ACA MAGI: Living off of dividends vs LTCG

[braumeister]

I don't know how much longer this thread will remain open, but if the tone doesn't change it might not be very far off. Just sayin'.

[gwraigty]

Quote:

Originally Posted by 24601NoMore Love the polite discourse. That said, I'm not "draining" anything. The value of the second portfolio remains constant after dividends cover most of the bills. Whether it's keeping pace with inflation or not is totally irrelevant to my plan. For the record, I don't CARE what it is at the end - it will be roughly what it is today in terms of 2020 dollars. That's where the second (growth) portfolio comes in. My plan is rock solid, and survives all market scenarios. Plus, it maximizes total portfolio value at the end - unlike plans that "burn down" (via spending) your main investment portfolio balance to pay the bills. If you prefer to spend from an investment portfolio - even in scenarios where the market may be down 20, 30, 50 or even more % while you're pulling from it to pay the bills, that's just fine. I prefer an income based approach to pay the bills while keeping reserves to cover out years (10+). In my case, CDs make up a good part of that 2nd portfolio. Others prefer dividend paying stocks, individual bonds, bond funds or whatever. Best of luck to all regardless of your approach. But let's also keep things civil here - the tone is getting a bit iffy and hasn't been particularly respectful of other's approaches or opinions.

+1

I was a lousy total return investor when I attempted it a few decades ago. I'll spare the details. I switched strictly to cash flow investing about 15/16 years ago, using a variety of the investment types you mention. There are advantages/disadvantages, but it works well for us. I say the following only to provide context for any skeptics. Bottom line, DH still works, but by choice. He can RE whenever he wants to. Cash flow from our investments (which I direct and manage 100% along with all of our finances) is almost double our annual expenses for a household of 4, and is also now more than his net pay plus money directed into his HSA/401K. I just computed the latter and had no idea. I'm somewhat stunned. For reference, DH grosses low 6 figures. I've been a housewife throughout our 27 year marriage.

I would in no way try to convince total return investors that my way is superior. I don't think it is, nor is it inferior. I think that both ways can work as long as the style(s) one uses suits one's understanding and temperament.

Quote:

Originally Posted by Luck_Club Never is when you are disagreeing with some fundamental stances of the borge: Structuring income to get tax subsidies is morally superior and OK, where as structuring assets to get tax subsidies is morally reprehensible. Any investing approach that is different from the total return philosophy has inferior returns and more risk, and not worthy of serious consideration or discussion. Rental real estate in retirement is not truly being retired. It gets to me sometimes but I still come back hoping to glean a few gems of knowledge here and there.

+1

Hope all goes well for the OP at the dentist.

[gwraigty]

Quote:

Originally Posted by 24601NoMore I'm very confident in the outcome of my approach and have spreadsheets to the Nth level of detail proving things out. I'm sure many of the "total return" folks have something similar. Personally, I believe my strategy is lower risk and gets me to age 95+ with a minimal level of risk compared to a large amount of equities and living through market rollercoasters. If you believe otherwise, that's fine.

I'm also a fan of spreadsheets. Plus, monthly statements and 1099s .

[RunningBum]

Quote:

Originally Posted by gwraigty I would in no way try to convince total return investors that my way is superior. I don't think it is, nor is it inferior. I think that both ways can work as long as the style(s) one uses suits one's understanding and temperament.

I'm glad you found a method that works well for you. I've found a different one that works well for me. You may not believe it, but for the most part I agree with what you said above.

For the OP, he desires to bring taxable income down to get the ACA subsidy without reducing spending. Whatever he's doing now puts him over by some $5000. Unless he's missing other ways to reduce income (HSA or tIRA contribution, tax loss harvesting, etc.), he needs to

1) reduce taxable income, namely dividends;
and
2) sell some shares each year to make up for the lost income and keep his current level of spending.

OR go without the subsidy.

It's free to take a look at this, which is why I'm encouraging him to look. If he can restructure his portfolio to reduce his income to fit under the subsidy limit, it's then up to him to decide if he's comfortable with the new portfolio (for both near term and long term), and the tax hit this year to sell off current assets and replace them with the lower income yielding investments. It doesn't matter to me either way. I just trying to show him his options.

Without trying to restart a fight, I felt like some of you were saying that he needs all of the dividend income, so he just can't do this (your post #13). Or that moving towards less dividend income flow is a worse strategy, without even considering what the other options are. Apologies if I've misrepresented what you are saying, feel free to correct it.

