Post RE Higher Income Strategies

[DawgMan]

Been reading thru a number of the threads on minimizing tax implications on RE income, most which seem to be focused on Roth conversions, getting ACA subsidies, and keeping income in the lowest or zero tax bracket. Obviously, this is all good common sense strategy. What I have not read much on and am interested to hear is what, if anything, are the higher post RE spenders ($150K +) doing to help minimize taxes. Personally, my plan when I potentially RE in 3 yrs calls for generating a RE income of over $200K/yr net to me (driven by wants not needs) and my RE income will come solely from my assets (tax differed/taxable brokerage accts and some real estate). While still in the accumulation phase, being in the highest tax bracket, I have no incentive to do Roth conversions as putting away tax differed $ helps me best now. I realize these are good problems to have, but like everyone else, every $ I can keep for myself means that's a bunch more $$ I don't have to store up before I start my SWR. For you higher RE spenders, have you employed any strategies that are helping you keep more of your $? I would also be curious to here what your spending and what you have experienced in terms of an effective tax % on the gross $ you are pulling out annually. In other words, if you are pulling out $200K gross, after deductions and employing your strategy (i.e. cashing out LTCG, qualified dividends) your simple effective tax % is X. In my case, a good 60% of my investments are in tax differed accounts which will obviously be taxed as ordinary income upon withdrawals. Being 3 yrs away, I have not run the math on the best withdrawal strategy, but suspect it will be a combination the above. Curious to learn from some of the bigger spenders.

 

[nun]

Maybe now's the time to talk about whole life....and munis

 

[BeachOrCity]

I think when people let the tax efficiency be the primary driver of their investment strategy they are apt to make decisions that are not optimal.
I would just keep taxes in mind when you make decisions but not let not paying taxes drive yiur decisions to too large an extent.

 

[6miths]

Maybe now's the time to talk about whole life....and munis

Please no!

 

[GrayHare]

I don't spend at that level but can see at higher levels it's better to have capital gains than dividends and taxable interest. For tax purposes CGs can be nullified by the inevitable losses whereas dividends cannot.

 

[2017ish]

We plan to be doing just a bit less than that in spending in our first year, but have a higher percentage of our portfolio in tax deferred accounts. Given how close we are, I've run tax scenarios under existing tax law, incoming administration's proposal, and House GOP proposal.

Given our lack of tax diversification, our present plan is to do relatively aggressive Roth conversions until we exhaust our after-tax dollars. (yeah, that's opposite of many recommendations....) Under each of the proposals, we'd convert Roths to top of 25% bracket; but under existing law probably to AGI of 250K (Medicare surcharge cliff). Given the personal exemptions and deductions, that would put us within spitting distance on either side of 20% effective rate (ignoring capital gains and dividends, which would reduce that rate slightly)--far better than the top marginal rate at which we put the monies in.

Once we exhaust the after-tax monies, we'll need to restock our spending by yearly IRA withdrawals. We'll examine the law at that time to determine whether to do any more Roth conversions, or just withdraw similar amounts from IRAs each year and start again on accumulating after-tax monies until we have achieved closer to true tax diversification going forward. This plan increases our taxes in our first years of retirement, but will reduce tax hit (and, maybe, medicare premiums) for the bulk of our years.

 

[harley]

We're not quite at that level of spending, but well over the limit for the 15% bracket. As far as I can figure, the only way to minimize taxes at that level are to have enough deductions to take you down. We have a healthy amount of cash available, so we can draw from that pretty much tax free. Then we also have a couple of rentals, the income from which after deductions and depreciation actually lower our taxes. We also are carrying a mortgage which helps. But I also have a small side business that is getting a little more successful than I ever planned. So far, even though we're spending over $100K/year, we still manage to stay in the 15% bracket. But I think that time is ending. We'll probably start taking DW's SS in a year or so, and that will be the end of that. At some point the business will end, but then again my SS and our RMDs will kick in. We'll just have to learn to grin and bear it at that point. All you can do is the best you can.

 

[Happyras]

I am optimistic that tax law changes will favor business. I strongly believe the standard deduction will increase to make most folks unable to effectively take interest and tax expenses as better than the new higher standard deduction. I believe there will be some form of incorporation individuals might use to take advantage of such changes. We can't justify Roth conversions as we do not see our marginal rate being much higher in the future.

 

[rodi]

I have no useful advise for this situation since I've got a much lower spend rate. But I would imagine there are folks here who have decent pensions *and* RMDs/rental income/etc that kick them up to high tax brackets.

It's a nice problem to have.... even if we don't like paying taxes, it's nice to have enough income to have this is an issue.

 

[haha]

For tax purposes CGs can be nullified by the inevitable losses whereas dividends cannot.

And not just for tax purposes! Also for buying groceries purposes!

Ha

 

[pb4uski]

While our spend isn't up to the $200k level, we did have a period of time between RE at 56 and when my pension and our SS starts where we are living off of after-tax investments so our income is minimal. This has been an ideal time to do low tax-cost Roth conversions at about 10% or less. Some of our Roth conversions are covered by our exemptions and itemized deductions (effective 0% tax), some is 10% and the rest 15%... blending to about 10% or so. When I deferred this income I was in the 28% tax bracket or higher and once my pension and SS are coming in I expect to be in the 25% bracket so I figure that i'm saving at least 15% based on the current tax scheme.

