At 68, She Plans to Sell $100,000 From a Fund She Has Bought Monthly for 20 Years. The Shares She Chooses Could Alter Her Tax Bill by Thousands

She opens her brokerage account, enters $100,000 in the sell field for the index fund she has been buying every month for two decades, and submits the trade. It clears in moments, but the screen never asks the question that determines her tax bill: which shares will be sold?

She is 68, single, retired, and the fund is held in a taxable brokerage account, so the sale will appear on this year’s return. Many investors are in a similar position. Federal Reserve data show that households headed by people ages 55 to 69 own about 39% of all stock and mutual fund shares held outside workplace retirement plans. A lot of those holdings were built one automatic purchase at a time.

Quick Read

• Choosing the highest-cost shares first instead of FIFO on a $100,000 fund sale can cut federal tax from about $10,900 to about $2,000, saving roughly $8,900.

• Lot selection has to be set before settlement; mutual fund investors can lose the option if they already used average cost on a prior sale.

• Using the highest-cost shares first can help keep income below Medicare’s $109,000 surcharge threshold, avoiding about $2,900 in added annual premiums.

Each Monthly Buy Created a Separate Tax Lot

Every monthly purchase created a distinct group of shares with its own buy date and price. Tax rules call each group a tax lot. The amount paid for a lot is its basis. The gain is the sale price minus the basis of the lots that are sold. Because her earliest shares cost much less than her newest ones, the choice of lots determines how large the gain will be.

Brokerages generally use one of three methods:

• First in, first out, or FIFO: the oldest shares are sold first. This is also the IRS default for stock when the seller does not identify shares.

• Average cost: every share is treated as having the same blended price. Many mutual fund companies and brokerages use this as the default for mutual funds.

• Specific identification: the investor chooses the lots. A highest-cost-first method is an automatic version that sells the priciest lots first.

The Same $100,000 Sale Can Create Very Different Tax Bills

Here is a simplified version of her record. 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 is trading at $110, so she sells about 909 shares. Because her last purchase was more than a year ago, every lot is long-term. Before the sale, her taxable income is about $60,000, and her modified adjusted gross income, the figure Medicare uses, is about $80,000.

In 2026, a single filer owes 15% on long-term gains once taxable income rises above $49,450, up to $545,500. That means her entire gain is taxed at 15%.

Same sale, same fund. Picking the expensive lots instead of letting FIFO apply saves her about $8,900 in federal tax. Compared with average cost, the savings are about $5,200.

She Has to Lock In Her Lot Choice Before Settlement

She can choose the lots if she tells her broker which shares to sell at the time of the trade and receives written confirmation. Treasury rules accept the election if it is made by the settlement date, and a standing instruction on file also counts. Once the trade settles, the decision window closes.

Mutual funds add one more wrinkle. She can use a method such as specific identification only if she has not already used average basis on an earlier sale of that fund. Her first sale establishes the pattern. On the Bogleheads forum, one investor described trying to switch a fund’s method just to see what would happen. That kind of comparison has to be done before the first sale.

Delaying the Gain Can Still Help

Selling the costliest shares first leaves the cheaper ones in the account, which pushes the taxable gain into the future. That can still work in her favor. Later sales may happen in a lower-income year. And shares she still owns at death can receive 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 attention too. Shares held for one year or less create short-term gains, which are taxed as ordinary income. For her, that falls in the 22% bracket. A highest-cost method can also select a recent lot.

A Smaller Gain Can Also Reduce Her Medicare Costs Later

Medicare uses income from two years earlier to set premiums. Single filers above $109,000 pay an income-related surcharge. Under FIFO, her income reaches about $152,700, which at 2026 rates would mean a $405.80 monthly Part B premium plus a $37.50 Part D surcharge. That works out to roughly $2,900 more a year, while average cost is only about $1,150 extra. Highest-cost-first keeps her near $93,600, below the threshold. The limits will change over time, but the spread remains.

Social Security works in a similar way. Up to 85% of benefits become taxable once a single filer’s provisional income exceeds $34,000, and because she is already above that level, this sale does not change her situation. For a retiree with lower income, however, a large gain could push more benefits into taxable income.

One Brokerage Setting to Review Before the Next Sale

Before she sells again, she should open the cost-basis settings for this fund and change the default to specific identification, with highest cost first or the broker’s tax-efficient lot option as the standing instruction. She should then review the trade confirmation to make sure it lists the lots that were sold.

The expensive mistake is assuming the brokerage automatically chose the most tax-friendly shares. If she clicks sell without changing anything, she gets the default method, which may be average cost or FIFO. Under these assumptions, either one can cost thousands more. It is one of several IRS rules that can quietly drain retirement accounts.

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