For people who retire in their 30s, there is a long stretch ahead before we can access our retirement accounts at age 59.5.

For ourselves, and many others, the solution is a sufficiently large taxable brokerage account to fund life for several decades. The long term, if you will.

But over time, this can become increasingly tax inefficient.

Compound Interest

In the dream scenario, the years of retirement see economic prosperity for all and a stock market that trends upward with no end in sight. Or in other words, more of what we have seen for the past 200 years or so.

We’ve all seen those great charts that go up and Up and UP! In fact, here is one that I found on Over the long term the market has returned ~9% per year, roughly 50/50 dividends / capital gains.

We are spending our dividends as we go, so with 4.5% capital growth only, over the next 25 years we could see a nice 200% gain / 3X return on our investments.

Compound interest is a beautiful thing.

Spending Money

In the early years of retirement, we can sell some stock when we want some spending money. If we sell $10,000 worth of stock that has appreciated 5%, we will have a taxable $476 (long-term) capital gain (likely with a tax rate of 0% at the Federal level.) The remaining $9,524 is just the money we bought the stock with originally.

Fast forward 20 years or so and that same stock sale generates a taxable capital gain of $6,667. Only $3,333 is a non-taxable return of basis.

It is pretty fascinating to see how normal long term growth changes what percentage of equity sales are gain vs return of basis, so much so that I made a chart :)

Due to the generous nature of the Federal tax code, this may only impact payments to the IRS for the really big spenders. But for people in States with an income tax and/or enrolled in ACA health insurance, this can be substantial.

With ACA premiums as much as 3X higher for Seniors, if greater realized capital gains push a household over the ACA subsidy cliff the effective tax rate could be massive. (A Roth IRA to bridge the gap before Medicare can help insure staying on the beneficial side of the subsidy cliff.) (Other MAGI based benefits may also be impacted, e.g. FAFSA / education assistance.)

Harvesting Capital Gains

To minimize long term long-term capital gains, we can employ a sustained multi-year effort to harvest capital gains. Again, State and ACA subsidy taxes may apply.

Over the past 5 years the S&P500 increased 87%. As the markets rose, we harvested $147,207 worth of gains while paying $0 in tax.

With an 87% gain, a stock sale would consist of 47% capital gain ($4,650 of a $10k sale, from the chart.) Because we raised our basis through harvesting, we can sell stock with only a 25% gain. This means only 20% of a sale is a capital gain ($2,000 of a $10k sale, also from the chart.)

Assuming a 15% capital gain tax rate and a 15% ACA subsidy reduction, this alone would be a tax savings of ~$800, and I can always harvest more next year. Not bad for just a few minutes of my time once per year.

If you don’t already have it, you can get my capital gain harvesting template based on the trades I executed in Dec 2016. Fill out this form and I’ll email it to you.


Over the long term, due to the wonderful force of compound interest we will likely end up with a large amount of capital gains. If/when those gains are realized, we may be taxed or have ACA subsidies reduced. This impact increases with time.

As an example: On a $10k stock sale, with 5% growth we have only a $476 capital gain. With 100% gain we have a $5,000 capital gain. If this gain was taxed at 15%, the difference is a tax of $71 vs $750.

To minimize the tax impact of long term long-term capital gains, we can employ a sustained multi-year effort to harvest capital gains, which effectively increase our basis. This can be done tax free if NOT using ACA health insurance and not in a State with an income tax. Or outside the US.

How are you minimizing the impact of long term long-term capital gains?