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Focus on Finance: Tips for selling or keeping long-held stocks

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By Steve Wright

Question: My wife and I purchased stock more than 20 years ago. What’s the best way to get the most money from long-held stock?

Answer: Many individuals own stock they bought decades ago—but they’re reluctant to sell it because of the capital gains taxes that will be due. What’s the best way to get the most money from long-held stock?

If you own shares of stock you bought 10, 20 or even 30 years ago, it may have appreciated. But that appreciation may have led your portfolio to become unbalanced, with a greater percentage of equity assets than you’d ideally like. By selling the stock, you could more appropriately diversify your portfolio — but you’d also trigger capital gains.

Before taking any action, you probably want to think about why you hold the stock in the first place.

If your goal is to leave money to your heirs, having a stock-heavy portfolio may not be a bad idea, because your portfolio can potentially grow more than it would if invested more in bonds, and you have some time to weather any market fluctuations that might occur.

On the other hand, if your goal is to generate income for yourself, it’s important to have a diversified portfolio of stocks and bonds: While diversification can’t protect you from a loss, it can help you better weather the ups and downs of the market. So, you may want to consider selling some stocks.

One way to do that would be to convert the majority of the stocks in your Individual Retirement Account to bonds, and leave your non-qualified portfolio as-is. That’s because selling stock funds and buying bond funds in your IRA likely would have relatively low transaction costs.

If you don’t have that option, you may want to consider selling your low-basis stocks. Keep in mind the capital gains tax is not as bad for 2012: For individuals with taxable incomes of up to $35,500 a year (and couples with incomes up to $70,700), the tax on long-term capital gains is 0 percent — the lowest it’s ever been.  For people with higher incomes, the long-term capital gains tax rate is 15 percent. The example here  illustrates what you might pay in capital gains when selling a hypothetical stock.

Rates are scheduled to increase in 2013, capital gains rates will revert to pre-2003 rates, generally 20 percent (10 percent for gains in the 15 percent bracket) and the special five-year holding period rules, unless Congress extends the low rates. As a result, 2012 might be the best time to sell appreciated stocks from a tax standpoint.

As a final note, highly appreciated stocks also can be used to fund a charitable remainder trust or gift annuity. You’d get an income each year, and a tax deduction that could be worth half the market value of the gift.

Steve Wright is the Managing Member of The Wright Legacy Group LLC.

WHAT IS FOCUS ON FINANCE?

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A panel of local experts with experience and knowledge of this community respond to questions about 401(k)s, 403(b)s, annuities, certificates of deposit, home mortgages and/ or refinancing, investing in the stock market, financing retirement, reducing income taxes and related topics. E-mail your questions to: focusonfinance@thenewsenterprise.com or mail to: Melanie Parker, The Wright Legacy Group, LLC, 1104 Julianna Court, Elizabethtown, KY 42701.