Are Capital Gains Holding Your Money Hostage?

Over the last number of years, really going back to 2008 or even during Covid, we’ve seen tremendous growth in the US stock market, and we’ve seen a lot of individuals talking to us at events or coming in from watching our TV show where they have these taxable investment account. So think non IRA. So non traditional IRA, non Roth IRA. They have tremendous amounts of what I would call embedded capital gains. And essentially this money is being held hostage. You know. So we want to think about if we’ve been in a position where we’ve had a lot of equity growth in these taxable or trust accounts, how can we start to leverage those positions or make those assets that they’re actually usable? So I had a meeting with an individual a couple of weeks ago that came to our dinner event. As we were going through their portfolio, they have millions of dollars held in one individual stock. Now that’s fantastic. They’ve had tremendous growth in their portfolio over this time period. However, they really can’t use that money. You know, if they were to go to sell those positions, they’re going to pay hundreds of thousands of dollars in capital gains tax. So we have to start to be creative in how we approach the situation, because they’re going into retirement wanting to have retirement income, but they really have this position and that makes their net worth statement look really good. But it’s basically unusable. So we’re seeing this trend of individuals that have benefited from market growth. And the market’s basically holding their money hostage by this capital gains tax. So what can we start to do in their portfolio to maybe start to minimize that or make this money so it’s actually usable for them. Well one thing we can start to do is just look at just simple tax loss harvesting. You know, a lot of times in these types of portfolios there may be other positions or they’ve added to this large position over time. So there’s different lots. Well we can start to look at that portfolio and dig into the summaries or dig into some of the other positions. And not all times is the entire portfolio up. So in periods where we have a market pullback we can actually use that to our advantage. Maybe sell some of those holdings at a loss to help offset gains. Almost think of it like we’re building up a tax savings account to either be used in the current year or used in future years. You know, that’s also something we call gain loss matching. You know, maybe positions that we sell at losses. We can offset that loss by selling some of the high appreciated stock holdings off again trying to leverage some of that, that income, another position where we’ve had a lot of people thinking think of Nvidia, Apple, this AI and quantum computing movement of I don’t want to sell that stock. I never want to get rid of that. Well, you’re still retired. We need to generate income. So how can we maintain that position but potentially still give you some income? Well, we’ve seen a lot of individuals starting to do is using different option strategies. You know. So this kind of is twofold. We can talk about either doing covered call strategies which we’re essentially using to generate income, leveraging that highly appreciated position to give you some retirement income. We may use that income just for spending. Maybe pay the tax bill to start to unwind this large position or buy different put options to help protect it options. We could spend a whole hour talking about how they work, but the idea is we can use this as the ability to either protect or provide you income in retirement. That’s a good place to be. You know, the other thing we want to be thinking about is just proactive tax management and proactive rebalancing. You know, we always want to be thinking about when we’re doing retirement planning. The decisions we’re making today are going to have an impact down the road. So if we were starting to build up assets outside of our traditional IRAs, outside of our 401(k)s is kind of our normal retirement plans. We want to be careful when we start to build these equity positions in these taxable investments, that we don’t let them get away from us, because if we just let these things ride for the next ten, 20 years, we’re essentially taking the tax time bomb down the road. And we’re making ourselves in a position where these stock holdings or equity holdings maybe are unusable. So when we think about investments, we talk a lot about diversification. You know, you can go to our YouTube channel. We talk a lot about it. Asset allocation, asset allocation. What about strategy? You know we want to think about diversification by strategy. A lot of times the reason people end up in these positions is they’ve been very passive.