Planning on selling some mutual funds from my brokerage account that have gained 1-200% since purchase and looking for some advice with the process.

A couple questions I have:
1. Depending on the amount sold, do I need to pay taxes on the sale or will I just expect to owe extra next year? Is there a withholding option?
2. Does the appreciated asset amount have an impact on our adjusted income to affect any other taxes or any other limits like Roth contributions?

1. depends on your brokerage, some allow tax withholding on the transaction
2. long term capital gains are taxed as such, but they are not treated as income for the purposes you're asking

JR2007 said:

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Planning on selling some mutual funds from my brokerage account that have gained 1-200% since purchase and looking for some advice with the process.

A couple questions I have:
1. Depending on the amount sold, do I need to pay taxes on the sale or will I just expect to owe extra next year? Is there a withholding option?
2. Does the appreciated asset amount have an impact on our adjusted income to affect any other taxes or any other limits like Roth contributions?

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on question 1.

It depends on the amount of the capital gain and how it affects your overall tax liability.

You can always make a payment to the IRS directly and not bother with withholding.

Here's the criteria.



You also may be required to pay estimated taxes on capital gains. Generally, you must pay 90% of your current year's taxes, or an amount equal to 100% of your taxes from the prior year (110% if your AGI was more than $150,000), either through withholding or estimated tax payments.

Another way of saying the same thing...

either through withholding or direct pay to the IRS in total the amount you pay..

Is 100% or 110% (Depending on last years AGI) of last years taxes this year, you won't incur a penalty..

OR

is 90% of what you will owe, then you also won't incur a penalty.

It depends on how much taxes on long term gain affects your overall tax liabilty.

Old McDonald said:

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1. depends on your brokerage, some allow tax withholding on the transaction
2. long term capital gains are taxed as such, but they are not treated as income for the purposes you're asking

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Long term gains are included in adjusted gross income and therefore could affect the ability to itemize certain deductions because of AGI thresholds. This is assuming you can itemize deductions.

txaggieacct85 said:

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Old McDonald said:

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1. depends on your brokerage, some allow tax withholding on the transaction
2. long term capital gains are taxed as such, but they are not treated as income for the purposes you're asking

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Long term gains are included in adjusted gross income and therefore could affect the ability to itemize certain deductions because of AGI thresholds. This is assuming you can itemize deductions.

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So if our AGI would otherwise be below Roth thresholds, this could push us over?

my understanding is that long term gains will change AGI and there are AGI thresholds for determining eligibility to contribute to a ROTH IRA.

If you want to contribute to a ROTH IRA and think the long term gain will affect AGI enough to disqualify you for a ROTH, then consider selling some in 2023 and some in 2024

If the long term gains are significant I would suggest creating a pro forma tax return for 2023 and do some what ifs

you may want to get a tax advisor to do this for you.

alternatively, sell as much as you want this year and do a backdoor Roth. it's super easy.

I'm about 2/3 of the way to maxing our roths for the year and can back door the remainder. Just hoped to avoid being penalized on what I've already contributed.

Make sure to check your unrealized gains. You may have already paid tax on most of it as cap gains distributions paid out. Mutual funds are often inefficient year by year, which can make it easier to liquidate in the future.

Check your projected cap gain payouts for the year, you may be paying and not even know it.
Look for a loser and sell it to offset, if you like that loser buy it back in 31 days.

mosdefn14 said:

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Make sure to check your unrealized gains. You may have already paid tax on most of it as cap gains distributions paid out. Mutual funds are often inefficient year by year, which can make it easier to liquidate in the future.

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This. Just looked up a real world example in my portfolio that may help amplify:

I bought a Schwab Small Cap Index Fund in 1994 - $1,500 for 101 units. Never touched it since then. It is now worth about $20,000, and I have 660 units. My P&L shows about $6000 in unrealized gains (42% return) over almost 30 years, but obviously, I have been reinvesting and paying cap gains and dividend taxes all along. So despite a real world 1300%+ return, I only have a relatively minor taxable gain if I liquidate it.

I have long ago switched over to ETFs over mutual funds because of this tax inefficiency (not to mention the ease of intraday trading). Mutual funds are still just fine for set-and-forget retirement investing, but are not great for taxable investing.