If you’re 45 to 65 and eyeing retirement, tax choices matter more than ever. One quiet setting inside your brokerage can raise or lower your tax bill: your tax‑lot method.
Many accounts default to FIFO—first in, first out. It sounds harmless. Yet FIFO can increase capital gains taxes, trigger IRMAA down the road, and complicate retirement withdrawals if you don’t plan ahead.
Today, I’ll translate FIFO investing into plain English, show when it helps or hurts, and give you practical steps to align your lot method with a smarter retirement tax plan.
Quick note: Education only, not tax advice. Your plan documents and tax return control.
Table of Contents
Why Lot Methods Matter More Near Retirement
During your working years, new savings cover a lot of sins. In retirement, your portfolio has to carry more weight.
Tax lot accounting decides which shares you’re deemed to sell, which decides the size of your capital gains taxes. Those gains can ripple into Social Security taxation and Medicare IRMAA two years later.
In other words, lot method is not a housekeeping detail. It’s a lever in retirement tax planning.
I’ve seen two investors sell the same fund and owe very different taxes—only because one used FIFO and the other used specific share identification. Let’s make sure your method fits your plan.
FIFO 101: The First‑In, First‑Out Method
Definition. FIFO assumes you sell your oldest shares first. If you bought a fund ten years ago, then added to it every year, a FIFO sale starts with those ten‑year‑old lots.
Where it appears. Many brokers default to FIFO for stocks and ETFs unless you choose something else. Many mutual funds default to average cost basis, which is a separate method. Custodian defaults vary, but many firms use FIFO for stocks and ETFs and average cost for mutual funds unless you choose otherwise.
Why it matters. In long bull markets, your oldest lots usually have the lowest cost basis. Selling them first can create the largest gains today. That can bump you into a higher capital‑gains bracket, raise AGI, and raise IRMAA two years later.
A tiny example.
Lot A: 100 shares at $20 (oldest)
Lot B: 100 shares at $45 (newer)
Current price: $50
Sell 100 shares with FIFO and you realize a $3,000 gain. Sell 100 shares from Lot B with specific ID and you realize only a $500 gain. Same sale size. Very different tax bill.
Cost Basis and Lots: The Building Blocks
Your cost basis is what you paid, adjusted for certain items. Each purchase creates a lot with its own basis and holding period.
Dividend reinvestments (DRIPs) create many tiny lots through the year. Those tiny lots can create surprises when FIFO sells older, cheaper shares instead of the newer ones you expected.
Keep your basis tidy. Reconcile your 1099‑B to your records each year. Confirm that your broker shows every lot, every specific share identification you chose, and each sale method on the trade confirmation. Clean data is step one toward clean taxes.
How FIFO Changes Your Tax Bill
In rising markets, FIFO sells the cheapest shares first, which tends to realize larger gains now. That can push you from the 0% to the 15% or 20% long‑term bracket, increase AGI, and bring the 3.8% NIIT into play if you’re over the threshold. It can also raise provisional income so more Social Security becomes taxable and may trigger a higher Medicare IRMAA tier two years later.
In sideways or volatile markets, effects are mixed. FIFO might hit some low‑basis lots and some higher‑basis lots. Forecasting helps. Run a quick “if we sell X shares, what bracket are we in?” check before placing trades.
In falling markets, older lots could be losses, but not always. After a long run‑up, even old lots can remain gains despite a pullback. Don’t assume. Check.
FIFO vs. Other Methods: Which Fits Your Plan?
FIFO vs. Specific Share Identification (SpecID)
SpecID lets you choose the exact lots to sell. You can trim high‑basis lots to realize smaller gains, harvest losses with precision, or target long‑term lots to avoid short‑term rates.
It takes a bit more effort, but it gives you far better control. I prefer SpecID for most retirees.
FIFO vs. Average Cost Basis
Average cost combines all purchases into one blended basis per fund position. It’s simple, but it removes your ability to steer taxes with lot choice.
If you need precision for rebalancing taxes or retirement withdrawals, average cost can box you in.
FIFO vs. LIFO
LIFO sells the newest shares first. Retail brokers rarely offer it as a default. Even if they did, LIFO still lacks SpecID’s control.
If you have access to SpecID, you likely won’t miss LIFO.
Decision frame. Need maximum tax control? Choose SpecID. Want set‑and‑forget simplicity? FIFO can be okay—if you understand the trade‑offs.
When FIFO Can Be the Right Choice
FIFO is not the villain. It fits some situations.
You value simplicity and want fewer clicks and confirmations.
You plan to realize 0% long‑term gains during lower‑income gap years before RMDs.
You’re cleaning up small, old lots and intend to hold the rest long term.
You don’t want to manage lots trade‑by‑trade and you’re okay with the resulting tax profile.
When FIFO Can Hurt—And What To Do Instead
Surprise gains and higher brackets. Selling after a long bull run means FIFO hits your cheapest shares. That can spike taxes. It can also push you into a higher Medicare IRMAA tier two years later.
