Author Topic: Protecting gains while deferring taxes to retirement (time for options?)  (Read 1353 times)

sideways

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Hi MMM Readers,

Happy new year!

My family is very lucky: we have been investing in a particular fruit company over a period of years, and now our stock is highly appreciated, representing almost all of our portfolio. We also have a good income which puts us in a high tax bracket, but we are looking at FIRE in 2016, where we should be in a low bracket. We would like to reduce the risk of owning this stock (e.g. by diversifying to an index fund), but selling today would realize mucho capital gains, which we would rather defer until 2016. How can we do that?

One strategy I found is an options trade called a "collar." Say our fruit stock is at $100. We buy put options at $85, and sell call options at $115, both to expire in 2016. This limits our losses to 15%, and costs nothing out of pocket. The downside is that it limits our gains to "only" 15%, and if either option is exercised we'll be forced to sell.

Is a collar a good idea for me, or have I blasted off into Enron land? I have no experience with options trading yet.

Has anyone else been in a similar situation? What did you do?

The grubby details: we have $1.15 million in stock, ~65% of which is long term capital gains. We expect to face a combined capital gains tax rate of 34% (20% federal, 10.3% state, 3.8% Medicare) in 2015.

Thank you for your thoughts and experiences, and best of luck to you, yours, and your mustaches in 2015.
« Last Edit: December 31, 2014, 01:38:27 PM by sideways »

Gone Fishing

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Re: Protecting gains while deferring taxes to retirement (time for options?)
« Reply #1 on: December 31, 2014, 01:58:25 PM »
I'm not an options guy, but if you make any cash donations, you might be able substitute your stock for cash.  Then you use your cash for alternant investments. Probably won't help much, but if you are a 10% tither it could make a small difference.  Are your dividends set to reinvest?  You can turn that off as well and take the cash.  Every bit helps.   

What ever you do, diversify, and never let yourself end up like this again.   


dandarc

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Re: Protecting gains while deferring taxes to retirement (time for options?)
« Reply #2 on: December 31, 2014, 02:23:01 PM »
So Close - I like that - give it away. 

OP - Perhaps a charitable remainder trust?  Give the shares to your favorite large university, and it gets them off your books, with a large charitable donation deduction for the current year (depends how you structure it).  They then pay you a set percentage back every year for a certain amount of time.  Then you put that income into your index fund.

Actually that does pretty much exactly what you want to do - the charity will undoubtedly liquidate the stock and invest it in a broad-market portfolio.  Then pay you the specified amount of the proceeds.

clifp

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Re: Protecting gains while deferring taxes to retirement (time for options?)
« Reply #3 on: December 31, 2014, 07:13:14 PM »
Collar are exactly what you want to do. If the fruit company is the really really big one you can easily purchase long term options (LEAPs) that go out to 2016 and even 2017. You also might want consider writing in deep in the money covered calls so for instance a Jan 16, 70 call which get you say $41.50 today. You won't owe tax on the $41 until April of 2017. The IRS has rather strict rules about using calls like this so you'll want to read the rules and/or talk to a CPA. But say if you wanted to sell 20-30% of the stock per year until you got to reasonable size position that's one way of doing it.