Selling some taxable to keep cash or pay mortgage?

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sergio
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Selling some taxable to keep cash or pay mortgage?

Post by sergio »

I just did some 2021 tax planning and we have about $9000 of "room" in the 0% dividends/long-term capital gains bracket (taxable income will be around $72k, 0% bracket goes up to $81k). State tax will be about 6%.

We have a relatively small taxable account $50k but it has a lot of gains as we invested that money a long time ago.

Would any of these make sense?
1. Sell $9000 of taxable and put towards our mortgage?
2. Sell $9000 of taxable and keep as liquid cash?
3. Tax-gain harvest?
4. Do nothing?

The reason why #1 and #2 are on here is because my job is less secure than it used to be, though still fairly secure and I could probably find another job within 6 months. With equities at all time highs, we could put the $9k towards our mortgage ($75k left at 3.25%) which we're trying to pay off ASAP. Target is to pay off the mortgage within 2 years, which would be awesome peace of mind. I'm also not sure if the 0% bracket will stick around going forward.

We have about 12 months of expenses in an emergency fund and another $9,000 would boost that to close to 15 months, which would help with peace of mind as well. I would need to research the benefits of #3 and #4, but if we didn't do #1 or #2, then #3 would seem like a no brainer.

Sorry if these seems somewhat rambling, but a buddy of mine just lost his job and for whatever reason that caused me to go into a minor panic.
miamivice
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Re: Selling some taxable to keep cash or pay mortgage?

Post by miamivice »

With an interest rate of 3.25%, and stocks averaging 10% annual gain over the last 10 years, I am hard pressed to see an incentive to pay your mortgage off early.
lakpr
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Re: Selling some taxable to keep cash or pay mortgage?

Post by lakpr »

I would differ from the previous poster, and I do encourage you to take advantage of tax-gain harvesting. Your post sounds like you are getting uncomfortable a bit about the change in your circumstances -- "job not as secure as it used to be" -- so I would call it a qualitative change and NOT market timing. Realize that $9k in long term capital gains, and pay down the mortgage with the proceeds.

I am not sure which state you are in, but be aware that while your Federal capital gains tax will be 0%, almost all states treat capital gains as ordinary income. So do make sure that you will get to keep only about 95% to 93% of the amount you sold to pay for the mortgage.

$75k at 3.25% implies your mortgage interest is not providing you any tax benefit (your standard deduction is higher). So paying down this mortgage balance down is exactly the same as buying a CD that pays 3.25%/0.88 = 3.7% before-tax.

I don't see any banks offering you 3.7% CD for 2 years ... do you?
miamivice
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Re: Selling some taxable to keep cash or pay mortgage?

Post by miamivice »

lakpr wrote: Sat Jan 16, 2021 8:38 pm I would differ from the previous poster, and I do encourage you to take advantage of tax-gain harvesting. Your post sounds like you are getting uncomfortable a bit about the change in your circumstances -- "job not as secure as it used to be" -- so I would call it a qualitative change and NOT market timing. Realize that $9k in long term capital gains, and pay down the mortgage with the proceeds.

I am not sure which state you are in, but be aware that while your Federal capital gains tax will be 0%, almost all states treat capital gains as ordinary income. So do make sure that you will get to keep only about 95% to 93% of the amount you sold to pay for the mortgage.

$75k at 3.25% implies your mortgage interest is not providing you any tax benefit (your standard deduction is higher). So paying down this mortgage balance down is exactly the same as buying a CD that pays 3.25%/0.88 = 3.7% before-tax.

I don't see any banks offering you 3.7% CD for 2 years ... do you?
Paying down his mortgage doesn't change the monthly amount that he has to pay. However, if he keeps the money more liquid (cash or stocks), he can always use that money to pay his monthly mortgage amount if he loses his job.

I don't see job insecurity as a valid reason to partially pay down a mortgage.
mbasherp
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Re: Selling some taxable to keep cash or pay mortgage?

Post by mbasherp »

If in the 0% capital gains bracket, one should lock in as much as they can every year in long term gains at 0%. Always always always tax gain harvest. It is a free lunch!

