The Stock Retirees Should Never Sell In Retirement To Save A Ton Of Money

Selling your stocks that have appreciated in value over time might seem like a great way to generate income during retirement or reduce your exposure to market changes. The benefits are there, yet, holding on to them can help both you and your heirs. On the surface, holding onto appreciated stocks can help you profit from capital appreciation, where you receive regular income as a shareholder in the form of dividends.

Going deeper, the tax advantages include being taxed at a lower rate when you sell them after holding these stocks for a year or more and having deferred taxes — taxes you do not pay at the time they are incurred — on your investment growth until retirement. This is for tax-advantaged accounts such as IRAs or 401(k)s. It also lowers brokerage commissions and helps to preserve the purchasing power of your investments in the long run. In summary, retirees who hold onto appreciated stocks, and other assets with high amounts of capital gains, in particular, continue to defer paying any taxes on those gains. Once they sell, they owe taxes — often a high amount.

The tax benefits of holding on to appreciated stocks is further seen in the "Step-up in Basis" rule. This rule allows heirs who inherit assets to only pay taxes on the appreciation that occurred after the deceased's death instead of on the original purchase price.

For instance, let's say a person buys a stock for $50,000 and at the time of passing, the stock is worth $100,000. When their daughter inherits the stock, the Step-up in Basis rule means the IRS treats the value of the stock as $100,000 (the value at the person's death), not the $50,000 they originally paid. If the daughter sells the stock for $110,000, she only has to pay capital gains tax on $10,000, which is the gain that occurred after her parent's death.

This makes it easier to calculate capital gains because heirs don't need to track the original purchase price of the inherited asset. It also helps with estate planning as assets can now be easily transferred to heirs with little tax implications. The desire to get the benefits of the step-up in basis should encourage retirees to hold onto their stocks even when they appreciate. If you do plan to sell investments in retirement, there are other investment opportunities that make sense, particularly for seniors seeking to protect their retirement accounts from rising inflation.

Retirees who do not wish to sell their appreciated stocks can give them up to a qualified charity or use them for better estate planning. Donating exempts donorsfrom wash-sale rules, lowers their taxable distribution, provides tax savings while giving them fair market value on federal tax returns. Charity is also a way to reduce how much you're taxed on Social Security.

Aside from donating, retirees can gift assets to family or other beneficiaries, especially if they want to reduce the burden of estate taxes upon death by transferring assets out of their estate. The gift can come in the form of real estate, business interests, mutual funds, and stocks. Also, retirees who can afford it should give their appreciated stocks to a Donor Advised Fund as part of a larger charitable strategy. This is because deducting the fair market value of the stock as a charitable contribution can help the donor eliminate the capital gains tax they would have owed if they donated cash after selling the stock. Gifting assets lowers or eliminates estate taxes, exempts investors from incurring gift tax liability, and helps reduce estate tax liabilities.