Using Capitol Losses

[FIRE man]

Hi all,

I'm 62, retired at 55. I have $1,000,000 in my 401k, $350,000 in my roth, $60k in savings and $30K in treasury direct account. I have $600k equity in my house that is paid off and no debts. Started collecting SS for me and my wife this year and have pension for a total monthly income of 6K, so not really using the 401k or Roth to live on now.

I have $500K of capitol losses from when I was actively trading stocks, I paid a lot of taxes on the gains but could not write off the losses as I stopped trading when I retired and used the taxable account to buy my house.

I was looking for a way to use the capitol losses before I'm dead, currently only using 3K of it every year. Does it make sense to transfer some or all of the 401k into a regular brokerage account so it can effectively grow tax free using the capitol losses to offset the gains?

Any thoughts appreciated

 

[mathjak107]

we were in the same situation from closing up our LLC and have lots of carry over .

we had a lot of money from the the real estate sales the LLC held over the years so we invested in our brokerage account over the years .

slowly we are using the carry over to offset gains … we had about 400k in capital costs we couldn’t take until we closed the llc .

i think from about 400k we are now down to 150k carry over

 

[DrRoy]

You can only claim $3K per year against ordinary income, but you can offset any amount of other capital gains that you have.

 

[FIRE man]

Yes of course I understand that. The question is should I move money from the 401K into a regular brokerage account so I can accumulate the capitol gains there tax free. Does that make sense or would leaving in a protected 401k be the better option or perhaps another strategy that I have not considered be better.

 

[jebmke]

Yes of course I understand that. The question is should I move money from the 401K into a regular brokerage account so I can accumulate the capitol gains there tax free. Does that make sense or would leaving in a protected 401k be the better option or perhaps another strategy that I have not considered be better.

Why would you pay taxes on a distribution just to do that?

 

[FIRE man]

The thought is i pay taxes on the distribution then no more taxes on the growth kind of the same as rolling over to a roth. If i leave it in the 401K all the growth will be taxed

 

[jebmke]

The thought is i pay taxes on the distribution then no more taxes on the growth kind of the same as rolling over to a roth. If i leave it in the 401K all the growth will be taxed

I would never do that. But I'm not you.

 

[CardsFan]

The thought is i pay taxes on the distribution then no more taxes on the growth kind of the same as rolling over to a roth. If i leave it in the 401K all the growth will be taxed

As you said, Roth conversions do the same thing, and don't complicate your tax return in the future by requiring you to sell, report the gain, and offset the gain.

 

[mathjak107]

the selling to convert may bang you harder tax wise then the taxes later .

here in nyc we have a state and local tax .

had i converted i would have gotten killed .

now in retirement our state and local taxes are tiny .

i paid 900 bucks on a six figure income .

ss isn’t taxed , my wife’s pension isn’t taxed , the first 20k in retirement money isn’t taxed and all our treasury interest isn’t taxed .

plus we get a 1600 state tax credit for having long term care partnership plans .

so. conversions would have hit us harder

 

[pb4uski]

If you take money from the 401k as proposed, what would the tax bite be?

Depending on the tax bite your plan might make sense. It seems a waste to let $500k of capital loss carryforwards end up unused. Your could invest the proceeds in a non-dividend paying stock like BRK and then occasionally do a gains trade to use the loss carryforward.

 

[Closet_Gamer]

Depending on your after-tax portfolio, if you need to shift your AA from a more equity heavy allocation to more fixed income (either to lock in the current decent rates or just to manage volatility/risk now that you are a bit older), you can do this tax without tax worry. The losses will offset the sale gains.

Might be worth considering if your AA is right.

Just a thought.

 

[RunningBum]

If you take money from the 401k as proposed, what would the tax bite be?

Depending on the tax bite your plan might make sense. It seems a waste to let $500k of capital loss carryforwards end up unused. Your could invest the proceeds in a non-dividend paying stock like BRK and then occasionally do a gains trade to use the loss carryforward.

But converting to a Roth does the same thing. Who cares if you waste that cap loss carryover if you get the same tax break in a Roth?

OP, how much do you have in your taxable account now? I would put as much as you don't need short term in stock funds and periodically reap gains to use up the carryover. You may not use up all of it, but you could use a lot. I recall having a low 6 figure carryover at one time and now I've got just 4-5 years of taking $3K off of regular income and it will be gone.

 

[Exit 2024]

If you are considering to take money out of 401k and pay taxes to put money in Taxable account, I would put all of it in Roth IRA as rollover. You will get the same tax on distribution and same tax free growth, but also for those who inherit your leftovers (if any) is way better to have Roth IRA than taxable and even more 401k.

