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Optimizing taxable account returns/strategy
Old 11-03-2015, 05:53 AM   #1
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Optimizing taxable account returns/strategy

Looking for some outside views to check my current approach/strategy to maximizing my taxable accounts. Some info that may help...

- 4 to 5 yrs from FIRE the way I want to do it, currently 51
- self employed sole earner of family
- maximize retirement plans every year
- only debt is primary residence at $350k, house worth about $850k. Main reason I don't pay off is interest rate is around 3% so $$ earn more in market/investments (in theory anyways). Plans are to downsize and pay cash for next house once FIREd.
- while income fluctuates, it is high and I am saving/investing a significant amount (generally 30% - 50% per yr, just depends)
- paying for 2 last kids in college (another 4 yrs of costs), so most of my heavy lifting will be completed by FIRE, hence my targeted FIRE dates
- have 2 more girl weddings/1 boy wedding in the hopper, just knocked out 1 girl this yr... damn those girls are expensive!
- all my Retirement income will come from my investments (AA, RE)
- for retirement accounts, I had set up a Defined Benefit plan that has been very lucridive and provided significant tax benefits for me over the years, however, this will be my last year as I have hit the max in the account. This will effectively leave me with a SEP or 401k going forward.

Since I am still working, I basically pull out a years worth of expenses and keep that essentially in cash and then look at my over AA based on the remaining investments (taxable & tax differed, as well as my RE investments). With my Defined Benefit plan going away, a high income, and significant $ (7 figures) in taxable accounts, I am running out of ideas on ways to minimize my taxes on both my taxable accounts and income for that matter. What are you all doing to maximize your taxable accounts in terms of investments that give you respectable returns with the least amount of taxable consequences? I am always looking at RE deals, but the markets are very frothy right now so pickings are thin. By the way, I am not complaining and feel very lucky to be in this position, I am just tax adverse.
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Old 11-03-2015, 06:29 AM   #2
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You probably already know this but your best bets in your taxable accounts are tax-free munis (interest not taxed) or equities (tax preferenced and foreign tax credit for international equities). However, as a high income W-2 earner there is only so much that you can do to minimize tax. Grin and bear it.

The good news is that once you retire, your taxes will plummet. To get an idea, take last year's Turbotax and strip out your employment income and make any appropriate adjustments and see how the tax changes (or use Taxcaster).

My federal income tax went from $47k the last year I worked to $0 the first year that I retired because I did some capital gains trading in my taxable account but kept my taxable income in the 15% tax bracket so those LTCG were taxed at 0%. Even now, while I'm doing Roth conversions to the top of the 15% tax bracket my overall tax is only about 8% of my income.

Edited to add: make that 6% of income, not 8%.
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Old 11-03-2015, 06:49 AM   #3
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Quote:
Originally Posted by pb4uski View Post
You probably already know this but your best bets in your taxable accounts are tax-free munis (interest not taxed) or equities (tax preferenced and foreign tax credit for international equities). However, as a high income W-2 earner there is only so much that you can do to minimize tax. Grin and bear it.

The good news is that once you retire, your taxes will plummet. To get an idea, take last year's Turbotax and strip out your employment income and make any appropriate adjustments and see how the tax changes (or use Taxcaster).

My federal income tax went from $47k the last year I worked to $0 the first year that I retired because I did some capital gains trading in my taxable account but kept my taxable income in the 15% tax bracket so those LTCG were taxed at 0%. Even now, while I'm doing Roth conversions to the top of the 15% tax bracket my overall tax is only about 8% of my income.
Yep. My dilemma has always been finding the best investments that yield the best after tax return relative to risk. Buying munis makes you feel better that you are saving taxes, but comparing 2% (no tax) to say an 8% taxable return, even at the highest tax bracket, still says go for the 8%. Psychologically, I just hate seeing anything get hit by 39% + in taxes. As you said, grin and bear it!!
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Old 11-03-2015, 06:55 AM   #4
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Originally Posted by pb4uski View Post
The good news is that once you retire, your taxes will plummet. To get an idea, take last year's Turbotax and strip out your employment income and make any appropriate adjustments and see how the tax changes.
Great idea with the TurboTax suggestion. I just did the experiment. My taxes will plummet more than $25K. I knew the taxes would plummet, but never thought about just deleting my W2 from Turbotax to see the result. The rental income stays the same, mostly.

