Liquefiable Assets | A Retirement Wheel of Fortune
In retirement, most people have a grand assortment of assets that can be used to cover expenses- stocks, bonds, mutual funds, taxable IRAs, Roth accounts, and for a few fortunate maybe a Picasso or two on the wall. My ranking begins with something so in need of liquidation that you should get rid of it yesterday. It ends with a precious tax planning tool that you should be clutching as you slip into the grave. Please keep in mind that my list will not be anything earth shattering that you don’t already know. It is merely a reminder/refresher.
Depreciated securities: Let’s assume you have $25,000 in investment losses. You have 2 choices-sell and you have your funds along with a healthy loss that can help absorb capital gains from other investments. Don’t sell and likely make the IRS better off. That’s because unrealized capital losses and capital-loss carry forwards vanish on your death.
Cash: Common advice is to have cash on hand to pay all bills for the next six months. Most people don’t stop at six months. They have up to two years of cash sitting in a liquid cash account. This is poppycock. You don’t need cash, you need liquidity. You can get liquidity from a fully invested brokerage account. Sales are settled in three days and a link to your checking account will allow the funds to go back and forth with ease. Keep the six months and allow the rest to grow.
Taxable IRAs: Beginning roughly when you are 70, you have to take out a certain amount. Should you take out more if you need the cash? Often, yes, if it spares you selling appreciated securities outside your retirement account. Your tax bill is going to be higher on the IRA withdrawal than cashing out your Apple shares, but don’t forget that your heirs are destined to pay taxes, in most cases at higher ordinary income rates, on that IRA someday. Cashing in the Apple shares to preserve the IRA just defers the day of reckoning for the IRA.
Roth IRA’s: These retirement funds, on which taxes have already been prepaid, belong at the bottom of the list because they allow you to take investment gains tax-free. They also do not have a withdrawal mandate while you or your spouse is alive. In addition, under the present law, children and grandchildren can stretch them out over their lifetimes.
Highly appreciated securities: These assets should be sold last. You should not sell these securities unless you are completely tapped out. Leave the shares in your will, and your heirs will escape income tax on the appreciation upon your death. It’s that simple.
In summary, this article is not meant to give tax or estate advice. It should merely be used as a barometer on what assets/asset classes should be considered for sale before others when additional cash is needed to cover expenses during retirement