While we don't know what he holds, certainly he could do it if he really wanted to. All he'd have to do is sell off his dividend yielding stocks, and buy BRKA, which famously pays no dividends. Or the lower cost BRKB so he could sell off as needed in smaller chunks. I wouldn't recommend this, but it is an option. Whether there are better options depends on what he has now, and whether the other options are acceptable is up to him.

[pb4uski]

I don't recall saying that one way or the other is superior... to me it is six of one or a half-dozen of the other... what I object to more is the dividend investing advocates claiming that it is superior to total return investing when it doesn't really matter.

And then there is that whole "eating the pie" fallacy.

And then misleading examples.

[ncbill]

Every few months over on bogleheads there will be some variation of the questions "why not just live off earnings?" (i.e. dividends) or "why not set aside X years of spending somewhere safe?" (bucket strategy)

While those approaches provide emotional comfort those threads eventually get around to backtesting, where it is shown time and again that historically both those approaches produce a lower risk-adjusted return vs. the total return approach.

Still, the emotional comfort is worth the price for many.

[MichaelB]

Does anyone think all the snark contributes to the discussion or will lead to any greater awareness or understanding?

[24601NoMore]

Quote:

Originally Posted by ncbill Every few months over on bogleheads there will be some variation of the questions "why not just live off earnings?" (i.e. dividends) or "why not set aside X years of spending somewhere safe?" (bucket strategy) While those approaches provide emotional comfort those threads eventually get around to backtesting, where it is shown time and again that historically both those approaches produce a lower risk-adjusted return vs. the total return approach. Still, the emotional comfort is worth the price for many.

That may very well be the case. But there are often instances (including my own situation) where the main goal is not necessarily to maximize returns.

It's a classic risk-reward trade-off. Some may prefer to take on lots of risk with the goal of winding up with the biggest pile of assets possible at the end of the game. Others (me included) want to minimize risk as much as possible while still achieving our goals and are willing to forego some potential additional return to do so. (In my own situation, the goal is to "meet" needs through age 95+ with the minimum amount of risk possible. As I've said in other threads - I have no desire to live through another 2008 or worse..and I suspect the next bear market will make 2008-9 look like a good day at Disneyworld by comparison). I'm not at a point risk-wise I was 10+ years ago. So, if I have to miss potential extra returns while attempting to avoid that scenario, I'm perfectly willing to do so. Tortoise and Hare, and I prefer to be the Tortoise every time at this point in life.

So, back to the OP's question - there are two choices..try to keep income under 4X FPL for the subsidies (most likely by pulling from taxable savings - ideally something that won't generate significant LT or ST Cap Gains to cover the expense delta), or don't worry about it and realize you're going to have MAGI in excess of 4X FPL and lose the subsidies. Just model both out in a spreadsheet and run the numbers out year by year through at least Medicare age to see what happens.

[BeachOrCity]

If the aca subsidy is significant and there is a way to keep magi below 400% fpl I think it usually makes sense to do what is needed to make that happen.
Sometimes that may mean going well above 400 in one year to make under 400 the next.

[pb4uski]

OP could sell any higher dividend tickers in his taxable account and buy lower dividend tickers to reduce dividends to get income under ACA limit and then do the inverse in his tax-deferred account... sell lower dividend tickers and replace with higher dividend tickers.

OP could potentially have the same overall portfolio composition but just reconfigured to reduce taxable account income to achieve ACA subsidies. Gains from taxable account sales will likely make him ineligible in the year of configuration but he should be ok in subsequent years.

[bobandsherry]

If OP is "always just a hair over the ACA cliff", I'd suggest harvesting any losses in the year to lower it a hair+.

If no losses to harvest, bundling gains within the year to the point before his taxable income hits the next tax bracket (take a one time hit for ACA penalty instead of paying each year). Put proceeds into growth stock and re-allocate from income/dividends to growth stocks so his taxable income is better managed, selling stocks and only having to report the gains.

Better to "pay the man" once instead of year after year.

[Starsky]

The ACA is something else to consider when selling rental properties. Under the ACA, rental income is included on Line 7, so it is net of depreciation. Roughly 80% of our cash flow is not counted as Line 7 income for the purposes of the subsidy. It's one good reason to wait until I'm on Medicare to sell...another 6 years.

[GenXguy]

The ACA is something else to consider when deciding whether to take SS benefits before age 65.

Not only do taxable SS benefits count towards your MAGI, but non-taxable SS benefits count towards your MAGI as well. This is one reason why I plan to hold off until at least 65 to take SS benefits, although I probably would have delayed to at least 65 even if the ACA didn't exist.

