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Already Retired age 76 A taxable account
Old 04-09-2010, 09:37 AM   #1
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Already Retired age 76 A taxable account

This is directed to those who are already taking their Required distribution and have no other earned income other than social secuirty and some interest/dividends and are in the 10-15% tax bracket.
What do you find is the most tax advantaged way to invest the taxable account? As you know, if you are using tax free interest investments, you must add that back into income to determine the percent of Social Security that is taxable. In 2010 capital gains and qualified dividends are not taxable in the 15% tax bracket, but are also included in income to determine how much SS is taxable. After 2010 it is unknown if that tax advantage will continue. I have just gone through an estimate of my 2010 taxes as I decided to use 2010 to take some long term CG and this had me thinking about how to manage our taxable account and if I can improve it.
I'd be interested in how others are doing this.
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Old 04-09-2010, 10:11 AM   #2
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RMDs are designed to go on until death. Did you accelerate yours? Do you have more than enough cash flow for your budget needs, or is your budget kind of tight? Are you single, or married?

Ha
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Old 04-09-2010, 10:18 AM   #3
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Quote:
Originally Posted by haha View Post
RMDs are designed to go on until death. Did you accelerate yours? Do you have more than enough cash flow for your budget needs, or is your budget kind of tight? Are you single, or married?

Ha
I am married, wife is 74. What does RMD have to do with my question?
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Old 04-09-2010, 01:54 PM   #4
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I am married, wife is 74. What does RMD have to do with my question?
It is kind of hard to do tax planning without knowing what kind of AGI you will be looking at. RMDs are often a big part of AGI, depending of course on the size of the tax deferred account and one's other income. Good planning would be different for someone in the 25-33% marginal brackets, as compared to a lower bracket.

If generic advice is what you want, look at a book, or the Fidelity or Schwab or Fairmark or Ed Sprott websites.

Ha
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Old 04-09-2010, 05:42 PM   #5
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It is kind of hard to do tax planning without knowing what kind of AGI you will be looking at. RMDs are often a big part of AGI, depending of course on the size of the tax deferred account and one's other income. Good planning would be different for someone in the 25-33% marginal brackets, as compared to a lower bracket.

If generic advice is what you want, look at a book, or the Fidelity or Schwab or Fairmark or Ed Sprott websites.

Ha
Yes RMD is a large part and Social Secuity is a large part. I also have some in Roth. But as I said I have no earned income. We are comfortable that we have enough for as long as will be around. 15-18 years if we're healthy and lucky.
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Old 04-09-2010, 09:53 PM   #6
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oldman is just asking how to invest tax efficiently in taxable accounts. That's relatively easy. Put your large cap index funds in taxable. Choose your foreign large cap index fund first for taxable since you can get the foreign tax credit. If you still have room in taxable, then add your US large cap index or total stock market index.

Why?

1. These index funds will have few, if any, capital gains distributions.
2. All the dividends should be qualified dividends and at about the 2% yield.
3. Return of capital is tax-free.
4. Unrealized cap gains are tax-deferred.
5. Realized long-term cap gains are taxed at a preferential rate.
6. When you die, your heirs get the stepped-up basis.

You do not need tax-exempt bonds in taxable since you can have your bonds in tax-deferred and you are in a low tax-bracket.

BTW, the above applies whether you are young or old, high or low tax bracket. It always applies.
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Old 04-10-2010, 09:32 AM   #7
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Thanks LOL, I think that would be the perfect scenario as long as we don't have to take taxable money or maybe its also ok for that also. But, in case need to have cash or equivalent, don't want to sell shares. Everything, I read says in order of distribution of money from accounts to take taxable 1st, Trad.IRA 2nd, Roth 3rd. If I need the added cash I go to taxable. Would be nice to also have some growth there.
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Old 04-10-2010, 11:39 AM   #8
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Why wouldn't you want to sell shares? That doesn't make any sense.

If you sell shares at a loss, then you get a tax deduction.