 

[Exchme]

There was a post on bogleheads.org about someone buying SGOV on the first trading day of each month and sell right before close on the last day, so instead of dividends, it creates short term capital gains.
https://www.bogleheads.org/forum/viewtopic.php?p=7408650

Also, there is a new ETF called BOXX trying to do much the same thing. A long discussion at Bogleheads ensued over whether this is legal or runs afoul of the "anti-conversion" statute.
https://www.bogleheads.org/forum/viewtopic.php?t=396613

But I don't see how the math of a taxable withdrawal and then using a strategy to avoid dividends can be better than just doing a Roth Conversion, where you know that neither the gains nor dividends will be taxed. In your case, it might have been attractive to do Roth conversions prior to claiming SS. But only very small conversions, if any, are likely to be attractive now as your marginal tax cost will be 1.5 or 1.85 times normal as it seems likely you are in the window where extra income increases the taxation of SS benefits.

 

[pb4uski]

But converting to a Roth does the same thing. Who cares if you waste that cap loss carryover if you get the same tax break in a Roth? ...

Fair point. It just seems crazy to let a $500k loss carryforward go to waste, but you have a good point.

 

[SecondCor521]

Maybe not now, but if you move in a decade or so, it's possible that the capital gains on the sale of your home would exceed the $500K MFJ exemption. Those excess capital gains would sop up some of the carryforward loss; possibly quite a lot depending on the specifics.

If there are any capital gains in your taxable I would sop those up as well, perhaps yearly.

It's unlikely, but if you're potentially going to inherit a trust account with embedded capital gains, those capital gains could also be offset with your carryforward loss. (There are certain situations where trust accounts do not get a step up in basis at death.)

 

[N02L84ER]

Also, with a MFJ tax return situation and only $72K of income, the first ~$30K+ of capital gain that you would be offsetting with your carry forward losses would be taxed at 0% if they were long term capital gains. This would be equivalent to letting the losses expire unless you are taxed on the gains by your state. If you bought and sold to keep gains short term you could easily get to a situation where you are sitting on unrealized losses for a couple of years or more.

 

[DrRoy]

Yes of course I understand that. The question is should I move money from the 401K into a regular brokerage account so I can accumulate the capitol gains there tax free. Does that make sense or would leaving in a protected 401k be the better option or perhaps another strategy that I have not considered be better.

I guess I would do what I could to accumulate taxable funds and capital gains there to offset. I would not shift the sheltered $.

 

[Exchme]

I believe OP could improve the retirement plan.

OP will be in 22%-24% bracket (25%-28% if TCJA expires) a few years into RMDs, so doing Roth Conversions now in the 12% (15% post TCJA) is a bargain.

Since he just started SS, I would stop SS benefits and return the money. Then spend down taxable and withdraw enough to live on from the 401K and also do Roth Conversions up to the top of the 12% bracket. Meanwhile, SS benefits grow.

OP didn't reveal if the pension had a COLA, but since SS does, this strategy may improve inflation protection too.

 

[Flieger]

Trying to understand...

The $500k of losses were outside of a tax deferred plan? Then you would move the 401k and use the losses to offset taxes?

Flieger

 

[mathjak107]

Trying to understand...

The $500k of losses were outside of a tax deferred plan? Then you would move the 401k and use the losses to offset taxes?

Flieger

no , he would move the money out of retirement , pay the taxes on the move .

then any future gains are offset with the loss.

we kind of do that with rmds and rebalancing.


we also have a big carryover so i rebuy the same funds we had in the ira in the taxable account rebalancing or taking the rmds

 

[Flieger]

no , he would move the money out of retirement , pay the taxes on the move .

then any future gains are offset with the loss.

we kind of do that with rmds and rebalancing.


we also have a big carryover so i rebuy the same funds we had in the ira in the taxable account rebalancing or taking the rmds

Thanks. I think i understand now about whether the offsetting gains will outpace the initial tax hit.

Flieger

 

[mathjak107]

with rmds it’s a given for us that we will be taxed…

 

[TheWizard]

You should be looking to levelize your AGI over the next 15 years or so, thus avoiding a big jump in AGI once you start RMDs.
Put all sources of taxable income in a spreadsheet for both of you to see yearly projections of AGI.
Typically you would be doing Roth conversions of around 4% of your tax-deferred accounts each year prior to start of RMDs (age 75 for you).

Then after RMDs start, that money goes to your taxable account each year, where you will eventually have capital gains that can be harvested and offset with your carried over loss.

But taxable accounts get stepped up basis on owner's death so it depends on what you'll be doing with all your money.
It can be complicated...

 

[pb4uski]

I believe OP could improve the retirement plan.

OP will be in 22%-24% bracket (25%-28% if TCJA expires) a few years into RMDs, so doing Roth Conversions now in the 12% (15% post TCJA) is a bargain.

Since he just started SS, I would stop SS benefits and return the money. Then spend down taxable and withdraw enough to live on from the 401K and also do Roth Conversions up to the top of the 12% bracket. Meanwhile, SS benefits grow.

OP didn't reveal if the pension had a COLA, but since SS does, this strategy may improve inflation protection too.

Good plan.