LTCGs

[Sandy & Shirley]

We are domestic partners and we each have standard IRA and Roth accounts. About 2/3 of our retirement savings are in the Roth accounts and 1/3 in the standard IRA accounts.

When we look at our Federal Returns, our “fixed incomes”, Social Security, Pensions, Annuities, and Minimum Required Distributions from our IRAs allow us each to have about an additional $15,000 of extra income, currently IRA withdraws, before we enter the 22% Federal tax bracket, which, with the 85 cent per dollar taxation of our SSB, results in a Marginal Tax Rate of 40.7%.

We are currently considering the possibility of creating standard brokerage accounts where we will purchase stocks and be in complete control of when we sell the stocks to create Long Term Capital Gains. Since the actual LTCGs will be tax free, but will still make 85 cents of SSB taxable per dollar of LTCG, the tax rate on those gains will only be 10.2% instead of 12% x 1.85 = 22.2%.

On other forums, the heavy investors are recommending using the extra $15,000 to perform more Roth Conversions at 22.2% Federal plus State and Local, and some are saying to just invest in mutual funds and let the fund managers determine how the gains come back to us.

What do you feel about trying to create LTCGs to minimize our Federal Taxes to 10.2%?

 

[audreyh1]

Index equity funds generate very low capital gains (particularly the Vanguard Index funds which are as low as their ETFs) if you don’t want to manage your own individual stocks.

Some ETFs only generate qualified dividends which are taxed the same way as long term capital gains. That’s all I’ve ever seen from SCHD for example.

 

[Exchme]

Converting with a marginal tax rate of 40+% would make no sense unless you were nearly done with SS taxation by the time you hit the 22% bracket, then it might be worth pushing through a small window of 40+% taxes to convert larger amounts at 22% or 24% to bring down future RMDs. To bother doing that, you need to have later years where it would be worse if you don't pay the piper now.

In your taxable account, just buy a broad, super low cost ETF like Vanguard Total market or an S&P 500 fund. You want something you can hold forever, so it has to be super diversified or you will eventually sell it for underperforming and then have taxes due. I would stick with ETF, Mutual funds can give you unplanned tax liability because of CGDs, sometimes it can be quite a headache. I would avoid anything active as those just make the fund manager rich.

 

[audreyh1]

The Vanguard index funds are just tax efficient as their corresponding Vanguard ETF.

 

[Sandy & Shirley]

The problem with mutual funds and ETFs is the lack of control. The normal cross over from 12% to 22% with the 85% taxation of SSB is actually 22.2% to 40.7%. My goal here is to create as much as possible with LTCGs. So my cross over with actually be 10.2% to 49.95% if I cross over the line that is $100 less than the top of the 12% bracket.

If all goes as planned, I will be creating LTCGs within the 12% bracket, so they will be tax free, but each dollar of LTCG will also make 85 cents of my Social Security taxable, and 85% of 12% is 10.2%! You just have to love the tax laws!

Each dollar of unexpected year end dividends will be taxed at 12% of $1.85, 22.2 cents, plus a 15% of $1.85 of LTCG, 27.75 cents for a total of 49.95 cents tax for each dollar of unexpected income.

This is why I want to work with individual stocks, so I can be in complete control of when and if I sell anything.

I have a short list of websites that give reports on the best long term stocks:
https://www.forbes.com/advisor/investing/best-long-term-stocks/
https://money.usnews.com/investing/slideshows/best-long-term-stocks-to-buy
Then I can compare all the on line “best” lists against the 12 month future forecasts on sites like:
https://money.cnn.com/quote/quote.html?symb=AAPL

And then make my own decision on what stock symbols to buy and sell.

So my questions to the forum are:

Does this sound like a reasonable plan?
What other links do you have for short lists of LTCG stocks?
What other links do you have for 12 month forecasts?

Thanks in advance for any replies!

 

[Sunset]

The Vanguard index funds are just tax efficient as their corresponding Vanguard ETF.