If you sell shares at a gain, then you only pay tax on the gain and even that could be at the rate of 0% (i.e. no tax). Return of capital is tax free.

Suppose you own shares of Vanguard Total Stock Market Index Fund (VTSMX) in your taxable account. It is very tax efficient. Further suppose you have absolutely $0.00 in cash in your taxable account, nada, zippo, zilcho, nothing, ZERO. But you have cash in your tax-deferred accounts.

Now if you needed $10,000 without penalty, you sell $10,000 worth of VTSMX in your taxable account and spend it. At the same time, you take $10,000 of that cash hidden in your tax-deferred account and buy $10,000 worth of VTSMX in your tax-deferred account.

Do you see that you still have that $10,000 worth of VTSMX? To an outsider, you have not sold a single share of VTSMX and it appears that you removed $10,000 in cash from an IRA without any penalty or tax consequences. There are many tax advantages to doing it this way.
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Old 04-10-2010, 06:58 PM   #9
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You have still removed the $10,000 from the taxable account, what does buying the fund in your IRA accomplish at the same time? Don't follow that LOL. Also, my thought about selling shares is to not having to do it in a down market.
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Old 04-10-2010, 07:10 PM   #10
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Let's take this slowly.

Re: selling in a down market.

Answer me this:

If you sell 1000 shares of fund A that is down by 50%, then in another account buy 1000 shares of fund A that is down by 50%, where does that leave you?

(ignore wash sale rules for the moment -- they can be dealt with easily).
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Old 04-10-2010, 07:19 PM   #11
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now you're making me think. I lost 50% on the 1000 shares I sold and I'm even on the 1000 shares I bought. Did I pass?
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Old 04-10-2010, 07:22 PM   #12
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You get a low pass. You actually come out ahead because the 1000 shares you sold generate a tax loss for you. Get it?

In other words, you should be happy to sell shares at a loss in a down market.

Let me ask you this directly: Are you happy to sell shares at a loss in a down market?
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Old 04-10-2010, 07:32 PM   #13
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I'm never happy to sell except when I want to, not if I have to. Actually, I've been spending alot of time deciding how much to sell in my taxable account in 2010 to take advantage of the 0% tax on LTCG on some very long term stuff while the 0% is still available. I will reinvest most of it but available gains will look good this year and raise my cash level. Who know whats in store after 2010?
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Old 04-10-2010, 10:45 PM   #14
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Unfortunately, I don't think you are getting it.

If you sell 1000 shares of fund A in one account and buy 1000 shares of fund A in another account, you still have 1000 shares of fund A. You have just shifted the 1000 shares of fund A into another account. You have neither gained nor lost any shares of fund A. It does not really matter whether you sold those 1000 shares of fund A at a gain, at the same price you bought them, or at a huge loss ... you still have 1000 shares of fund A. That is, you can confidently sell at a loss.

One should sell each and every year all losers in a taxable account in order to save on taxes. i am very happy to sell my losers. It saves me money on my taxes. I use the money from selling my losers to buy similar (but not substantially identical) investments. This is a very important part of portfolio management.

You asked about a taxable account and hinted at saving money on taxes or at least not costing you extra money in taxes. Until you get comfortable selling your losers, you are costing yourself extra money in taxes. And you are only going to have losers in a down market, so you need to be prepared to sell in a down market. At the same time, you buy in a down market.

When you tell me that you are comfortable and happy to sell at a loss in a down market, we can go on to the next step.
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Old 04-11-2010, 09:07 AM   #15
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I certainly have no objection to selling in a down market. My taxable account is a small part of my investments but unitl the past year I also had earned income and 2009 was my first year officially retired. I'm sure my thinking will also change. I had too much in 2 stocks for too many years but both had such low cost basis and I was earning too much and they were doing so well, I didn't think I could do better. Now, I have no earned income and the lowest tax bracket I've ever been.
I still have a few closed end muny bond funds because money markets were paying nothing and they were very cheap a year ago.
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