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Take Capital Gains or do Roth Conversions?
Old 11-15-2018, 10:02 AM   #1
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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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Old 11-15-2018, 10:10 AM   #2
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Rather than repeating myself, I'll refer you to these recent threads/posts.

Roth Contribution or LTCG - no brainer, right?

What method do you use to decide how much income to realize?
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Old 11-15-2018, 01:04 PM   #3
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Quote:
Originally Posted by popntx View Post
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!
Thatís what Iíve done (I call it ďtax gain harvestingĒ) 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 isnít 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 itís 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 wifeís SS significantly lower? If so, itís 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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Old 11-15-2018, 02:43 PM   #4
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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.
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Old 11-15-2018, 02:53 PM   #5
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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.
Yep. Why I don't CG ex what mutual funds force on us.
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Old 11-15-2018, 04:02 PM   #6
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Originally Posted by pb4uski View Post

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.
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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Old 11-15-2018, 04:08 PM   #7
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Originally Posted by popntx View Post
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.
For assets owned jointly the surviving spouse gets a stepped up basis for 50% of the assets.
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Old 11-15-2018, 04:34 PM   #8
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Originally Posted by pb4uski View Post
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.
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.
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Old 11-15-2018, 05:31 PM   #9
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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.
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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Old 11-15-2018, 10:36 PM   #10
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^^^^^ This.
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Old 11-16-2018, 10:49 AM   #11
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^^^^^ This.
I doesnít look like you live in a community property state so, Iím 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 spouseís name (assuming no Estate complications) to gain the most CG tax advantage, if one didnít already live in a community property state?
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Old 11-16-2018, 11:54 AM   #12
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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!
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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Old 11-16-2018, 05:40 PM   #13
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I doesnít look like you live in a community property state so, Iím 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 spouseís name (assuming no Estate complications) to gain the most CG tax advantage, if one didnít already live in a community property state?
Depends how much you trust each other.
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Old 11-17-2018, 12:43 AM   #14
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I doesnít look like you live in a community property state so, Iím 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 spouseís name (assuming no Estate complications) to gain the most CG tax advantage, if one didnít already live in a community property state?
Depends how much you trust each other.
Well, I was hoping that Ďtrustí was implied in my question. But, letís assume it exists. Is it wise to do this?
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Old 11-17-2018, 06:24 AM   #15
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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.
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.
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Old 12-02-2018, 06:00 PM   #16
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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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Old 12-02-2018, 06:39 PM   #17
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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.
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Old 12-02-2018, 08:56 PM   #18
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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.
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Old 12-03-2018, 04:50 AM   #19
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One option is to do partial Roth conversions to the top of the 12% bracket until RMD time.
I'm doing this.
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