Yes, only for Vanguard this is true due to some a very special mechanism, that other brokerages were not interested in doing many years ago.

I'm just mentioning it so other readers don't think it applies to Schwab or Ameritrade funds, etc..

 

[Sunset]

OP - We have ditched many of our mutual funds as we discovered they sometimes gave us a surprise of declared Capital gains, etc.. These were not Vanguard ones, more like Janus funds.

I think you will find Vanguard ETF's like VTI don't give you surprises.
If you want a stock that has zero dividends, then BRK.B is decent as it's really a lot of other stocks and businesses, so it has some diversification.

 

[Montecfo]

I do think you are on the right track. I do own and like some of the stocks in the lists you linked.

But I am not sure there is such a thing as a "good LTCG" stock. Are you seeking stocks which do not pay dividends, since those are also taxed as LTCG?

I invest for total return, meaning maximizing overall gains, considering both dividends and capital gains combined.

So I guess the lists are beginning points for additional research. But the only real roadmap is understanding value and having a well considered view about market direction.

The "forecasts" are not real valuable as I see it.

Good investing!

 

[FLSUnFIRE]

Buying individual stocks for perceived tax advantages is a mistake IMO. You are adding a lot of work for little to no gain -either through researching investments for a concentrated portfolio* or buying dozens-hundreds of small positions to get adequate diversification and in order to maintain adequate diversification it will require selling/buying to rebalance thus creating taxable events. Even individual stocks occasionally generate surprise income, usually in the form of special dividends that are taxed at ordinary rates and not preferred like LTCG. Also, there have been pushes by some in Washington to restrict stock buy backs... if successful, the companies will need to do something with the "excess" cash and dividends are likely how they will distribute that value to the shareholders. If that happens it would eliminate some of the perceived benefits of owning stocks as well.


I have VTSAX in my taxable, I get minimal distributions from it far below any thresholds to trigger taxes and I can sell to optimize realized income. If I was starting out today or investing a large chunk of found money (inheritance, etc), I'd probably do the ETF so I could use limit orders to fine tune my return but it's really a minimal benefit.


* The ability of individuals and professionals to pick stocks and time markets has been proven nearly impossible again and again so I won't beat that horse here.

 

[audreyh1]

Yes, only for Vanguard this is true due to some a very special mechanism, that other brokerages were not interested in doing many years ago.

I'm just mentioning it so other readers don't think it applies to Schwab or Ameritrade funds, etc..

The others can’t do it because Vanguard holds the patent is my understanding.

Nevertheless the Fidelity index funds are only slightly less tax efficient in my experience.

 

[pb4uski]

We are domestic partners and we each have standard IRA and Roth accounts. About 2/3 of our retirement savings are in the Roth accounts and 1/3 in the standard IRA accounts.

When we look at our Federal Returns, our “fixed incomes”, Social Security, Pensions, Annuities, and Minimum Required Distributions from our IRAs allow us each to have about an additional $15,000 of extra income, currently IRA withdraws, before we enter the 22% Federal tax bracket, which, with the 85 cent per dollar taxation of our SSB, results in a Marginal Tax Rate of 40.7%.

We are currently considering the possibility of creating standard brokerage accounts where we will purchase stocks and be in complete control of when we sell the stocks to create Long Term Capital Gains. Since the actual LTCGs will be tax free, but will still make 85 cents of SSB taxable per dollar of LTCG, the tax rate on those gains will only be 10.2% instead of 12% x 1.85 = 22.2%.

On other forums, the heavy investors are recommending using the extra $15,000 to perform more Roth Conversions at 22.2% Federal plus State and Local, and some are saying to just invest in mutual funds and let the fund managers determine how the gains come back to us.

What do you feel about trying to create LTCGs to minimize our Federal Taxes to 10.2%?

So if you do Roth conversions today you would incur an effective tax of 22.2% because each $1 of Roth conversions would result in an additional 85c of SS being taxable.

