My first full year of retirement, 2018 tax plan...

[TEO]

Im 46, retired for 6 months, 2+million networth (50/50 taxable/IRAs), healthy, single, no debt, paying $3400/yr for bronze health plan. All dividend paying investments are in the IRA. Interest may be $1000.

My life isn't complicated but I like to have a plan even if its simple. I have read a lot posts in this forum tonight and this is what I've come up with...

2018 Standard deduction of 12K means I can convert 11K from IRA to Roth (Interest takes up 1K of the deduction). Harvest ~38K worth of LT cap gains and still end up with zero Fed tax. I think my AGI will be ~50K so I would get no ACA subsidies. State cap gains taxes will still need estimated payments but I plan to send no estimated payments to the Fed.

It seems way too simple. Am I missing something?

T.J.

 

[VanWinkle]

Im 46, retired for 6 months, 2+million networth (50/50 taxable/IRAs), healthy, single, no debt, paying $3400/yr for bronze health plan. All dividend paying investments are in the IRA. Interest may be $1000.

My life isn't complicated but I like to have a plan even if its simple. I have read a lot posts in this forum tonight and this is what I've come up with...

2018 Standard deduction of 12K means I can convert 11K from IRA to Roth (Interest takes up 1K of the deduction). Harvest ~38K worth of LT cap gains and still end up with zero Fed tax. I think my AGI will be ~50K so I would get no ACA subsidies. State cap gains taxes will still need estimated payments but I plan to send no estimated payments to the Fed.

It seems way too simple. Am I missing something?



T.J.

Seems ok to me but make sure you have covered all of the surprise income- late bonus, pension, unexpected non-dividend income in the taxable account.

 

[walkinwood]

If you have an HSA compliant health care plan, you can deduct that contribution from your income too.

When you say "harvest LT cap gains", I assume you know that Mutual Fund distributions (qualified dividends and cap gains) fall into that bucket.

It is as simple as you've stated.

 

[TEO]

If you have an HSA compliant health care plan, you can deduct that contribution from your income too.

When you say "harvest LT cap gains", I assume you know that Mutual Fund distributions (qualified dividends and cap gains) fall into that bucket.

It is as simple as you've stated.

Thanks walkinwood, this is the kind of info I was hoping for. I don't have an HSA compliant plan because it was strangely much more expensive. I did add to the HSA THIS year, because I had a compliant plan for half the year (so I'm able to contribute 50% of the max), that should last me for a while.

I dont have many mutual funds in my taxable account but thanks, I need to dig a little deeper to understand the distributions from the ones I have. I'm planning to harvest gains toward the end of the year, once I have a better understanding of distribution/dividend values.

T.J.

 

[MrLoco]

Honestly, I think the biggest thing you have going for you is that you are single. No future college expenses to worry about. No income from a spouse to help pay the bills, etc. Also the fact that you are debt free is huge, although not sure if you currently own or rent?

Also, the $3400 you now pay for an ACA Bronze plan I assume is just the premiums? These bronze plans are the cheapest and usually have the highest deductibles? What is the worst case scenario for out of pocket expense in any given year? I know you say you are "healthy", but after 50...."stuff happens."

The $2M net worth (Assuming this is all investable assets) is enough to provide $60-$80K/year before taxes. Obviously, the IRA assets are subject to the 10% penalty pre 59 1/2 unless you do a 72t.

As long as you can manipulate your expenses if necessary and cover potential future healthcare issues until Medicare kicks in ( that's 19 years from today).....it looks good.

A pension would help in future years as well. Good luck!

 

[TEO]

Thanks for the input MrLoco... I own, I paid off the house in 2017. The second house I have owned free and clear!

$3400 is premiums, 7K deductible. So I could be hit with 10K/year. For the last 5 years I've been tracking my costs closely and the house payment of 12K/yr was included and I could still handle that cost. So the worse case medical expenses should simply replace the house cost. Anything less is a bonus.

The 2M is 75% equities and 25% cash. For a few years I had been thinking about retiring even earlier and using my IRA/401K with the SEPP rule but now I think I have enough that I wont need to do that. But the option is always there to get around the penalty.

Pension is minuscule as is SS. Both a function of retiring early and not paying into the systems.

 

[FREE866]

2 million, 46, retired, no debt, no kids....do you realize how many miserable married men are disgusted by this? hahaha well done!!!

 

[Done]

All dividend paying investments are in the IRA. Interest may be $1000.

Perhaps this is what you meant, but for tax efficiency you want all of your bonds in the IRA, otherwise the interest is ordinary income. Qualified dividends and LTCG in taxable accounts are taxed at zero in your bracket. https://www.bogleheads.org/wiki/Tax-efficient_fund_placement
In your case, less ordinary income will allow you to do more Roth conversions.

Since you won't access the traditional IRA for 13 years (other than for Roth conversions), you might try running i-ORP to see how your spending level affects the taxable account balance.

 

[pb4uski]

Im 46, retired for 6 months, 2+million networth (50/50 taxable/IRAs), healthy, single, no debt, paying $3400/yr for bronze health plan. All dividend paying investments are in the IRA. Interest may be $1000.

My life isn't complicated but I like to have a plan even if its simple. I have read a lot posts in this forum tonight and this is what I've come up with...

2018 Standard deduction of 12K means I can convert 11K from IRA to Roth (Interest takes up 1K of the deduction). Harvest ~38K worth of LT cap gains and still end up with zero Fed tax. I think my AGI will be ~50K so I would get no ACA subsidies. State cap gains taxes will still need estimated payments but I plan to send no estimated payments to the Fed.

