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Taxable Dividends, Interest and the dreaded RMD - what to do?
Old 03-03-2014, 06:56 PM   #1
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Taxable Dividends, Interest and the dreaded RMD - what to do?

So, we all know that standard interest and dividends in after tax accounts are taxed as ordinary income.

Does that affect your post retirement strategy?

Do you avoid such investments in your after tax portion of your portfolio?

Or is your AGI low enough that you could care less?

And what about the dreaded and inevitable RMD?

What is your strategy there?

1.Avoid withdrawing from your qualified/tax deferred accounts before 70 - because they too are taxed as ordinary income? And just push the tax bump down the road until RMDs force you to withdraw?

2.Or do you tap into your 401k/403b before 70 because you need to for expenses?
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Old 03-03-2014, 07:22 PM   #2
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I try to have only qualified dividends in taxable. I have not been too successful.

I try to have mostly international funds in taxable, so that I get the foreign tax credit for the foreign taxes withheld from the dividends.

Before age 70, I will live off of taxable accounts because return-of-capital is tax-free and I have plenty of carryover capital losses from 2008, so that I will have no cap gains for a while. During that time, I will convert my 401(k) and IRAs to Roth IRAs while paying no taxes. By age 70, I should have mostly Roth IRA assets.

Did you read the ZERO taxes thread I linked in another thread of yours? This is all exquisitely described there-in.
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Old 03-03-2014, 08:19 PM   #3
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I have been withdrawaing from the TSP (like a 401K) to lower my future RMD's while I am at a lower marginal tax bracket; I have not yet claimed SS income.

When I turn 70 I will have RMD's, and I will have SS income as well. I will be in a much worse position tax wise. Most of my income and spending money right now is coming from qualified dividends.
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Old 03-03-2014, 08:23 PM   #4
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I try to have only qualified dividends in taxable. I have not been too successful.

I try to have mostly international funds in taxable, so that I get the foreign tax credit for the foreign taxes withheld from the dividends.

Before age 70, I will live off of taxable accounts because return-of-capital is tax-free and I have plenty of carryover capital losses from 2008, so that I will have no cap gains for a while. During that time, I will convert my 401(k) and IRAs to Roth IRAs while paying no taxes. By age 70, I should have mostly Roth IRA assets.

Did you read the ZERO taxes thread I linked in another thread of yours? This is all exquisitely described there-in.
Kind of close to that, though in a higher than 0% tax bracket.

Although I don't have an allocation to bonds, I do try to keep my heavy dividend paying equities in the tIRA and Roth.
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Old 03-03-2014, 08:28 PM   #5
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I am having a similar problem. 68 this year. No SS. RMD's will be over 50K, SS will be about 40K in addition to interest, dividends and LTCG's. As my old, now deceased, accountant told me 25 years ago, "Do you wish you were had not earned a good income so you can pay less taxes?"
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Old 03-03-2014, 10:34 PM   #6
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Originally Posted by BBQ-Nut View Post
So, we all know that standard interest and dividends in after tax accounts are taxed as ordinary income.

Does that affect your post retirement strategy?

Do you avoid such investments in your after tax portion of your portfolio?

Or is your AGI low enough that you could care less?

And what about the dreaded and inevitable RMD?

What is your strategy there?

1.Avoid withdrawing from your qualified/tax deferred accounts before 70 - because they too are taxed as ordinary income? And just push the tax bump down the road until RMDs force you to withdraw?

2.Or do you tap into your 401k/403b before 70 because you need to for expenses?
At 50 years old, I am 10 years away from being able to tap into my IRA on an unfettered basis although I hope not to need to make any withdrawals right away. (I might need to tap into it for a few years until I can gian access to SS and my frozen pension.) My main income source in ER is a taxable bond fund. However, I have other income sources consisting of qualified dividends, LTCG distributions, and some muni bond fund income which make up nearly half of my taxable income. I pay federal income taxes at an average rate of about 4% so I am not too worried about income taxes for now. I also pay state income taxes at about 4%, too, because nearly all of my income is taxable at the state level.
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Old 03-03-2014, 11:08 PM   #7
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So, we all know that standard interest and dividends in after tax accounts are taxed as ordinary income......
Actually qualified dividends are not taxed if your income is in the 15% tax bracket.

Other than two years worth of cash, my taxable accounts are all domestic and international equities. Most (about 3/4) of the dividend income is qualified and not taxed, plus I have a nice sized foreign tax credit.

I also do tIRA to Roth conversions to the top of the 15% tax bracket. I actually messed up this year and my TI is $107 into the next tax bracket.
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Old 03-04-2014, 01:28 AM   #8
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I am still working and well into the 28% tax bracket. My taxable side is all equities and muni funds/cash and I tilt toward value so I have lots of (mostly qualified) dividends coming in. they are taxed at 15% mostly, but there are some new investment taxes that one can get hit with that were a result of ppaca. I don't worry too much about the qualifed dividend tax since it's half my federal rate, and I abide by the saying, "don't let the tax tail wag the investment dog".

Edited to add:....and all of my tax advantaged space is taken up with bonds funds and REITS.
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Old 03-04-2014, 07:42 AM   #9
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I have pretty much just...given up. We're very fortunate at 62 with pension and no SS that interest, dividends, etc all put us well out of 15%. RMD's will be over 50K. I thought I was sneaking $20k out to the Roth in the 15% but now that I got the 35 pages back from the accountant I see that there's no way. So the RMD will just be growing. Only reason to move to Roth now is fear of increasing tax rates.