Will the same thing happen when you turn RMD age and instead of $1 of Roth conversion you have $1 of RMD? I would think so, so based on that alone I'm not sure that I would do Roth conversions. Why pay 22.2c now to save 22.2c later?

Now other factors to consider might be if the surviving domestic partner will inherit the tIRA and the RMDs from the two tIRAs combined will put you in a higher tax bracket. Or if others will inherit your tIRA and they are already in really high tax brackets.

So if there is not good reason to do Roth conversions then qualified dividend/LTCG income is best since there will be 0% tax on the qualified dividend/LTCG income and it will push 85c of SS into the 12% tax bracket... so 10.2% is better than 22.2%.

 

[mrfeh]

So my questions to the forum are:

Does this sound like a reasonable plan?

No.

 

[TheWizard]

Seems to me the OP is conflating two different things.
If possible, step one would be to get your retirement income up above the level where 85% of SS is subject to taxation. The dollar amounts for that level of income are NOT adjusted for inflation, so shouldn't be too hard, I would think.

Step two is to buy/hold only index funds in your taxable investment account, since they tend not to have Capital Gains Distributions.

Beyond that, it may be possible to do Tax Gain Harvesting some years depending on the inflation adjusted start of 15% LTCG taxation...

 

[TheWizard]

Also, it would appear that 50% of the OP's SS income is taxable presently.
So going from 50% to 85% isn't that big a jump.

And I agree with the other about not investing in individual stocks, just index funds...

 

[Exchme]

If you specifically pick stocks that have no dividend, then you are actively avoiding diversification and concentrating your holdings on those sectors. Active non-diversified stock selection is far more dangerous to your financial health than paying 10% taxes on the 1.74% dividends thrown off by the Vanguard Total Market ETF. That will become more true as you age and your skills diminish, simplicity is your friend.

As for Roth Conversions and taxes on them, the very high marginal tax rate stops once you get to 85% of SS taxed, so it's quite possible that if you have a large IRA, you should push through the SS taxation window and go into the 22% or higher brackets or higher IRMAA tiers, we can't guess without more specifics.

None of us can see into the future, but there are various computer programs that allow you to build models to test different scenarios to figure out what might make the most sense for you. I use a paid Excel spreadsheet, Pralana Gold, as it's very flexible and its tax package is good. I've seen others recommend some on-line paid programs like New Retirement.

 

[RunningBum]

I'm not following. 2/3 of retirement savings is in a Roth and 1/3 in a tIRA. Where is this money coming from to invest in a taxable brokerage account? Why isn't it already being invested?

 

[Sandy & Shirley]

I'm not following. 2/3 of retirement savings is in a Roth and 1/3 in a tIRA. Where is this money coming from to invest in a taxable brokerage account? Why isn't it already being invested?

All of the money is already invested, but this year we will pay off our Motor Home, saving $18,000 a year in expenses and also start Shirley’s first Annuity for about $10,000.

We live in what I call our Social Security Sweet Spots, the top end of the 12% (22.2%) Federal Tax Bracket, just before crossing into the 22% (40.1%) Federal Tax Bracket. We currently do this each year with small withdrawals from our Roth accounts. That will end this year due to the payoff and annuity.

Starting in 2024, we will be able to have extra money left over without any additional Roth withdrawals. The question is, what to do with the extra cash?

Small Roth Conversion within the 12% bracket will cost us 29.95% of our savings, 22.2% Fed plus 4.75% State and 3% Local. OR, we can just put all of the extra pre-Hump money into standard accounts to try to build up future LTCGs.

 

[pb4uski]

What ever you do, don't get married... a much higher percentage of your SS will be taxed.

Using https://www.irscalculators.com/tax-calculator I took a hypothetical single over 65 taxpayer in 2023 and input equal amounts of unearned income and SS income until I was close to the top of the 12% tax bracket.

For a single person with $37,200 of unearned income and $37,200 of SS, 62% of their SS will be taxed and their total federal taxes would be $5,135.60, marginal tax rate is 12% and effective tax rate is 6.90%.