Also, having our taxable accounts mostly in equities has resulted in a lot of tax-free qualified dividends and long term capital gains... as well as some taxable dividends ofset by the foreign tax credit.

 

[LOL!]

There does not have to be any relationship between spending lots of money and income taxes.

Return of capital is tax-free. Tax exempt interest from muni bonds is not taxed.

So one can have high spending and no income if they want to.

 

[audreyh1]

>90% of our investments are in taxable accounts. Most of our income is taxed at cap gains rates which is a good thing overall. Using stocks, ETFs, or mutual funds that are tax efficient (like index funds) can really reduce the taxable income thrown off by a taxable portfolio. Avoiding mutual funds that pay high capital gains distributions is key.

 

[Rambler]

Like Audrey, 90% or so of our retirement assets are in taxable accts. Income is from a blend of divvies and tax free muni bond interest, that I picked up when the muni market was distressed in 2009 or so. I have a very large chunk of money in deferred income from megacorp, that starts paying out in 2019. This would put us in the 39.6% bracket plus 11% or so in Cali.

We bought a house in Nevada, and will be moving there. Back of the napkin calculation tells me we'll save approx $400,000 in taxes (over 10 years, incl what we are already paying on divvied income) by living in NV rather than Cali. We may keep the home in Cali for vacations, and maybe not. We are giving ourselves the next year coming and going to the new home to decide if we can handle the move.

 

[Hermit]

Most of my money is in tax deferred accounts. I will be hit hard when RMDs kick in. In the meantime, I stay just under Medicare income fees by limiting my withdrawals. I can never get under the 25% tax bracket and will go into higher brackets with RMDs. Make sure you understand the Medicare fees. A couple thousand in unexpected dividends can push you into the next step and for a couple both on Medicare, that can be quite expensive.

 

[Teacher Terry]

Rambler, are you moving to Northern or southern NV?

 

[FIREd]

>90% of our investments are in taxable accounts. Most of our income is taxed at cap gains rates which is a good thing overall. Using stocks, ETFs, or mutual funds that are tax efficient (like index funds) can really reduce the taxable income thrown off by a taxable portfolio. Avoiding mutual funds that pay high capital gains distributions is key.

Same for us.

In addition to using tax-efficient investments, we have a pretty tax-diversified portfolio. About half of our passive income is tax-sheltered (IRAs, tax-exempt munis, I-bonds). The rest consists mainly of qualified dividends from low yielding index funds. To pay for living expenses, we withdraw exclusively from taxable accounts and most of that is tax-free return of capital, so our overall taxable income is very low compared to our spending.

 

[NW-Bound]

There does not have to be any relationship between spending lots of money and income taxes.

Return of capital is tax-free. Tax exempt interest from muni bonds is not taxed.

So one can have high spending and no income if they want to.

+1, although I do not spend $200K/year.

If you are spending the money saved that has already been taxed or money from Roth, not money withdrawn from IRA or 401k, there is no new tax levied, except for sales taxes.

If you are spending tax-deferred savings, the tax man is catching up with you now. I am really curious to see if anyone can avoid that.

 

[RobbieB]

I'm gonna have a big tax bill this year. Even with most of it cap gains and qdivs. it's gonna go 15 grand.

But I don't mind paying taxes, the government needs the dough. Their debt to income ratio is way more than mine.

 

[NW-Bound]

I'm gonna have a big tax bill this year. Even with most of it cap gains and qdivs. it's gonna go 15 grand.

But I don't mind paying taxes, the government needs the dough. Their debt to income ratio is way more than mine.

The government does need money, but that's not a reason to give them more.

Lots of people would want my money, if that's the case.

 

[Hermit]

I'm gonna have a big tax bill this year. Even with most of it cap gains and qdivs. it's gonna go 15 grand.

But I don't mind paying taxes, the government needs the dough. Their debt to income ratio is way more than mine.

They will find more ways to spend all the money you give them, but lets don't encourage them!

 

[RobbieB]

The government builds my roads, educates me and provides defense and security.

I like it here and have no problem paying for it.

 

[NW-Bound]

A married couple can have $96K worth of tax-free qualified dividends and capital gains already. Throw in some money from your principal that is already been taxed, and one can live large on $150-200K without paying any taxes.

And even if you are paying taxes for the cap gains and dividends above the $96K, it's still just 15% for most people. I wonder where the AMT kicks in. I have not had to worry about AMT for quite a while now.

 

[COcheesehead]

Look at a deferred annuity. No max contribution, no min withdrawals at 70.5. Almost all investment options open to you. Cheap if you use someone like Fidelity, .25%. No cost to get out. Great way to bury more funds tax free at low cost and little if any disadvantage.
All income streams are deferred to some point in your 90's, but you can do whatever you want with the funds and never let it annuitize. So money just grows tax deferred.

 

[NW-Bound]

The OP wants to spend now, not to defer anymore.