Blog

You've done the hard work. You've spent years, maybe decades, saving, investing, and building wealth. Now, retirement is on the horizon, and you're facing a question that doesn't get nearly enough attention: what do you actually do with all those appreciated securities sitting in your brokerage account?

This is one of the most nuanced and important planning conversations for early retirees. Done well, it can save you a significant amount in taxes and give you tremendous flexibility. Done poorly, it can create an unnecessary tax burden right when you're trying to enjoy the fruits of your labor.

There are four strategies available to you when dealing with appreciated securities in a brokerage account. I've listed them in order of how commonly they'll apply to most people, from the most accessible to the least common but most powerful.

Why the Brokerage Account Matters So Much in Early Retirement

For most people who retire before age 59½, the brokerage account (also called a taxable or after tax account) is the first place you'll draw income in retirement. Pre tax retirement accounts like 401(k)s and IRAs come with age based restrictions and required minimum distributions. Roth accounts have their own rules. But the brokerage account is flexible, accessible, and available to you on day one of retirement.

That flexibility, however, comes with a catch: embedded capital gains. If you've been a diligent investor and your holdings have grown significantly, every dollar you pull out may come with a tax consequence. The goal is to be strategic about how you handle those gains so that you keep more of what you've built.

Strategy 1: Realize the Gains and Pay 0%

The first strategy, and for most early retirees the best one, is simply to realize your long term capital gains in a tax efficient way. This sounds counterintuitive at first. Why would realizing gains be a good thing? Because the U.S. tax code has a 0% long term capital gains rate, and in early retirement, many people are in the perfect position to take advantage of it.

Here's how it works: if your taxable income falls below a certain threshold, your long term capital gains are taxed at 0%. In 2026, that threshold is higher for married couples filing jointly than it is for single filers, but the principle applies to both. If you've left your career and your ordinary income is low, you may have a meaningful window each year to harvest gains completely tax free.

For most early retirees, there will be a period (potentially several years) where this strategy is your primary tool. The goal is to keep your adjusted gross income under the threshold while systematically realizing gains from your brokerage account to fund your lifestyle.

This is the most flexible and efficient option available, and for many people reading this, it's simply the answer. But what if your situation is more complex? What if the gains are too large, or your income is too high to stay in the 0% bracket? That's where the next strategy comes in.

Strategy 2: Mitigate the Gains

When you know you're going to owe something on your capital gains, the question becomes: is there anything you can do to reduce the impact? The answer is yes, and there are two particularly effective approaches.

Direct Indexing and Tax Loss Harvesting

One of the most powerful and underutilized tools for managing capital gains is a direct indexing account, sometimes called a custom indexing account. Instead of owning a mutual fund or ETF, you own the individual securities that make up an index, for example, the individual stocks within the S&P 500.

Why does this matter? Because when you own individual securities, you have the ability to tax loss harvest. This means selling securities that have declined in value, locking in a loss, and then reinvesting in something substantially similar after 31 days to comply with the IRS wash sale rule. That harvested loss can then be used to offset gains elsewhere in your portfolio.

Here's a real world example. I worked with a client couple who were approaching retirement and had a significant concentration in a single mutual fund with large embedded gains. In the one to two years before retirement, we opened a direct indexing account alongside their existing holdings. When the market experienced volatility in early 2025, we harvested losses in that account. When they were ready to diversify out of that concentrated mutual fund, those carryover losses helped offset a meaningful portion of the gains, reducing their tax bill substantially while still meeting their financial goals.

The key takeaway is that volatility isn't always the enemy. In a direct indexing account, downturns create harvesting opportunities that can be used strategically for years to come.

Gifting Appreciated Stock to Family Members

A second, simpler way to mitigate gains is through strategic gifting while you're alive. If you own a stock that you purchased at $10 per share and it's now worth $100 per share, you have a $90 per share embedded gain. If you sell it yourself, you pay capital gains tax on that $90.