What you do from there is a separate story. But I feel that if there’s a possible need for liquidity and you don’t have enough to totally eliminate the mortgage, paying that down only partially will expose you to more risk, not less.
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GerryL
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Re: Selling some taxable to keep cash or pay mortgage?

Post by GerryL »

miamivice wrote: Sat Jan 16, 2021 9:06 pm
lakpr wrote: Sat Jan 16, 2021 8:38 pm I would differ from the previous poster, and I do encourage you to take advantage of tax-gain harvesting. Your post sounds like you are getting uncomfortable a bit about the change in your circumstances -- "job not as secure as it used to be" -- so I would call it a qualitative change and NOT market timing. Realize that $9k in long term capital gains, and pay down the mortgage with the proceeds.

I am not sure which state you are in, but be aware that while your Federal capital gains tax will be 0%, almost all states treat capital gains as ordinary income. So do make sure that you will get to keep only about 95% to 93% of the amount you sold to pay for the mortgage.

$75k at 3.25% implies your mortgage interest is not providing you any tax benefit (your standard deduction is higher). So paying down this mortgage balance down is exactly the same as buying a CD that pays 3.25%/0.88 = 3.7% before-tax.

I don't see any banks offering you 3.7% CD for 2 years ... do you?
Paying down his mortgage doesn't change the monthly amount that he has to pay. However, if he keeps the money more liquid (cash or stocks), he can always use that money to pay his monthly mortgage amount if he loses his job.

I don't see job insecurity as a valid reason to partially pay down a mortgage.
I routinely paid extra on my mortgage, a little each month, more when I got a bonus. But when I felt that my job might be vulnerable, that is when I STOPPED paying the extra. Figured I might need the $$$. Also, as the mortgage ages, the extra payments are not worth as much. If you want to harvest the gains in that particular holding, how about reinvesting in a different holding?
Hyperchicken
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Re: Selling some taxable to keep cash or pay mortgage?

Post by Hyperchicken »

Are you selling $9,000 worth of assets, or are you realizing $9,000 worth of gains? First post mentions both and this is self-contradictory.
retired early&luv it
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Re: Selling some taxable to keep cash or pay mortgage?

Post by retired early&luv it »

We are only 2 weeks into the calendar year, maybe December is a better time to figure out if it is a good time to sell in a taxable account.

That really is a separate issue of whether or not you want to build a cash reserve for a potential market downturn.

In some years I estimated my taxes and tax rate in December using Turbo Tax Taxcaster app on my Android phone to try to figure out how much of my Rollover IRA to convert to a Roth. I mention the Roth only in passing, you could use Taxcaster in December to figure out how much of your taxable account you want to realize.

If you do decide to sell in a taxable account to build a cash reserve at this time, I think that Taxcaster could help make sure you are not missing something, but keep in mind that by December the tax system could be different.

If you do sell stocks or funds for tax reasons, I think what you do with the money is a completely separate issue, if you want cash or to pay down a mortgage, or re-invest in stocks all depends on your future expenditures and your future income. You have to make that call yourself. If you pay down mortgage with your cash reserve, if you had a job loss, you may regret that, so you may want to figure out in dollar terms how much it will cost you in interest to keep the cash reserve without paying down mortgage.

There are lots of individual topics here and keeping the topics separate from each other may help your analysis.
Topic Author
sergio
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Re: Selling some taxable to keep cash or pay mortgage?

Post by sergio »

Hyperchicken wrote: Sun Jan 17, 2021 12:09 am Are you selling $9,000 worth of assets, or are you realizing $9,000 worth of gains? First post mentions both and this is self-contradictory.
$9000 of gains. That would be a good chunk (maybe half) of the $50k taxable account.
Mike Scott
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Re: Selling some taxable to keep cash or pay mortgage?

Post by Mike Scott »

How important is paying off the mortgage to you? How much emergency fund would you have left if you sold your taxable as stated and also used part of your emergency fund to completely pay off the mortgage? If the mortgage was gone, you would have reduced budget needs which would extend the life of the remaining emergency fund and you could use the prior mortgage payment to rebuild your emergency fund.

