At 68 She’ll Sell $100,000 of a Fund She’s Bought Every Month for 20 Years. Which Shares She Tells the Brokerage to Sell Can Change Her Tax Bill by Thousands
Quick Read
Choosing highest-cost shares first over FIFO on a $100,000 fund sale cuts federal tax from $10,900 to $2,000, a savings of $8,900.
Lot selection must be locked in before trade settlement; mutual fund investors lose the option if they already used average cost on a prior sale.
Selling high-cost shares first can keep income below Medicare’s $109,000 surcharge threshold, avoiding roughly $2,900 in extra annual premiums.
She logs into her brokerage account, types $100,000 into the sell box for the index fund she’s bought every month for 20 years, and clicks submit. The trade goes through in seconds, but the screen never asked her the one question that sets her tax bill: which shares?
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She’s 68, single, retired, and the fund sits in a taxable brokerage account, so this sale shows up on this year’s return. Lots of people are in her spot. Households led by people aged 55 to 69 hold about 39% of all stock and mutual fund shares owned outside workplace retirement plans, according to Federal Reserve data. Many built those positions one automatic purchase at a time.
Every Monthly Purchase Created Its Own Tax Lot
Each monthly buy created a separate batch of shares with its own price and date. The tax world calls each batch a tax lot. What she paid for a lot is its basis. Her gain is the sale price minus the basis of whichever lots get sold. Her early shares cost far less than her recent ones, so the lots that go out the door decide how big her gain is.
Brokerages generally use one of three methods:
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First in, first out (FIFO): the oldest shares go first. It’s also the IRS default for stock when the seller doesn’t identify shares (26 CFR 1.1012-1(c)(1)).
Average cost: every share gets the same blended price. Many brokerages and fund companies use it as the default for mutual funds.
Specific identification: the seller picks the lots. Highest-cost-first is an automatic version that sells the costliest lots first.
Same $100,000 Sale, Three Very Different Tax Bills
Here’s a simplified version of her history. Her purchases fall into four five-year lots: 1,200 shares at $30, 1,000 at $45, 800 at $65, and 1,000 at $95. The fund trades at $110 today, so she sells about 909 shares. Her last purchase was more than a year ago, so every lot is long-term. Before the sale, her taxable income is about $60,000, and her modified adjusted gross income (the number Medicare looks at) is about $80,000.
In 2026, a single filer pays 15% on long-term gains once taxable income passes $49,450, up to $545,500. Her entire gain is taxed at 15%.
Same sale, same fund. Choosing the expensive lots instead of letting FIFO run saves her roughly $8,900 in federal tax. Against average cost, she saves about $5,200.
Her Lot Choice Has to Be Locked In Before Settlement
She can pick lots if she tells her broker which shares at the time of the sale and gets written confirmation. Treasury rules accept the choice if it’s made by the settlement date, and a standing instruction on file counts too (26 CFR 1.1012-1(c)(8)). Once the trade settles, the moment has passed.
Mutual funds have one more catch. She can use a cost method like specific identification only if she hasn’t already used average basis on an earlier sale of that fund. Her first sale sets the pattern. On the Bogleheads forum, one investor described trying to switch a fund’s method just to see what would change. That kind of looking around goes before the first sale.
Pushing the Gain Later Still Pays Off
Selling the costly shares first leaves the cheap ones behind, so the gain gets pushed down the road. She still comes out ahead. Later sales might happen in a lower-income year. Shares she still owns at death get a new basis equal to their fair market value on the date of death, so her heirs could sell those $30 shares with little or no taxable gain.
If she keeps buying, the newest lots need care. Shares held one year or less produce short-term gains, taxed as ordinary income. For her, that’s the 22% bracket. A highest-cost setting can pick a recent lot.
A Smaller Gain Shrinks Her Medicare Bill Two Years Out
Medicare sets premiums using income from two years earlier. Single filers above $109,000 pay a surcharge. Under FIFO, her income hits about $152,700, which at 2026 rates means a $405.80 monthly Part B premium plus a $37.50 Part D add-on. That’s about $2,900 extra a year, while the average cost is only about $1,150 extra. Highest-cost-first keeps her near $93,600, under the line. The thresholds will shift by then, but the gap holds.
Social Security works similarly. Up to 85% of benefits become taxable once a single filer’s provisional income tops $34,000, and since she’s already past that, this sale doesn’t change it for her. For a retiree with lower income, a big gain can push more benefits into taxable income.
One Brokerage Setting to Change Before Her Next Sale
Before she sells another share, she should open the cost basis settings for this fund and switch the default method to specific identification, with highest cost first (or the broker’s tax-efficient lot option) as the standing instruction. Then she should check the trade confirmation to make sure it lists the lots sold.
The costly mistake is thinking the brokerage picked the tax-friendly shares for her. If she clicks sell without changing anything, she gets the default: average cost or FIFO. Under these assumptions, either one costs thousands more. It’s one of several IRS rules that quietly drain retirement accounts, and we covered the rest in a free resource: The Retiree’s Tax Trap Map.
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If you’ve saved over $1,000,000, this guide is for you. The last thing you want in retirement is to run out of money, you want your money to generate lasting income while you enjoy your life.
Now you can learn the strategies wealthy retirees use to fund their retirement with The Definitive Guide to Retirement Income from Fisher Investments. Download the guide today! (sponsor)
