How can you transfer $500,000 from a taxable equities(stock) account, to a lower taxed retirement account?

Question

Heres the situation:

My unemployed (retired) 58 year old father has about 500k in a Schwab account. He owns his house outright has no write-offs. He will start receiving a pension type retirement income when he turns 65.

When he needs money he sells some stock and gets killed on his taxes. Nearly the entire schwab account is filled with stocks that were bought at substantially lower levels, so when he sells it is all capital gains.

Question? What is the easiest way to transfer some of these volatile stocks into some income generating, capital preserving, index or bond funds that will give my father approximately 50,000 a year for 8 years until his retirement kicks in?

Answer 1

If he transferred the stocks into bonds or money market accounts, any interest income generated would be taxed at a higher rate than capital gains.  

He sounds well-situated to live off of low-taxed capital gains until his pension starts.   He may want to shift some money into dividend paying stocks, since most dividend income is also taxed at a low rate, and he could get income without selling the stock.

Answer 2

You can't transfer those to a retirement account.  Only earned income can be salted away in retirement accounts and capital gains are not earned income.  Since he has no earned income this isn't an option.

Capital gains are already taxed at some of the lowest tax rates, as low as 0% for 2008 and 2009 and no more than 15%.

You should cull through the lists of the securities that are in the account and rank them according to the potential capital gains, from least to highest.  Then sell off enough of them with the lowest total gain to keep him in the 15% tax bracket.  That way, no tax will be due in 2008 or 2009.  Move those funds to something less volatile if income and capital preservation are a priority.  Dump anything with a capital loss as well and offset that with gainers as they cancel each other out nicely.

Even if you cashed out the entire account and it was ALL gains, the worst case tax bite would be $75,000.  That would still leave $425,000 which is plenty to cover $50,000 per year for 8 years.  Since it's unlikely that his basis in any of the securities is $0, the gain will be less than the total value of the account so the total tax will be less than $75k.

Answer 3

your father has done a good job with his Schwab account but now he needs the expertise of a full-service broker with experience dealing with retired people...good luck

Answer 4

There is no way to do what you are asking without tax implications.  You might be able to put the stock into a tax defered annuity, but you would have to sell the stock triggering capital gains to do it.

He is probably in the best situation now, Capital Gains are taxed at max %15 which is probably less than his marginal rate.