At the very least, do the tax gain harvest as previously mentioned.
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Watty
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Re: Selling some taxable to keep cash or pay mortgage?

Post by Watty »

sergio wrote: Sat Jan 16, 2021 6:52 pm Would any of these make sense?
1. Sell $9000 of taxable and put towards our mortgage?
2. Sell $9000 of taxable and keep as liquid cash?
3. Tax-gain harvest?
4. Do nothing?
You have two separate decisions that you are artificially linking together. If you separate these it will be easier to figure out what to do. I would look at them this way;

1) Should I sell of $X in stock to max out the 0% long term capial gain tax bracket?

Of course you should.

2) I now have $X sitting in cash in my account after selling the stock. What should I do with it?

This is a lot more complex decision but one thing you did not mention is if you are maxing out all your tax advantaged retirement accounts. If not then I would look at putting that money into a retirement account to get the tax advantages to see if that makes sense.
gotlucky
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Re: Selling some taxable to keep cash or pay mortgage?

Post by gotlucky »

Definitely tax-gain harvest at 0% especially if you 1) don't have state taxes, 2) aren't giving up premium tax credits or 3) aren't losing other credits like child tax, retirement savings, etc. Even then, if costs me < 10%, I'd probably still strongly consider it.

Then you can buy-back the same day. You've reset your basis. If the stock/fund drops, you can tax-loss harvest now (or in the future if and when you are in higher bracket) to reduce your income by $3k.
Triple digit golfer
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Re: Selling some taxable to keep cash or pay mortgage?

Post by Triple digit golfer »

miamivice wrote: Sat Jan 16, 2021 9:06 pm
lakpr wrote: Sat Jan 16, 2021 8:38 pm I would differ from the previous poster, and I do encourage you to take advantage of tax-gain harvesting. Your post sounds like you are getting uncomfortable a bit about the change in your circumstances -- "job not as secure as it used to be" -- so I would call it a qualitative change and NOT market timing. Realize that $9k in long term capital gains, and pay down the mortgage with the proceeds.

I am not sure which state you are in, but be aware that while your Federal capital gains tax will be 0%, almost all states treat capital gains as ordinary income. So do make sure that you will get to keep only about 95% to 93% of the amount you sold to pay for the mortgage.

$75k at 3.25% implies your mortgage interest is not providing you any tax benefit (your standard deduction is higher). So paying down this mortgage balance down is exactly the same as buying a CD that pays 3.25%/0.88 = 3.7% before-tax.

I don't see any banks offering you 3.7% CD for 2 years ... do you?
Paying down his mortgage doesn't change the monthly amount that he has to pay. However, if he keeps the money more liquid (cash or stocks), he can always use that money to pay his monthly mortgage amount if he loses his job.

I don't see job insecurity as a valid reason to partially pay down a mortgage.
Agree. Either keep the cash or invest it.

Even if the $9k could pay the mortgage off, I wouldn't recommend it if he's got anxiety about losing his job.

Too many people feel a false sense of security paying off a mortgage. Mine is around $1,290 PI. Having monthly obligations $1,290 a month lower if unemployed would be nice. But you know what's better? Having $9,000.

Paying DOWN a mortgage in his situation, anxious about possible job loss, makes even less sense.
Admiral
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Re: Selling some taxable to keep cash or pay mortgage?

Post by Admiral »

sergio wrote: Sat Jan 16, 2021 6:52 pm I just did some 2021 tax planning and we have about $9000 of "room" in the 0% dividends/long-term capital gains bracket (taxable income will be around $72k, 0% bracket goes up to $81k). State tax will be about 6%.

We have a relatively small taxable account $50k but it has a lot of gains as we invested that money a long time ago.

Would any of these make sense?
1. Sell $9000 of taxable and put towards our mortgage?
2. Sell $9000 of taxable and keep as liquid cash?
3. Tax-gain harvest?
4. Do nothing?

The reason why #1 and #2 are on here is because my job is less secure than it used to be, though still fairly secure and I could probably find another job within 6 months. With equities at all time highs, we could put the $9k towards our mortgage ($75k left at 3.25%) which we're trying to pay off ASAP. Target is to pay off the mortgage within 2 years, which would be awesome peace of mind. I'm also not sure if the 0% bracket will stick around going forward.

