losses (this can offset taxes, but can also make carry forward paperwork if the losses are large).

        #85496 Reply

          When you go to place a sell order on a stock in which you have gains or losses, most brokerages have a pop-up box labeled something like “Tax Lots.” If you click on it, the system will display your buying history and show you which shares you own that are long-term and short-term shares.

          If you want to minimize taxes, just sell the shares designated as long-term shares and leave the short-term shares in your account until they, too, are long-term shares.

          Don’t miss: Is it better to set up my taxable brokerage account as an individual owner or joint with my wife?

          #85497 Reply

            When you withdraw what other income will you be reporting on taxes? Spec ID gives you control. You see the lots you bought and when and for how much you bought them. You may choose to sell long term gains when you are in the zero % LTCG bracket.

            I could sell shares generating $20k in LTCG with no tax in a typical tax year. I don’t do it because I don’t have that much gain and because even though there’s no tax on the LTCG it is included in AGI. If my AGI goes from $20K to $40K for example I lose my ACA subsidy and retirement savers credit.

            Anyways, spec ID gives you control. Maybe it’s unwieldy if you are selling a lot of shares bought at different times. Some other methods may work just as well.

            My taxable brokerage, M1, does not give me a choice. I downloaded my purchase lot data, ordered it by their fixed order of sales and tjen figured out how much to sell so only losing shares were sold for tax loss harvesting purposes.

            #85499 Reply

              Depends on your current (and expected future) tax situation. Typically, for people retiring early, you would want to take long term losses now (while you are paying higher capital gains) and take gains in the future when you may qualify for 0% capital gains rates (or pass appreciated shares to your heirs so they get a step up in cost basis).

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