When to use tax exempt funds

[COcheesehead]

To be fair though, many early retirees are in the 15% tax bracket or lower and would typically pay 0% on capital gains anyway... though it is nice that you can do more low tax cost Roth conversions because of your tax losses.

Thanks for pointing this out. I have gotten so used to paying cap gains in the 33% bracket I didn't realize there was a pot of gold at the end of the rainbow. I hope that tax break still exists when I have more control over my income when I retire. Until then I am a tax loss harvesting farmer.

 

[Frankie1926]

This scenario does not work for many retirees. If one has SS or pension income or rental income sure. But for retirees relying on their portfolio for the majority of their income....not so much.

You are limited a $3,000 capital loss in any year. By carrying over loss amounts beyond $3,000, you are in effect giving the govt. an interest free loan until the next year.

So in 2008-2009, if you had a huge unexpected expense of say $50,000....then selling at a huge loss may result in many future years of TLH. Not something I would want to do.

Ditto


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[Ready]

I don't have any cash nor fixed income in any taxable account. That is, no savings account, no CDs, no bonds, no bond funds, etc. The reason is taxes. I don't want to earn any interest or dividends that increase my income and cause me to pay more taxes.

I understand in theory why this makes sense. However, when I do the math, it doesn't seem to work out that way for me. I have CDs in taxable accounts earning between 2.25-3%. I also have intermediate term muni bonds paying 1.23% tax free. In my tax bracket, that equates to about 2% equivalent yield. So it's still lower than my lowest earning CD.

Intermediate term bonds have moderate interest rate sensitivity that CDs (non-brokered) do not. And with interest rates being at all time lows, it seems more likely that bond fund prices will fall over the coming years rather than rise. So as much as I hate having money in CDs that I'm paying taxes on, I can't find a good reason to put all of it into bond funds just to avoid paying the taxes.

 

[dallas27]

There is a pretty simple algebraic formula out there for comparing taxfree bonds to taxable so you know which is the most efficient for you, ceteris paribus. It, of course, bakes in your marginal rate so that is accounted for.


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[audreyh1]

You are making assumptions here. You are assuming that in a year with a huge market drop and subsequent huge capital losses, one would be able
to tax loss harvest. What if there were not sufficient gains to offset a huge capital loss. Sure you were able to do it in 2008-2009 because the gains had probably been building for years. This is not always the case which is where a cash reserve comes in handy.

My point was if there is no corresponding gain to offset a huge loss....the loss needs to be carried over year after year and can only be offset by $3,000 in each subsequent year. That's the tax code as of today. Hope that makes it a little clearer.

Not quite correct. Capital losses taken today can offset capital gains in future years - including capital gains distributions from mutual funds and qualified dividends from both stocks and mutual funds. You are only limited by $3000 in years where you have 0 capital gains and 0 qualified dividends.

 

[travelover]

.......... I have CDs in taxable accounts earning between 2.25-3%.........

Where can I get a 3% CD?

 

[Ready]

Where can I get a 3% CD?

Currently, nowhere. But many of us on the forum took advantage when Penfed offered 3% five year CDs a couple of years ago.


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