We have about 12 months of expenses in an emergency fund and another $9,000 would boost that to close to 15 months, which would help with peace of mind as well. I would need to research the benefits of #3 and #4, but if we didn't do #1 or #2, then #3 would seem like a no brainer.

Sorry if these seems somewhat rambling, but a buddy of mine just lost his job and for whatever reason that caused me to go into a minor panic.
You say you are "trying to pay it off in 2 years." But how much time remains? How much interest does this $9k save you?

Paying down a little over 10% of your outstanding balance does nothing for your cash flow, and likely saves only a small amount of interest, assuming you are at the tail end. I'm with Watty. Def harvest the gain, but I would not pay down the mortgage. Invest the money and then reevaluate in a year.
saintsfan342000
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Re: Selling some taxable to keep cash or pay mortgage?

Post by saintsfan342000 »

Hyperchicken wrote: Sun Jan 17, 2021 12:09 am Are you selling $9,000 worth of assets, or are you realizing $9,000 worth of gains? First post mentions both and this is self-contradictory.
I don’t understand what you mean. Would you please clarify/explain?
Already impartial now
Hyperchicken
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Re: Selling some taxable to keep cash or pay mortgage?

Post by Hyperchicken »

saintsfan342000 wrote: Sun Jan 17, 2021 8:38 pm
Hyperchicken wrote: Sun Jan 17, 2021 12:09 am Are you selling $9,000 worth of assets, or are you realizing $9,000 worth of gains? First post mentions both and this is self-contradictory.
I don’t understand what you mean. Would you please clarify/explain?
Gains = Proceeds - Cost Basis

This question is whether Gains = $9,000 or Proceeds = $9,000.

OP already replied that Gains = $9,000 and Proceeds are around $25,000.
Grt2bOutdoors
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Re: Selling some taxable to keep cash or pay mortgage?

Post by Grt2bOutdoors »

miamivice wrote: Sat Jan 16, 2021 9:06 pm
lakpr wrote: Sat Jan 16, 2021 8:38 pm I would differ from the previous poster, and I do encourage you to take advantage of tax-gain harvesting. Your post sounds like you are getting uncomfortable a bit about the change in your circumstances -- "job not as secure as it used to be" -- so I would call it a qualitative change and NOT market timing. Realize that $9k in long term capital gains, and pay down the mortgage with the proceeds.

I am not sure which state you are in, but be aware that while your Federal capital gains tax will be 0%, almost all states treat capital gains as ordinary income. So do make sure that you will get to keep only about 95% to 93% of the amount you sold to pay for the mortgage.

$75k at 3.25% implies your mortgage interest is not providing you any tax benefit (your standard deduction is higher). So paying down this mortgage balance down is exactly the same as buying a CD that pays 3.25%/0.88 = 3.7% before-tax.

I don't see any banks offering you 3.7% CD for 2 years ... do you?
Paying down his mortgage doesn't change the monthly amount that he has to pay. However, if he keeps the money more liquid (cash or stocks), he can always use that money to pay his monthly mortgage amount if he loses his job.

I don't see job insecurity as a valid reason to partially pay down a mortgage.
+1 Agree. Liquidity is of paramount importance when ones source of employment is at risk. Exchanging liquid assets for illiquid assets is a poor move, you lose your job and you lose a source of cash. Want to know the value of money? Try borrowing some from a bank when you are unemployed and your assets are limited. A rate of 3.75 percent is cheap compared to the alternatives.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
saintsfan342000
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Re: Selling some taxable to keep cash or pay mortgage?

Post by saintsfan342000 »

Hyperchicken wrote: Sun Jan 17, 2021 9:11 pm
Gains = Proceeds - Cost Basis

This question is whether Gains = $9,000 or Proceeds = $9,000.

OP already replied that Gains = $9,000 and Proceeds are around $25,000.
Got it, thanks!
Already impartial now
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Toons
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Re: Selling some taxable to keep cash or pay mortgage?

Post by Toons »

Mortgage

:wink:
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
babystep
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Re: Selling some taxable to keep cash or pay mortgage?