Fix. Elect specific share identification as your account default. Pick higher‑basis lots for sales. Stage sales across months or calendar years to spread the impact.
Rebalancing gotchas. You intend to reduce risk, but FIFO forces sales of low‑basis lots, creating large gains. The rebalancing tax pain can hide the investment benefit.
Fix. Rebalance inside an IRA when possible. In taxable accounts, use SpecID and target high‑basis lots or lots with losses.
Harvesting losses with DRIPs on. Dividend reinvestments may buy substantially identical shares right before or after you sell. That can create a wash sale and disallow the loss.
Fix. Turn off DRIPs 31 days before and after planned harvests. Use a similar, not substantially identical, replacement during the 30‑day window.
Portfolio simplification before retirement. You want fewer funds. FIFO might force big gains today.
Fix. Use SpecID to pick higher‑basis lots, donate appreciated shares to a donor‑advised fund, or spread simplification over several years.
Practical Setup: How To See and Change Your Lot Method
Check your defaults. In your brokerage settings, find cost basis or tax lot method. Note the default per account and sometimes per security.
Elect your method. Choose specific share identification for positions where you want control. Keep FIFO for positions you plan to hold or sell in the 0% bracket.
Place trades with lot selection. When you sell, choose the exact lots. Save the trade confirmation that lists those lots.
By IRS rule, specific share identification must be made no later than the trade’s settlement date. Be sure your lot instructions appear on the trade confirmation.
Confirm on the 1099‑B. At tax time, confirm your sales reflect SpecID. If something looks off, call the broker early.
Important. Switch methods before you sell. After a sale posts, your choice may be locked for that transaction.
Real‑World Scenarios
Pre‑retiree couple, ages 62 and 60. They plan Roth conversions for a few years before RMDs. With FIFO, a 60,000‑dollar sale would push them out of the 0% long‑term bracket and raise AGI, complicating conversions. With specific share identification, they sell higher‑basis lots and keep capital gains within 0%, preserving room for conversions.
New retiree, age 66, rebalancing after a rally. They need to trim equities by five percent. FIFO realizes large gains and nudges them toward IRMAA. We switch to SpecID, sell higher‑basis ETF lots, and use the year’s dividends and cash to cover the rest. Risk drops, taxes stay measured.
Concentrated stock cleanup. They hold a big single stock from a former employer. FIFO would sell the oldest, lowest‑basis shares first. We use SpecID to create a step‑down plan: trim two to three percent exposure each quarter, donate some high‑gain shares to a donor‑advised fund, and spread sales across tax years to control brackets.
Simplifying before retirement. They want to go from eight funds to four. We map the embedded gains by lot, then rank lots by basis and holding period. Over three tax years, we sell high‑basis lots first, combine sales with harvested losses, and avoid IRMAA jumps.
Coordinate FIFO With Your Retirement Plan
Lot method touches every moving part of your retirement income plan.
Withdrawal order. Decide which accounts fund your paycheck. Then align taxable sales with your bracket targets.
Roth conversions. If you’re converting, smaller capital gains keep more room in your desired conversion range.
Social Security taxation. Gains raise provisional income and can make more benefits taxable. Stage sales carefully.
IRMAA planning. Look two years ahead. A large gain today can raise Medicare Part B and Part D premiums via IRMAA.
Charitable giving. Use SpecID to donate the highest‑gain lots and remove embedded gains tax‑free.
Common Mistakes (And Easy Fixes)
Assuming broker defaults are optimal. Check and change your method. Defaults rarely match your plan.
Selling in taxable when you could rebalance in an IRA. Place tax‑inefficient trades inside tax‑deferred accounts when possible.
Leaving DRIPs on before a sale. Turn DRIPs off ahead of harvesting or planned reductions to avoid wash‑sale headaches.
Ignoring household effects. Coordinate sales with spouse accounts. Mind IRMAA’s two‑year lookback.
Forgetting documentation. Save every trade confirm that lists the lots. You’ll need them at tax time.
Compliance, Records, and Your 1099‑B
Your 1099‑B should reflect your chosen method and lots. If it doesn’t, contact the broker early.
Keep a folder with trade confirmations showing lot IDs, annual cost‑basis reports, and notes on method changes by account and by security.
Good records make life easier for you and your tax professional—and reduce the chance of amended returns.
Action Checklist
Identify your current tax lot accounting method for every taxable account.
Decide where FIFO is fine and where you want specific share identification.
Turn off DRIPs at least 31 days before planned loss harvesting.
Map expected sales to brackets, NIIT, Social Security taxation, and IRMAA for the next 12–24 months.
Save confirmations and reconcile the 1099‑B each year.
In Conclusion: Let Strategy—Not Defaults—Decide
FIFO is simple, familiar, and sometimes perfectly fine. But it’s still a decision, and decisions carry tax consequences.
As you approach retirement, switch from autopilot to intention. Choose the lot method that fits your bracket targets, timing, and cash‑flow needs.
In many cases, specific share identification gives you the steering wheel you actually want.
