If you have over $1 million in investable assets, capital gains taxes could take a significant bite out of your portfolio’s growth. (Shutterstock),
If you have over $1 million in investable assets, capital gains taxes could take a significant bite out of your portfolio’s growth.
Without proper planning, the combined impact of capital gains taxes, required minimum distributions (RMDs), and taxable Social Security benefits might push you into a higher tax bracket in retirement.
Failing to strategically manage your tax liabilities may result in a significant and avoidable financial loss.
That’s why identifying strategies to help minimize capital gains tax may be an important step to maximizing your retirement income.
A fiduciary financial advisor may be able to help you optimize a tax strategy and identify savings opportunities to lower your tax liability.
In fact, SmartAsset’s latest proprietary model reveals that working with a financial advisor could potentially add from 36% to 212% more dollar value to investors’ portfolios over a lifetime, depending on multiple unique, individual factors.¹
SmartAsset’s no-cost tool can help you find and compare vetted fiduciary advisors.
The fiduciary financial advisors you match with are legally bound to work in your best interest. You may even be able to instantly connect with an advisor for a free introductory call. Advisors are vetted through our proprietary due diligence process.
What Are Capital Gains Taxes?
Capital gains are any profits you may make when selling an investment asset.
When you buy an investment asset, the original price you pay is known as the asset’s cost basis. When you sell that asset, you compare its sale price to its cost basis. If you made money, this is known as a “capital gain.” If you lose money, it’s a “capital loss.”
If you sell an asset after holding it for less than a year, your capital gains will be taxed as ordinary income.
Remember, the capital gains tax rate applies only to the income that’s realized when you sell an asset. If you have both capital gains and capital losses in a single tax year, you may deduct your losses from your gains when you calculate your taxes.
Consider consulting a financial advisor to determine how your potential gains may be classified so you can better know what to expect when taxes are due. Click here to get matched with vetted fiduciary financial advisors.
5 Strategies to Help Lower Capital Gains Tax
1. Leverage Tax-Loss Harvesting
One way to offset capital gains may be through tax-loss harvesting.
This strategy involves selling underperforming assets at a loss to counterbalance potential gains from winning investments.
Here’s a hypothetical example: Suppose you sell a long-term equity position in a stock for a $250,000 gain. Instead of facing this hefty tax bill, you could sell an underperforming asset for a loss.
For the sake of this example, let’s say you have another asset you can sell at a $100,000 loss. By doing so, you may be able to reduce your taxable gain to $150,000, lowering your tax liability.
2. Utilize Long-Term Capital Gains Rates
Not all capital gains may be taxed equally. Assets held for over a year qualify for long-term capital gains rates, which are lower than short-term rates (taxed as ordinary income).
Here’s a hypothetical example: Imagine an investor who purchased $500,000 of a stock, and its value has grown to $900,000 in 10 months. If they sell now, the $400,000 gain may be taxed at their ordinary income rate, which could be as much as 37% for high earners. That could result in a potential $148,000 tax bill.
By waiting just two more months to cross the one-year threshold, they may instead qualify for the long-term capital gains rate, maxing out at 20%, and reducing their potential tax bill to $80,000.
3. Consider a Charitable Giving Strategy
For investors with significant assets, philanthropy may be another way to reduce taxable capital gains while supporting causes you care about.
One method could be donating appreciated assets, such as stocks or real estate, to a qualified charitable organization instead of selling them for potential personal gain.
Here’s a hypothetical example: A high-net-worth investor owns $1 million in stock that originally cost $200,000. If they sell, they would realize a potential $800,000 gain and may owe up to 20% in federal capital gains tax—a potential $160,000 tax hit.
Instead, by donating the shares directly to a charity, they may avoid the capital gains tax entirely and could also receive a tax deduction for the full fair market value of the stock. Not to mention the impact such a gift could have on a charity.
4. Maximize 1031 Exchanges for Real Estate Investments
If your portfolio includes real estate, a 1031 exchange may help you defer capital gains taxes when selling a property.