Post by babystep »

sergio wrote: Sat Jan 16, 2021 6:52 pm I just did some 2021 tax planning and we have about $9000 of "room" in the 0% dividends/long-term capital gains bracket (taxable income will be around $72k, 0% bracket goes up to $81k). State tax will be about 6%.

We have a relatively small taxable account $50k but it has a lot of gains as we invested that money a long time ago.

Would any of these make sense?
1. Sell $9000 of taxable and put towards our mortgage?
2. Sell $9000 of taxable and keep as liquid cash?
3. Tax-gain harvest?
4. Do nothing?

The reason why #1 and #2 are on here is because my job is less secure than it used to be, though still fairly secure and I could probably find another job within 6 months. With equities at all time highs, we could put the $9k towards our mortgage ($75k left at 3.25%) which we're trying to pay off ASAP. Target is to pay off the mortgage within 2 years, which would be awesome peace of mind. I'm also not sure if the 0% bracket will stick around going forward.

We have about 12 months of expenses in an emergency fund and another $9,000 would boost that to close to 15 months, which would help with peace of mind as well. I would need to research the benefits of #3 and #4, but if we didn't do #1 or #2, then #3 would seem like a no brainer.

Sorry if these seems somewhat rambling, but a buddy of mine just lost his job and for whatever reason that caused me to go into a minor panic.
I would not sell stocks. Why unnecessary pay 6% state tax? In the worst case, if you are out of work and then you sell those stocks then you won't have to pay even 6% tax. 12 months of expenses in liquid cash is pretty good safety. I don't think it is worth adding more to it.

I assume there are no bonds in the taxable otherwise that would have been good choice to reduce the mortgage.
hudson
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Re: Selling some taxable to keep cash or pay mortgage?

Post by hudson »

sergio wrote: Sat Jan 16, 2021 6:52 pm We have a relatively small taxable account $50k but it has a lot of gains as we invested that money a long time ago.
Would any of these make sense?
1. Sell $9000 of taxable and put towards our mortgage?
2. Sell $9000 of taxable and keep as liquid cash?
3. Tax-gain harvest?
4. Do nothing?
I think that any of the above would be fine.
I like paying off mortgages and having zero debt. When I paid off my home equity loan, I just paid extra every month until the loan went away. We did the same thing with our children's college loans.
I also am in favor of never touching the investment pile unless there is a real need.
Tax-gain harvest: I have never warmed up to that because I don't want to pay the taxes.
What do you do? It's your choice. Maybe do nothing until the answer is clear in your mind?
presto987
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Re: Selling some taxable to keep cash or pay mortgage?

Post by presto987 »

Agree with a few other posters on the following points:

1. If your job situation is tenuous, you DO NOT want to pay down your mortgage, which locks up that cash. Keep the cash liquid in stocks or cash.

2. You can realize the $9k of capital gains and then reinvest the money! That way you use up your $9k allowance to reset your cost basis, but you still stay invested.
Admiral
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Re: Selling some taxable to keep cash or pay mortgage?

Post by Admiral »

hudson wrote: Mon Jan 18, 2021 8:36 am
sergio wrote: Sat Jan 16, 2021 6:52 pm We have a relatively small taxable account $50k but it has a lot of gains as we invested that money a long time ago.
Would any of these make sense?
1. Sell $9000 of taxable and put towards our mortgage?
2. Sell $9000 of taxable and keep as liquid cash?
3. Tax-gain harvest?
4. Do nothing?
I think that any of the above would be fine.
I like paying off mortgages and having zero debt. When I paid off my home equity loan, I just paid extra every month until the loan went away. We did the same thing with our children's college loans.
I also am in favor of never touching the investment pile unless there is a real need.
Tax-gain harvest: I have never warmed up to that because I don't want to pay the taxes.
What do you do? It's your choice. Maybe do nothing until the answer is clear in your mind?
Just to be clear: The point of tax gain harvesting is to realize gains when one is in the 0% cap gains bracket. The whole idea is to take gains while paying no tax. For many investors this is not an option. It just depends on your earned income.
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