But what if you were going to give money to a child or grandchild anyway? By gifting the shares rather than cash, you transfer your cost basis along with the stock. The recipient receives the shares as if they purchased them at your original $10 cost. If they sell at $100, they owe capital gains on the $90. Here's the planning opportunity though: if they are in the 0% long term capital gains bracket because their income is lower, that $90 gain may cost them nothing. That's a meaningful shift of the tax burden to a lower bracket family member, and it fits naturally into a broader gifting strategy.

Strategy 3: Defer the Gains

Sometimes the right move isn't to realize or reduce gains. Sometimes it's to push them further into the future. There are a couple of ways to do this effectively.

The simplest form of deferral is holding growth oriented investments that don't generate significant dividends or income each year. By doing so, you avoid forced capital gains distributions, and gains only become taxable when you choose to sell. You control the timing.

More powerfully, if you have a portfolio with a handful of concentrated positions that you'd like to diversify, you may be able to utilize a 351 Exchange (sometimes called a contribution to an exchange fund). This strategy allows you to pool your concentrated holdings with other investors' holdings through a partnership structure, effectively diversifying your portfolio without triggering a taxable event. The gains don't disappear, they're deferred, but it gives you the diversification you need while spreading the eventual tax liability into the future on your own terms.

This is a nuanced strategy with many specific rules and requirements, and it won't apply to single stock portfolios. Even so, it's a powerful option worth exploring if you have significant concentration in a brokerage account.

Strategy 4: Eliminate the Gains

Now for the most powerful strategy, and the one that comes with an important caveat. You can completely eliminate capital gains in a brokerage account. The good news is that it's possible. The challenging news is that it requires giving up control of the assets, either at death or through an irrevocable gift.

The Step Up in Basis at Death

When you pass assets to your heirs through a brokerage account, those assets receive what's called a step up in basis. This means the recipient's cost basis is reset to the fair market value of the asset on the date of your death, not what you originally paid for it.

Using our earlier example: you bought a stock at $10, it grew to $100, and you pass it to your child. Their cost basis is now $100. The $90 gain you accrued over your lifetime is gone, completely eliminated. Your heirs can sell the shares immediately and owe virtually nothing in capital gains taxes.

I sometimes call this the "anti Roth conversion." Rather than paying taxes today to move money into a tax free Roth account, you're intentionally holding appreciated assets in a brokerage account so that the embedded gains are forgiven at death and your heirs receive the assets tax free. For clients who want to leave a meaningful legacy, setting aside a dedicated brokerage account specifically for inheritance purposes can be an incredibly efficient strategy.

Donor Advised Funds

The second way to eliminate capital gains is through a donor advised fund (DAF). A DAF is a charitable giving vehicle that allows you to make an irrevocable contribution, ideally in the form of appreciated stock, and receive a charitable deduction in the year the gift is made.

When you contribute appreciated stock to a DAF, the embedded capital gain disappears. The fund sells the stock, pays no capital gains tax, and the full value is available to be granted to the charitable organizations of your choice over time. You get a large upfront deduction (subject to AGI limits), the capital gain is eliminated, and you retain the ability to direct grants to 501(c)(3) organizations in future years.

This strategy is particularly effective in your final working year when your income is at its peak and the charitable deduction provides the most tax benefit. The trade off is clear: you give up control of the assets permanently. But for those with a charitable intent, this is one of the most tax efficient moves available.

Putting It All Together

Here's a quick summary of your four options:

For most early retirees, the journey starts with realizing gains strategically during low income years. As complexity grows, whether through larger positions, higher income, or estate planning goals, the other three strategies come into play, often in combination.

The key is that none of these decisions should be made in isolation. The brokerage account doesn't exist in a vacuum. It fits into a larger picture that includes your Social Security timing, Roth conversion strategy, spending needs, and estate goals. Getting that picture right is what separates a good retirement from a great one.

This article is for educational purposes only and is not intended to be personal financial, tax, or investment advice. Please consult a qualified financial professional before making any decisions based on the information presented here.

Forest Dutton, CFP®, MSFP, MBA is the owner of Brightworks Financial Planning.