so you have a financial adviser that can't advise you on the income tax consequences of selling the stock and paying off the mortgage. sounds more like a securities broker than a FA. also do you have a state income tax?
so you have a financial adviser that can't advise you on the income tax consequences of selling the stock and paying off the mortgage...
That is one excellent point. Financial advisors should at the very least be aware of the basic tax implications that result from buying and selling securities.
Thanks all. In his defense, he did provide me with a chart for capital gains taxes and told me where I should fall - but thought I should talk to my tax preparer (myself?) just to be on the safe side. It sounds like I might be looking at the 3.8% in addition to 20%, so a maximum of 25% prepaid should cover federal taxes. I guess I also need to look at state taxes. Yuck.
Going back a step, if you have the resources to pay off your house which would enable you to somehow change your life or take a less lucrative job that’s more enjoyable, do you actually need to pay off the house to be comfortable? For example, you could set up a system of automatic withdrawals and transfers, so that at the end of each month you sold just enough stock to cover the next mortgage payment, transferred it to a checking account, and had the mortgage payment automatically debited. That way your mortgage would be covered and you wouldn’t have to think about it, but you wouldn’t be taking such a large lump sum of capital gains and you would retain your mortgage interest deduction.
You can also talk to your stockbroker about selling your stocks on a LIFO method (last in first out) which will minimize the current capital gains.
That is fascinating… and you hit on it. I had a job that is, possibly literally, killing me. It pays well, but I’ve hit an age where it just isn’t worth it anymore. Health and family are suffering. My retirement accounts are good, but I’m not old enough to touch them yet.
I wish I was as smart about these things as you all. The stocks are in ComputerShare, which seems a bit limited and I’m a bit gunshy about initiating a transfer to a brokerage account… but, really, that all sounds like a great idea.
If you are well diversified, as a good advisor would have you be,
you should sell a combination of stock some with loses and some with gains.
You pay off your mortgage but in the ideal case your tax is zero.
For this particular situation, it’s a big chunk of stock that I consider my “bug out” money. My parents, as a gag, bought me $500 of Apple stock in about 1998. It’s now worth a bit more 🙂
Most everything else I have is wrapped up in retirement accounts, although I guess I do have a decent chunk of “play” investments that would work as a potential offset.
Slow the roll if you can ... paying 25% in taxes to pay off a mortgage of less than 10% interest rate may not be wise. Quit the job if you like and sell off enough each month (or couple of months) to pay your bills to allow the investments to remain for a while longer. As long as they are making more in earnings/value than the mortgage interest this would be a better choice. There is no need to "break into the piggy bank" any faster than needed. Splitting this into more than one tax year helps as well ... if you are not working next year than the taxes would be lower.
If “computershare“ is a stock trading account, that is essentially what I meant by a broker. Wherever you hold and trade your stocks. You should be able to pick and choose which shares to sell, so that you could sell shares that had less gains.
I am not going to go into the very dangerous territory of telling you which stocks to buy and sell, but I would recommend a diversified portfolio that includes some mutual funds. If everything is in one stock, that’s fairly risky even if it seems to be an amazing stock.
if you are deducting mortgage interest on your tax return, that reduces your effective interest rate by 25%. For example if your mortgage is 4% APR, you are paying any effective rate of 3%. Right now the stock market is down, but suppose we expect that the stock market will recover 10% in the next two years. That’s 5% annual growth if you leave your money in the stocks compared to 3% effective growth if you pay off the mortgage. If the stock market grows more than 3% per year, you will do better by leaving your money in the stock market as long as possible. Of course, paying off the mortgage is a sure investment gain of 3% where the stock market is risky and variable.
There is no one size fits all right answer, but for most people, leaving their investments in the market as long as possible is the better long-term play. If these concepts have not been suggested to you by your financial advisor, then you need a better financial advisor.