It seems way too simple. Am I missing something?

T.J.

I'm not sure why you are bifurcating it the way you are other than to get tax to $0. The top of the 12% tax bracket is $38,700 and with the $12,000 standard deduction that is $50,700.

If you do $50,700 of Roth conversions that would be $4,453.50 in tax of a 8.8% tax rate on the conversion.. that's pretty good. Or you could do $58,700 of LTCG and pay $0 tax. Or the mix that you propos and pay $0 tax.

As you generate cash for spending from your taxable account or rebalance that may generate some LTCG... then fill the remainder with low-cost Roth conversions... I think that is your best strategy but you'll need to decide what is better for you in your circumstances.... which is more valuable low-cost Roth conversions or $0 cost LTCG?

 

[TEO]

Done... yes I meant unqualified dividend payers (REITs) are in my IRA. I spent a few minutes looking at the i-ORP, thanks for pointing me toward it. I still need to stare at it for a while.

pb4uski... yes the only reason to split it up it to stay at 0% tax. Free Roth conversions are a no-brainer, but paying for them seems to only work out if you know the future tax rates will be higher. So for now Im just choosing to harvest CGs.

Thanks for the input

 

[frayne]

It seems way too simple. Am I missing something?

T.J.

A wife and kids for starters to complicate things just a little.

 

[TEO]

It's that time and I've got the INT and DIV income in hand.

Interest is $2495 with two banks not paid yet. They wont be more than $5. Qualified dividends were $6584. This may be the final number but how often do dividends just pop up at the end of the year? Comparing to past years it looks like they are very consistant.

The Interest is income, so it comes off the $12K standard deduction and leaves about $9500 left for a Roth conversion. That's cutting it close, so I choose $9400. The result is $11,895 in taxable income.

The $11,895 is then subtracted from $50,600 ($12,000+$38,600) to get $38,705 LTCG I can harvest. But I still need to reduce that by the dividends... so $38,705-$6584= $32,121. Ill shoot for $32K.

I put all of this into an online tax software and it works out to $0 tax.

With 2 weeks to go. Is there anything that could still bite me?

 

[pb4uski]

Looks good to me, but just make sure that if any of your dividends are from international equities that you have factored in an estimate of foreign taxes paid. It will increase your dividends... but it will also allow you to do some additional LTCG for the foreign taxes paid divided by 15% less the foreign taxes paid.... you'll have some tax but any tax will be offset by the foreign tax credit that goes to waste if unused IIRC.

 

[mrfeh]

Qualified dividends were $6584. This may be the final number but how often do dividends just pop up at the end of the year?

I can't speak for all funds in general, but my index funds always have the lion's share of their distributions in December.

 

[RunningBum]

Looks good to me, but just make sure that if any of your dividends are from international equities that you have factored in an estimate of foreign taxes paid. It will increase your dividends... but it will also allow you to do some additional LTCG for the foreign taxes paid divided by 15% less the foreign taxes paid.... you'll have some tax but any tax will be offset by the foreign tax credit that goes to waste if unused IIRC.

You can carry that foreign tax credit forward up to 10 years, or backward one year. This was one of the problems I ran into using H&R Block for taxes. Since I couldn't use the FTC one year, it didn't fill out the form, and then I couldn't carry it forward the next year until I filed an amended return with the form showing the unused credit.

$1M+ in taxable and just $6584 in Qdivs and $2495 in interest? That seems awfully low. I think I get close to 2% divs with VTIAX and VTSAX. Are you sure you're looking at everything? I guess you could own individual stocks that pay little or nothing in dividends.

I would personally look at some Roth conversions at 10% and also look at whether limiting conversions and LTCG sales to get an ACA subsidy is worthwhile. I haven't read this close enough to follow all of the numbers but it looks like you're going for MAGI around $50,600? Drop that by a little over $2000 and you've the subsidy. Say $3000 for buffer. Taking $3000 less LTCGs at 0% is only worth about $450 if you had to pay 15% later. You probably can get a lot bigger subsidy than that. If you'd rather not take a subsidy, then disregard.

 

[TEO]

I haven't had any foreign tax credits for the last few years so Im expecting that wont change.

RunningBum, I do lean toward "rather not take a subsidy" but I went back and checked it again. I might be able to eek out a small advantage but its really close (maybe come out $60 ahead. Im estimating a SLCSP to be $437/mo. ). It's not worth it to me considering the number of estimates Im using to make this choice.

Thanks for the reminder though. Its always better to check.

 

[TEO]

Goal met: zero federal tax paid.

Ok, the taxes are done and I met my goal of paying nothing to the fed (actually less than zero).

The one sticking point in the plan was needing to know my 2018 dividends in time to sell and harvest LTCG. There was enough doubt there, that I decided harvest less and take some ACA tax credit. It turns out that they almost cancel each other... so the less LTCG I harvest the more ACA credit I get. In my case, I gave up the 0% tax on $2800 of LTCGs ($395.80) and gained a $448 refund.

The key to using the ACA premium credit is that it adjusts automatically when your actual AGI comes in higher or lower than what you estimated on Dec 31st! So it, in effect, is a hedge against the unkown dividends, interest, ect.

Thanks for all the advice,

T.J.

 

[nobody]

2 million, 46, retired, no debt, no kids....do you realize how many miserable married men are disgusted by this? hahaha well done!!!

Dang it I'm in the same boat, 1 year older but still working.....