If we had two singles like this and they married and filed a joint return wih $74,400 of unearned income and $74,400 of SS, 85% of their SS will be taxed and their total federal taxes would be $14,185.80, marginal tax rate is 22% and effective tax rate is 9.53%.

So while generally there is not a "marriage penalty", this is one instance where there is.

 

[Sandy & Shirley]

When the 1983 and 1993 laws for the taxation of our benefits were passed, the BASIS for everyone was half of your Social Security Benefit plus all of your other taxable income, Roth income is not included.


The SINGLE taxation points are 50% of the amount over $25,000 plus 85% of the amount over $34,000.
The MARRIED taxation points are 50% of the amount over $32,000 plus 85% of the amount over $44,000.

The current inflation factor used to calculate your SS Benefits for 1983 is over 4, so from today’s income viewpoint the taxation of your benefits does not start until your income is over $100,000, so all of the House and Senate members got before the cameras saying “we’re only taxing the rich”!

When they wrote the actual laws, they specifically included that the taxation points would not be COLA adjustable. Basically they designed the laws to dig deeper and deeper into our benefits when the Baby Boom generation started to retire around the year 2010, and keep digging deeper as time progressed.

When the Marriage Penalty was basically eliminated in 2004, it was accomplished by performing different COLA adjustments on the tax brackets and deductions for married and single individuals. BUT, the 1983 and 1993 laws prohibit COLA adjustments to the fixed taxation points for our benefits. That is why there is still a Marriage Penalty for retired married couples.

The SINGLE taxation points are 50% of the amount over $25,000 plus 85% of the amount over $34,000.
The PARTNER taxation points are 50% of the amount over $50,000 plus 85% of the amount over $68,000.
The MARRIED taxation points are 50% of the amount over $32,000 plus 85% of the amount over $44,000.

 

[RunningBum]

Seems to me you are mixing up unlike things. You are comparing a current rate of converting $15,000 with a future rate of tax on LTCGs. And you haven't factored in the future RMD cost of withdrawing that $15K if you don't convert it today.

Furthermore, it's not an either/or condition. It sounds like you can convert $15K @ 22.2%. That leaves $11,700 after you pay taxes out of your taxable account to invest and later sell with gains taxed at a future LTCG rate.

So the real question I think is:

Do you take $3300 from your taxable account this year to pay the Roth conversion tax to lock in 22.2% tax rate on a $15K conversion, where future gains on that $15K will never be taxed since it's in a Roth.

OR do you invest that $3300, where future gains on that $3300 are taxed at 10.2% (probably) and a future RMD will be taxed at possibly higher than 22.2% (since the 12% rate may go up to 15% when TCJA expires in 2026), and possibly even land you in the SS tax hump since the SS taxability factor is not inflation adjusted.

Maybe my assumptions aren't correct because you haven't given complete info, but I would take the "bird in the hand" 22.2% conversion rate now and invest the remaining $11,700.

How you invest that $11,700 is up to you. I wouldn't avoid index funds just so you can invest in individual stocks to keep it totally in your control for tax purposes. You may not get as good of returns by guessing on which stock to invest in. I prefer to invest for best overall return, net of taxes. Focusing on taxes instead of overall return is a mistake.

 

[Sandy & Shirley]

First of all, you will have $11,700 after paying 22%, $11,670 after paying 22.2% Federal tax. Add to that, in my situation, another 4.75% State tax plus 3% Local Tax, and I would only have $10,507.50 after paying all of my income taxes.

Also, the fact that the SS taxability factor is not inflation adjusted does not push you further into your tax hump. When all of your tax brackets and deduction points move up with COLA and your starting SS taxability remains fixed, a larger portion of the extra taxation occurs before your tax hump, not after it.

Bottom line, the Government wants to take more and more and more of my retirement money from me, and I’m looking for ways to give them less!

 

[RunningBum]

I can't make you understand my point.
Apply your corrections to my post. I doubt it changes anything unless in the future you will be moving to a lower tax state / local area.