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Take Capital Gains or do Roth Conversions?
11-15-2018, 09:02 AM
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#1
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Dryer sheet aficionado
Join Date: Oct 2018
Location: San Antonio
Posts: 27
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Take Capital Gains or do Roth Conversions?
I retired in March of this year and need to make some decisions regarding how to best manage taxes for this year as well as for the next 6 years when I will need to start taking RMD's. For these next 6 years I will be well within the 12% tax bracket, but at RMD time I will be in the 22% bracket, so I have time to take advantage of being in the lower bracket. I currently have a sizeable IRA, a taxable account that will should carry me thru until RMD time, and no Roth account. I currently plan for both me and my wife to delay taking SS until age 70.
One option is to do partial Roth conversions to the top of the 12% bracket until RMD time. If I do this over the next 6 years, I figure I can convert about 25% of my current IRA balance, however I will still be in the 22% bracket at RMD time.
Another option is to take advantage of taking some capital gains in my taxable account each year at 0% tax up to the top of the 12% bracket. I have some sizeable gains in my taxable account, specifically in Fidelity Contra Fund, and I'm thinking about moving these dollars to one of the no cost Fidelity Index funds. I think I can fully move all Contra Fund balances at 0% tax over the next 2-3 years and pay no taxes on the gains. After that, I could use the remaining 3-4 years to do Roth conversions. Another advantage to this option is that Contra Fund throws off large "internal" Capital Gains every year that I wouldn't expect to see with an index fund.
I'd appreciate any thought/opinions about which is the best option.
Thanks!
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11-15-2018, 09:10 AM
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#2
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2007
Posts: 13,184
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11-15-2018, 12:04 PM
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#3
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Recycles dryer sheets
Join Date: Dec 2016
Posts: 411
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Quote:
Originally Posted by popntx
I retired in March of this year and need to make some decisions regarding how to best manage taxes for this year as well as for the next 6 years when I will need to start taking RMD's. For these next 6 years I will be well within the 12% tax bracket, but at RMD time I will be in the 22% bracket, so I have time to take advantage of being in the lower bracket. I currently have a sizeable IRA, a taxable account that will should carry me thru until RMD time, and no Roth account. I currently plan for both me and my wife to delay taking SS until age 70.
One option is to do partial Roth conversions to the top of the 12% bracket until RMD time. If I do this over the next 6 years, I figure I can convert about 25% of my current IRA balance, however I will still be in the 22% bracket at RMD time.
Another option is to take advantage of taking some capital gains in my taxable account each year at 0% tax up to the top of the 12% bracket. I have some sizeable gains in my taxable account, specifically in Fidelity Contra Fund, and I'm thinking about moving these dollars to one of the no cost Fidelity Index funds. I think I can fully move all Contra Fund balances at 0% tax over the next 2-3 years and pay no taxes on the gains. After that, I could use the remaining 3-4 years to do Roth conversions. Another advantage to this option is that Contra Fund throws off large "internal" Capital Gains every year that I wouldn't expect to see with an index fund.
I'd appreciate any thought/opinions about which is the best option.
Thanks!
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That’s what I’ve done (I call it “tax gain harvesting”) and that you have only a few years of it means that you still have some future years for Roth conversions
That you will be in the 22% bracket whether you convert or not indicates that there really isn’t any advantage for significant Roth conversions later (maybe 1-3 years to give some extra options when you have a large cash flow demand in some year)
You do still need to consider what happens to the surviving spouse when one passes to see if it’s advantageous to push just a bit more into Roth since the tax bite is larger, even if you lose the lower SS.
Speaking of SS, is your wife’s SS significantly lower? If so, it’s probably better to have her start at FRA and then switch to spousal upon your claiming (lots of posts on that ____ here or on Bogleheads)
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11-15-2018, 01:43 PM
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#4
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,204
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I changed strategies recently.
Previously, I was living off of taxable (our taxable is about 50% basis and 50% unrealized gains) and Roth converting to the top of the 12% tax bracket... I was paying little tax on these Roth conversions (about 8% of converted amount) and 0% on qualified dividends and LCG. But even with these Roth conversions I would still have significant RMDs later on that put us well into the 22% tax bracket.
Now, I'm planning to live of tax-deferred withdrawals and Roth convert some and and leave the taxable accounts alone. I'll probably convert to the top of the 12% bracket for 2018 and 2019 while we are still subject to state income taxes and then into the 22% tax bracket once we are no longer subject to state income taxes. With this new approach we'll likely be just at the top of the 12% bracket once RMDs start rather than perpetually in the 22% bracket.
The epiffany was factoring in that when one or the other of us dies the survivor and/or our heirs will get a stepped up basis on the taxable account and any taxes on unrealized gains will go 'poof"............ and that the capital gains arising from living off of our taxable account was significantly restricting our Roth conversion headroom.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
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11-15-2018, 01:53 PM
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#5
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gone traveling
Join Date: Apr 2011
Posts: 3,375
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Quote:
Originally Posted by pb4uski
The epiffany was factoring in that when one or the other of us dies the survivor and/or our heirs will get a stepped up basis on the taxable account and any taxes on unrealized gains will go 'poof"............ and that the capital gains arising from living off of our taxable account was significantly restricting our Roth conversion headroom.