[Dtail]

Quote:

Originally Posted by GenXguy The ACA is something else to consider when deciding whether to take SS benefits before age 65. Not only do taxable SS benefits count towards your MAGI, but non-taxable SS benefits count towards your MAGI as well. This is one reason why I plan to hold off until at least 65 to take SS benefits, although I probably would have delayed to at least 65 even if the ACA didn't exist.

Same here as am getting 22k in subsidies for brother and I.
Pension lump sum at 65, so waiting to 66 at least for the SS.

[Looking4Ward]

So in practical terms - if one has a majority of their after-tax investments in Wellington and wants to minimize the unpredictable (and uncontrollable) effect of CG Distributions, what would be an equivalent but much more tax efficient Vanguard fund to convert to?

[ziggy29]

Quote:

Originally Posted by Looking4Ward So in practical terms - if one has a majority of their after-tax investments in Wellington and wants to minimize the unpredictable (and uncontrollable) effect of CG Distributions, what would be an equivalent but much more tax efficient Vanguard fund to convert to?

Almost anything that is indexed will have very low capital gains. And some ETFs manage to produce almost no taxable income, year after year.

One of the closer matches to Wellington I can find is VSMGX (Life Strategy Moderate Growth), which is a "fund of index funds" that maintains a 60/40 AA and a 0.13% ER. It does generate some capital gains (in part to maintain an appropriate AA), but far less than most managed funds, including Wellington. If you wanted something a little closer to Wellington, like 65/35, you could keep about 85% into this fund and 15% into an equity index fund like an S&P or total market index -- or use a 50/50 index and add some total market index into it.

Of course, making that change may include substantial LTCG if your current position in Wellington is significantly appreciated, unless you can find some other way to reduce your MAGI that year. And if you wanted to maintain a specific asset allocation you'd have to occasionally rebalance which will also trigger some LTCG.

[RunningBum]

Quote:

Originally Posted by Looking4Ward So in practical terms - if one has a majority of their after-tax investments in Wellington and wants to minimize the unpredictable (and uncontrollable) effect of CG Distributions, what would be an equivalent but much more tax efficient Vanguard fund to convert to?

Vanguard Balanced Index (VBIAX) is 50/50, so add some VG Total Stock Index (VTSAX) to get the same stock/bond mix as Wellington.

If you really like Wellington you can move it to an IRA, where the distributions won't affect your MAGI.

[sengsational]

Quote:

Originally Posted by pb4uski OP could sell any higher dividend tickers in his taxable account and buy lower dividend tickers to reduce dividends to get income under ACA limit and then do the inverse in his tax-deferred account... sell lower dividend tickers and replace with higher dividend tickers. OP could potentially have the same overall portfolio composition but just reconfigured to reduce taxable account income to achieve ACA subsidies. Gains from taxable account sales will likely make him ineligible in the year of configuration but he should be ok in subsequent years.

This is the thought I had when I read the OP. It has the awesome benefit of avoiding something which apparently manifests as the "third rail" between some members.


The strategy mentioned above also has the benefit of being immune to whether the market is frothy or in the dumps...you're selling to yourself in order to cross the tIRA / taxable boundary, so it doesn't affect your allocation.

[Looking4Ward]

Quote:

Originally Posted by RunningBum Vanguard Balanced Index (VBIAX) is 50/50, so add some VG Total Stock Index (VTSAX) to get the same stock/bond mix as Wellington. If you really like Wellington you can move it to an IRA, where the distributions won't affect your MAGI.

After close to 6 years of ER, I find myself in the situation where roughly half my portfolio is after-tax and comprised primarily of Wellington, and the other half in tIRA where again it's mostly Wellington.

I made the mistake (to me) of focusing on dividends and CG distributions in the first couple of years of ER and not on total return. While they were almost enough on their own from my after tax account to cover expenses, that is no longer the case and now they are threatening my ACA subsidies.

On the flip side, I'm considering purchasing a home in three years and will attempt to secure a mortgage with 30-40% down. The dividend and CGD's help qualifying because they show up on tax returns and I will also start to convert $60-$100K of my tIRA to a Roth and those distributions will also add as income to help qualify for a mortgage.

So I know that I will totally lose ACA subsidies for a couple of years while I do that. And the more I think about it the more it becomes clear ACA may complicate things more than it's worth.

5 years to Medicare and it won't be an issue for me anymore.

[homestead]

Quote:

Originally Posted by Looking4Ward So in practical terms - if one has a majority of their after-tax investments in Wellington and wants to minimize the unpredictable (and uncontrollable) effect of CG Distributions, what would be an equivalent but much more tax efficient Vanguard fund to convert to?

Look at Vanguard Tax-Managed Balanced Adm VTMFX, no capital gains were paid last year.