In a 1031 exchange, investors may reinvest proceeds from a real estate sale into a “like-kind” property without immediately triggering a tax liability.
Here’s a hypothetical example: An investor sells a rental property for $5 million with a $2 million capital gain. Instead of paying up to $400,000 in long-term capital gains taxes, they could roll the proceeds into the purchase of another multi-family real estate opportunity, potentially deferring taxes indefinitely while possibly increasing cash flow.
5. Optimize Retirement Accounts to Shelter Gains
Investing within tax-advantaged accounts may also help reduce capital gains exposure.
Contributing to a traditional IRA, or 401(k) allows investments to grow tax-deferred, while a Roth IRA allows investments to grow tax-free since taxes are based on contributions. But there are limits for high-earners.
Here’s a hypothetical example: Roth IRAs may be attractive since you don’t pay taxes on withdrawals in retirement. However, you can’t contribute to a Roth IRA directly if you make above a certain income. For 2025, single filers whose modified adjusted gross income (MAGI) is $165,000 or above and joint filers whose MAGI is $246,000 or more are ineligible for making Roth contributions.
However, a “backdoor Roth IRA” could allow you to convert a traditional IRA into a Roth.
Here’s how it works: A high-earning investor may still contribute the normal $7,000 per year to a traditional IRA. They could then convert it to a Roth IRA, allowing future capital gains to grow tax-free. There are other tax implications involved with Roth conversions, so it could be a good idea to speak with a financial advisor before pursuing such a strategy.
How to Get Help Optimizing a Tax Strategy
With significant wealth comes the potential for increased tax complexity. But high-net-worth investors who take a proactive approach to capital gains tax planning may be able to save over time.
If you’re looking for a way to decrease your tax burden, we recommend speaking with a financial advisor.
Consulting a fiduciary financial advisor could help you determine a plan that factors your assets and taxes into your overall retirement goals. Fiduciaries are obligated by law to act in your best interest and any potential conflicts of interest must be disclosed.
Finding a fiduciary shouldn’t be that hard. Thankfully, now it isn’t.
SmartAsset’s free matching quiz helps Americans find fiduciary financial advisors so they can compare and decide which advisor to work with. All advisors on the matching platform have been vetted through our proprietary due diligence process.
The quiz takes just a few minutes, and in many cases, you can be connected instantly with an advisor to have an introductory call.
Click Here to Get Matched With Vetted Financial Advisors
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This is a hypothetical example and is not representative of any specific security. Actual results when working with a financial advisor will vary.
This scenario is for illustrative purposes only and does not represent an actual client. Results may vary.
This is not an offer to buy or sell any security or interest. All investing involves risk, including loss of principal. Working with an adviser may come with potential downsides such as payment of fees (which will reduce returns). Past performance is not a guarantee of future results. There are no guarantees that working with an adviser will yield positive returns. The existence of a fiduciary duty does not prevent the rise of potential conflicts of interest.
SmartAsset.com is not intended to provide legal advice, tax advice, accounting advice or financial advice (Other than referring users to third party advisers registered or chartered as fiduciaries (“Adviser(s)”) with a regulatory body in the United States). The article and opinions in this publication are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you consult your accountant, tax, or legal advisor with regard to your individual situation.
SmartAsset Advisors, LLC (“SmartAsset”), a wholly owned subsidiary of Financial Insight Technology, is registered with the U.S. Securities and Exchange Commission as an investment adviser. SmartAsset’s services are limited to referring users to third party advisers registered or chartered as fiduciaries (“Adviser(s)”) with a regulatory body in the United States that have elected to participate in our matching platform based on information gathered from users through our online questionnaire. SmartAsset receives compensation from Advisers for our services. SmartAsset does not review the ongoing performance of any Adviser, participate in the management of any user’s account by an Adviser or provide advice regarding specific investments.
We do not manage client funds or hold custody of assets, we help users connect with relevant financial advisors.
Sources:
“The Value of a Financial Advisor: What’s It Really Worth?” SmartAsset (Nov. 2024)
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