As I say, I've pretty much given up on tax strategies. I've had far more savvy friends than I say that the only thing worse than having to pay a lot of taxes on your income is to not have any income. Or something like that. So I try to keep the dividend/interest generating stuff in the IRA's and the more cap gain stuff in the brokerage and leave it at that. It still throws off more than we spend. Our AGI was about what the FIDO calculator says we can spend till we're 92. Life is good.
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Old 03-04-2014, 05:36 PM   #10
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Actually qualified dividends are not taxed if your income is in the 15% tax bracket.

Other than two years worth of cash, my taxable accounts are all domestic and international equities. Most (about 3/4) of the dividend income is qualified and not taxed, plus I have a nice sized foreign tax credit.

I also do tIRA to Roth conversions to the top of the 15% tax bracket. I actually messed up this year and my TI is $107 into the next tax bracket.
I was expecting more qualified dividends this year. I could still recharacterize some conversion, effective tax rate .38%, I want to pay my fair share.
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Taxable Dividends, Interest and the dreaded RMD - what to do?
Old 03-04-2014, 10:07 PM   #11
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Taxable Dividends, Interest and the dreaded RMD - what to do?

Does that affect your post retirement strategy?

Only that I plan to draw from from taxable accounts as much as possible first. At 57, we have one one RMD due to a non spousal inherited IRA, but taking minimal RMDs will make that account last 25 years. Our one joint taxable account has been providing the rest of our annual WD (after RMD) without touching principle. Those two accounts represent about 1/4 of our portfolio. As the RMDs become greater, we'll take less from the taxable account. It will hit the point the RMD will exceed what we WANT to withdraw, and the unused portion will be reinvested back into the taxable account. The other 75% of the portfolio is in tax deferred accounts and will continue to grow un disturbed for at least 13 years, assuming the market follows historical patterns. Then they will produce RMDs which will be used if needed or reinvested in taxable accounts.

Of course that's the battle plan, and battle plans fall apart 30 seconds into the battle. We have no NEED to make withdrawals, except to finance our travel plans - we're gone as much as we are at home. We could skip the travel, should it become necessary, and leave the investments alone.

For the record, to answer your question, we can't get our income low enough for our dividends to be untaxed. So that's not an issue in our decision making.
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Old 03-04-2014, 10:35 PM   #12
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I've been contemplating this myself. My current tax deferred accounts make up about 80% of my savings. My base expenses are looking like about 70k per year, which is in the 15% tax bracket.
I'm tempted to reduce the funding to my 401k ( keep just enough to get the employer matching), and direct the rest to long term funding, but then I pay 28% now! so it still seems like I'm better off in the tax deferred accounts, unless my income drops and I can shift some to the my Roth account.
Am I missing something?
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Old 03-05-2014, 09:34 AM   #13
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Qualified dividends are not taxed as regular income.
I tend not to worry too much about it. As others have said, would you rather earn less income?
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Old 03-05-2014, 10:12 AM   #14
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If you earn from qualified dividends in your deferred tax account, how is that taxed, is it still at a lower rate? Or as regular income since it Gomes from the deferred tax account?
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Old 03-05-2014, 10:14 AM   #15
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If you earn from qualified dividends in your deferred tax account, how is that taxed, is it still at a lower rate? Or as regular income since it Gomes from the deferred tax account?
All distributions from your tax-deferred accounts are taxed as ordinary income.
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Old 03-05-2014, 10:59 AM   #16
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Each time one of my CDs comes up for renewal I go through the exercise of thinking about tax rates. The CDs subject me to 28% tax on the gains. The PenFed promotion made the exercise a bit challenging, as the net rate of a 3% CD after taxes is about 2.16%. California Municipal Bond Funds (VCADX) are currently yielding about 2.2%, so it's about a wash. Yet psychologically I just like having investments that I don't have to pay taxes on. With the CA state taxes thrown in, the bonds end up winning by a small margin actually.

I seem to keep splitting the difference and keeping half of my FI funds in each.
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Old 03-05-2014, 12:33 PM   #17
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All distributions from your tax-deferred accounts are taxed as ordinary income.

That's what I thought
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Old 03-05-2014, 01:25 PM   #18
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Originally Posted by Accidental Retiree View Post
All distributions from your tax-deferred accounts are taxed as ordinary income.
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That's what I thought
Unless it's from a Roth IRA in which case you paid all taxes going in...
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Old 03-05-2014, 02:17 PM   #19
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I have pretty much just...given up. We're very fortunate at 62 with pension and no SS that interest, dividends, etc all put us well out of 15%. RMD's will be over 50K. I thought I was sneaking $20k out to the Roth in the 15% but now that I got the 35 pages back from the accountant I see that there's no way. So the RMD will just be growing. Only reason to move to Roth now is fear of increasing tax rates.

As I say, I've pretty much given up on tax strategies. I've had far more savvy friends than I say that the only thing worse than having to pay a lot of taxes on your income is to not have any income. Or something like that. So I try to keep the dividend/interest generating stuff in the IRA's and the more cap gain stuff in the brokerage and leave it at that. It still throws off more than we spend. Our AGI was about what the FIDO calculator says we can spend till we're 92. Life is good.
And may I say, "ditto." Seems like all the tax cards are stacked against us.
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Old 03-05-2014, 03:32 PM   #20
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Yes, they appear stacked against. But at the risk of antagonizing some, with an overall tax rate of 10% I can't say I feel put upon. Someone has to pay for what the government does.
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