I never do any estimated taxes, I just pump up my megacorp withholding by a significant amount.

For 2016+, Rents will be up just a bit, interest deductions lowered by paying off (soon) another mortgage, but taxes will still be a lot less. Paying only? $10K - $12K a year in taxes, vs. almost $35K will be much better. Of course I also pay a bunch in property taxes, FICA, sales, etc.



Tax Savings
Prev FED $25,314 - $6,128 (New FED)= $19,186 savings
Prev MN $8,850 - $2,390 (new MN)= $6,460 savings
Total Tax Savings = $25,646
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Old 11-03-2015, 08:58 AM   #5
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I think tax-efficient taxable account investing boils down to just a few main things:

1. Tax-efficient stock index that pay no capital gains distributions and only qualified dividend income. These might be total US stock index funds, growth index funds, total international stock index funds, and maybe something that pays no dividends such as BerkshireHathaway stock. The tax drag for someone in the highest tax bracket will be 0.5% to 1% of the total invested amount. It turns out that the foreign tax credit is useful, but US stock index funds are more tax efficient than foreign stock index funds for folks in high tax brackets.

2. Tax-exempt muni bond funds.

3. Investments that lose money because you can take a tax deduction. Don't forget to do tax-loss harvesting when you can.

A problem with #1 above is that folks with a million dollars in just stock index funds will pull in about $25,000 to $30,000 a year in dividends which add to their AGI and bump them into higher tax brackets even if those divvies are qualified.

Other ways to save on taxes: Give your money away. Either to the kids or to your donor-advised fund. If you give away appreciated shares, then your kids can sell and pay the cap gains taxes in their tax bracket and not yours. With the charity, you get a tax deduction and do not pay cap gains taxes.

If you are not using a 529 plan to help pay for college, then you should do that, too.
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Old 11-03-2015, 06:44 PM   #6
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Originally Posted by LOL! View Post
I think tax-efficient taxable account investing boils down to just a few main things:

1. Tax-efficient stock index that pay no capital gains distributions and only qualified dividend income. These might be total US stock index funds, growth index funds, total international stock index funds, and maybe something that pays no dividends such as BerkshireHathaway stock. The tax drag for someone in the highest tax bracket will be 0.5% to 1% of the total invested amount. It turns out that the foreign tax credit is useful, but US stock index funds are more tax efficient than foreign stock index funds for folks in high tax brackets.

2. Tax-exempt muni bond funds.

3. Investments that lose money because you can take a tax deduction. Don't forget to do tax-loss harvesting when you can.

A problem with #1 above is that folks with a million dollars in just stock index funds will pull in about $25,000 to $30,000 a year in dividends which add to their AGI and bump them into higher tax brackets even if those divvies are qualified.

Other ways to save on taxes: Give your money away. Either to the kids or to your donor-advised fund. If you give away appreciated shares, then your kids can sell and pay the cap gains taxes in their tax bracket and not yours. With the charity, you get a tax deduction and do not pay cap gains taxes.

If you are not using a 529 plan to help pay for college, then you should do that, too.
Yes to all of the above except give away to kids... at least not yet. I am still accumulating for my retirement objectives so if paying taxes is the worst thing I do, so be it. I just wanted to make sure I was not missing anything. Thanks
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Old 11-03-2015, 07:23 PM   #7
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....3. Investments that lose money because you can take a tax deduction. Don't forget to do tax-loss harvesting when you can....
Not part of my strategy....I try as best I can to avoid these. Unfortunately the only ones that I currently have are in my IRA.
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