Planning with unrealized capital gains.

Henry K. Hebeler

6-15-08

There are not many retirement planning programs that make provisions for unrealized capital gains in taxable accounts.  An unrealized gain is the current security market value less the cost basis.  Unfortunately, this can lead to optimistic planning for retirees because the programs have no way to account for the capital gains tax that will ultimately be due on the sale of the securities.

The simplest way to make a gesture to account for such taxes is to reduce the value of your input for the taxes that would be due.  So if you had $100,000 current market value of taxable securities and a cost basis of $20,000, your unrealized gain would be $80,000.  If the future tax rate would be 20% for state and federal capital gains, you would incur $16,000 tax on the sale.  Hence, you could enter $100,000 less $16,000, or $84,000 for the amount of taxable investments.

More likely, you would spread the sale of such investments over a period of time.  To represent that you could include the tax as an expense to come from your retirement income.  There’s a better way if you have the Pre and Post Retirement Planner from www.analyzenow.com.  You can use the Special Event tab to make either specific tax entries in certain years or spread the entries out over a period of time.

However, there are other considerations too in the case of taxable investments.  Highly appreciated securities make great charitable gifts and can be good gifts to give to lower income people like grandchildren who are likely to be taxed at a lower rate.  Also, if people expect that highly appreciated taxable securities may be part of their estate, they will escape the capital gains tax on their death because of the cost basis mark up.  This latter point may not be a simple conclusion depending on what happens to estate taxes.  Whether leaving to an estate or making gifts while alive means that you would not deduct the tax on unrealized gains in your planning analysis.