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Yep. Why I don't CG ex what mutual funds force on us.
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11-15-2018, 03:02 PM
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#6
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Dryer sheet aficionado
Join Date: Oct 2018
Location: San Antonio
Posts: 27
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Quote:
Originally Posted by pb4uski
The epiffany was factoring in that when one or the other of us dies the survivor and/or our heirs will get a stepped up basis on the taxable account and any taxes on unrealized gains will go 'poof"............ and that the capital gains arising from living off of our taxable account was significantly restricting our Roth conversion headroom.
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My taxable account is a joint account with my wife. Is it true that if one of us dies, the other will get a stepped up basis? I understand this would be the case with our heirs, but not with the surviving spouse.
Also, thanks to all for some excellent things to consider regarding my original post. I think that in my particular case, an additional advantage of taking some capital gains, as opposed to Roth conversions, is that it will give me the opportunity to get out of a very tax inefficient fund (Fidelity Contra) and into a more efficient fund (Fidelity ZERO Total Market Index Fund). I also think that after taking these capital gains, I'll still be able to do some Roth conversions.
Regarding my wife's SS, it is about 80% of mine. I don't know if this is "significant" enough for her to start at FRA. This is something I need give some more thought to.....
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11-15-2018, 03:08 PM
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#7
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Administrator
Join Date: Jan 2008
Location: Chicagoland
Posts: 40,518
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Quote:
Originally Posted by popntx
My taxable account is a joint account with my wife. Is it true that if one of us dies, the other will get a stepped up basis? I understand this would be the case with our heirs, but not with the surviving spouse.
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For assets owned jointly the surviving spouse gets a stepped up basis for 50% of the assets.
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11-15-2018, 03:34 PM
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#8
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Thinks s/he gets paid by the post
Join Date: Jul 2011
Location: The Bay Area
Posts: 2,736
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Quote:
Originally Posted by pb4uski
The epiffany was factoring in that when one or the other of us dies the survivor and/or our heirs will get a stepped up basis on the taxable account and any taxes on unrealized gains will go 'poof"............ and that the capital gains arising from living off of our taxable account was significantly restricting our Roth conversion headroom.
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My understanding is this is only for assets owned 100% by deceased spouse (except for special trusts in a few states). For assets owned jointly WROS, surviving spouse get 50% of gain added to basis. Either way, a significant tax break.
__________________
You may be whatever you resolve to be.
100% x 10% > 10% x 100%
Small pensions & SS cover essentials
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11-15-2018, 04:31 PM
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#9
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Thinks s/he gets paid by the post
Join Date: Mar 2013
Location: Coronado
Posts: 3,655
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Quote:
Originally Posted by popntx
My taxable account is a joint account with my wife. Is it true that if one of us dies, the other will get a stepped up basis? I understand this would be the case with our heirs, but not with the surviving spouse.
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Your profile says you live in San Antonio. Texas is a community property state, so yes, the surviving spouse gets a step up on the full basis.
If you relocate to a state where you can only hold property as joint tenants, then the surviving spouse inherits half of the account and gets a step up in basis on that half.
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11-15-2018, 09:36 PM
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#10
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,204
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^^^^^ This.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
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11-16-2018, 09:49 AM
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#11
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Thinks s/he gets paid by the post
Join Date: Jul 2011
Location: The Bay Area
Posts: 2,736
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Quote:
Originally Posted by pb4uski
^^^^^ This.
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I doesn’t look like you live in a community property state so, I’m guessing you mean half of the basis is stepped up. This leads to an interesting question: Would it be wise to retitle assets in one spouse’s name (assuming no Estate complications) to gain the most CG tax advantage, if one didn’t already live in a community property state?
__________________
You may be whatever you resolve to be.
100% x 10% > 10% x 100%
Small pensions & SS cover essentials
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11-16-2018, 10:54 AM
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#12
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Thinks s/he gets paid by the post
Join Date: Oct 2004
Location: Portland
Posts: 2,038
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Quote:
Originally Posted by popntx
I have some sizeable gains in my taxable account, specifically in Fidelity Contra Fund, and I'm thinking about moving these dollars to one of the no cost Fidelity Index funds. I think I can fully move all Contra Fund balances at 0% tax over the next 2-3 years and pay no taxes on the gains. After that, I could use the remaining 3-4 years to do Roth conversions. Another advantage to this option is that Contra Fund throws off large "internal" Capital Gains every year that I wouldn't expect to see with an index fund.
I'd appreciate any thought/opinions about which is the best option.
Thanks!
