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Author: KrisAdAstra One star, 50 posts Mission Olympia 2 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121104  
Subject: Portfolio rebalancing and tax consequences Date: 7/7/2011 12:22 AM
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Dear Fools-

I'm a new investor who has benefited greatly from Stock Advisor advice. However, I now find myself in the position of needing to sell some stock to rebalance my portfolio due to some great gains that have now become too risky for my taste. I simply can't take the risk that 50% of the value of my portfolio is in a single stock (thank you NFLX). The problem is that if I sell a significant portion of this stock it will bump me out of the 15% tax bracket and I'll have to pay capital gains taxes.

Is there any way I can redistribute this risk, perhaps into new accounts in another family members name? Can you create IRAs for infants (crazy question)? I don't want to give away the money to charity as I'd like to allow it to grow, just in a more diversified way.

Any ideas?

~Kris
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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113646 of 121104
Subject: Re: Portfolio rebalancing and tax consequences Date: 7/7/2011 2:10 AM
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Is there any way I can redistribute this risk, perhaps into new accounts in another family members name? Can you create IRAs for infants (crazy question)? I don't want to give away the money to charity as I'd like to allow it to grow, just in a more diversified way.

Your screen name made me think you may have a Kansas connection, but a Kansan would already know that pigs get fat, but hogs get slaughtered. No, you can't cash in your gains, pay no taxes, and keep control of your money by pretending it belongs to someone else. In the ugly city we call that fraud.

Try looking at taxes this way. Your goal is to be in the 35% bracket. Waaaaaaaaaaaaay into it.

Unless the infant has earned income there's no IRA contribution available, but you can look into the education savings programs described in IRS Publication 970.

Phil
Rule Your Retirement Home Fool

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113647 of 121104
Subject: Re: Portfolio rebalancing and tax consequences Date: 7/7/2011 2:30 AM
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Is there any way I can redistribute this risk, perhaps into new accounts in another family members name?

A bona fide gift of the stock to another person would transfer the tax liability to them as well. But it needs to be a real gift, not a "gift". If you are of a mind to make a gift to any recent grads in the family, a couple shares of stock might not be a bad idea.

Can you create IRAs for infants (crazy question)?

Yes, but the infant has to have income from working. And that won't help you anyway, as contributions to an IRA must be in cash. You'd have to sell the stock and put the proceeds into an IRA. And that would trigger the tax liability.

Any ideas?

Count your lucky stars.

Sell just enough of the stock to stay in the 15% bracket. And even if you do go over the 15% bracket, it's only the amount OVER that bracket which would be taxed, not the entire gain.

If you're rebalancing, are there any losers to sell as well? If so, you net out your gains and losses before paying taxes, so any losers would reduce your taxable gain.

--Peter

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Author: CABob Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113648 of 121104
Subject: Re: Portfolio rebalancing and tax consequences Date: 7/7/2011 12:18 PM
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There are worse things than paying taxes. One of them is not having the income to pay the taxes upon.

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Author: DolonAltekar Three stars, 500 posts SC1 Red Motley Fool One Everlasting Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113649 of 121104
Subject: Re: Portfolio rebalancing and tax consequences Date: 7/7/2011 3:41 PM
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There are worse things than paying taxes. One of them is not having the income to pay the taxes upon.

Truer words have never been spoken.

First of all, moving into a higher tax bracket doesn't move all your income into that bracket, just the amount over the bracket.

Second, Would you rather pay some taxes, or be out of balance in your portfolio and then have the risks you are worried about come to pass?

I think it's important to consider taxes, but don't let the fact that you have to pay them make you take outsized risks with your money.

Another question: do you have some other positions that are losers that you can sell to offset the gains?

D.

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Author: 0x6a74 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113650 of 121104
Subject: Re: Portfolio rebalancing and tax consequences Date: 7/7/2011 4:43 PM
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Second, Would you rather pay some taxes, or be out of balance in your portfolio and then have the risks you are worried about come to pass?

I think it's important to consider taxes, but don't let the fact that you have to pay them make you take outsized risks with your money.



yup, didn't we used to have someone here who'd always say, "don't let the Tax Wagon shake the Investment Donkey"?


[ OP should have done what i did -- sell all NFLX back when it was $55 ]


another question might be --why is 'balance' so important? When i have a stock that gains so much i start getting nervous, i put in trailing-stop orders for a fraction ]

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Author: KrisAdAstra One star, 50 posts Mission Olympia 2 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113654 of 121104
Subject: Re: Portfolio rebalancing and tax consequences Date: 7/9/2011 10:50 PM
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Thanks everyone for the advice. I actually did not know that it was the amount OVER that gets taxed, which is really great news to me. We'll only be over the 15% bracket by a bit. I was concerned that the whole capital gain would be taxed - so that's a load off.

I don't have a Kansas connection - born and bred in New York.

One of you mentioned that I could "gift" the stock to someone else. Can I "gift" stocks into a Coverdell ESA or 529 plan for my son? Is that possible without triggering tax liability?

The idea of setting up trailing stop orders is also a good one. I wonder if it costs money to have those orders in place for a while before they get activated...

Thanks,
Kris

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Author: 0x6a74 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113655 of 121104
Subject: Re: Portfolio rebalancing and tax consequences Date: 7/9/2011 11:02 PM
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The idea of setting up trailing stop orders is also a good one. I wonder if it costs money to have those orders in place for a while before they get activated...



not with my broker (Schwab) probably not with any.

[ i've had trailing stops on AAPL for over a year ...
but then, it was trailing stops that got me out of NFLX when it was at $55 ]

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113656 of 121104
Subject: Re: Portfolio rebalancing and tax consequences Date: 7/10/2011 12:57 AM
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Can I "gift" stocks into a Coverdell ESA or 529 plan for my son?

No. Contributions to these plans must be cash.

Phil
Rule Your Retirement Home Fool

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