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I am in a similar situation except I have individual stocks instead of the contra fund. I have decided to use the index ETF products instead of the zero funds. The ETFs won't throw off end of year capital gains distributions. Also, the zero funds are not portable. If I ever decide to move back to Vanguard or to Schwab, I don't want to have to liquidate the zero funds in order to transfer.
Just thought I'd toss this out to you. Good luck with your decisions.
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11-16-2018, 04:40 PM
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#13
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Full time employment: Posting here.
Join Date: Jul 2013
Posts: 792
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Quote:
Originally Posted by Huston55
I doesn’t look like you live in a community property state so, I’m guessing you mean half of the basis is stepped up. This leads to an interesting question: Would it be wise to retitle assets in one spouse’s name (assuming no Estate complications) to gain the most CG tax advantage, if one didn’t already live in a community property state?
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Depends how much you trust each other.
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11-16-2018, 11:43 PM
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#14
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Thinks s/he gets paid by the post
Join Date: Jul 2011
Location: The Bay Area
Posts: 2,736
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Quote:
Well, I was hoping that ‘trust’ was implied in my question. But, let’s assume it exists. Is it wise to do this?
__________________
You may be whatever you resolve to be.
100% x 10% > 10% x 100%
Small pensions & SS cover essentials
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11-17-2018, 05:24 AM
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#15
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 37,931
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Quote:
Originally Posted by Helen
I am in a similar situation except I have individual stocks instead of the contra fund. I have decided to use the index ETF products instead of the zero funds. The ETFs won't throw off end of year capital gains distributions. Also, the zero funds are not portable. If I ever decide to move back to Vanguard or to Schwab, I don't want to have to liquidate the zero funds in order to transfer.
Just thought I'd toss this out to you. Good luck with your decisions.
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I think it’s very smart to think about the transferability/portability of the assets. The very low cost regular Fidelity Index funds will be just as portable. Index funds have low distributions mostly qualified divs.
__________________
Retired since summer 1999.
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12-02-2018, 05:00 PM
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#16
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Dryer sheet aficionado
Join Date: Oct 2018
Location: San Antonio
Posts: 27
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Back to my original post, I've decided to proceed this year by taking capital gains at 0% tax up to the top of the 12% bracket. I'm figuring I can realize about $20,000 in additional capital gains without paying any taxes. My plan is to sell my Fidelity Contrafund shares, up to that amount in capital gains, and with the proceeds purchase the Fideltiy ZERO Total Market Index Fund.
Fidelity has recently announced their long-term capital gains distributions per share, which for Contrafund will be paid on December 10th. The gain is 0.727 per share, so if I multiply that times the number of shares I currently own, the total gain will be about $7,500. This means I will have about $12,500 in additional gains I can take without paying any additional taxes ($20,000 - $7,500). Is my math correct?
My question is this. Should I wait until the capital gains distributions are paid on December 10th, and then sell the remaining shares necessary to achieve the remaining $12,500 in capital gains? Or, would it be more advantageous to sell the shares prior to December 10, which will lower the amount of shares that the fund will distribute capital gains? Or does it make any difference one way or the other?
I guess I could do the "math" to determine if there is a best method but am seeking advice. I am also not sure if the gains that Fidelity is publishing is an estimate that may not be completely accurate, in which case it might be better to wait. However, I don't plan to be precise, just trying to get close without going over the 12% bracket threshold.
Thanks!
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12-02-2018, 05:39 PM
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#17
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2006
Location: Boise
Posts: 7,863
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^ I would wait until after the distribution to sell. If you do it beforehand the math gets messier, because whatever # of shares you sell to generate the additional $12.5K will reduce the number of shares you have on which the CG of $7,500 were calculated.
As an example, let's say each share was $100 and paid $10 in CG. That means you would have 750 shares ($7,500 / $10). If you sold 125 shares today generate the $12,500 you want, you would now have 625 shares remaining. Those 625 shares would pay $6,250 in dividends (625 * $10). You'd be short $1,250 of goal.
There's plenty of time between 12/10 and 12/31 to make the trade.
From a tax point of view, I don't think it matters - your sale will generate LTCG, and the CG distribution will be LTCG as your post notes.
Finally, if the estimate is too low (say it ends up being 0.829 per share), then you can sell fewer shares after 12/10. If you sell the shares first and the estimate is too low, then you'll overshoot your target $20K number.
__________________
"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
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12-02-2018, 07:56 PM
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#18
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,204
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+1 also, the share value will decrease by the amount of the distribution which further complicates the calculation.
Also, keep in mind that in 2018 the 0% LTCG tax bracket ends at $77,200 of taxable income, $200 lower than the top of the 12% tax bracket of $77,400.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
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12-03-2018, 03:50 AM
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#19
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Thinks s/he gets paid by the post
Join Date: Dec 2015
Location: Michigan
Posts: 4,939
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Quote:
Originally Posted by popntx
One option is to do partial Roth conversions to the top of the 12% bracket until RMD time.
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I'm doing this.
__________________
"The mountains are calling, and I must go." John Muir
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