Dividends and CG's

[COZICAN]

The "Burned by Capital Gains" thread got me to thinking...... When I RE I plan to withdraw $58,000 yearly from IRA's/401K. That amount will keep me below the ACA cliff in Oklahoma. What would my best direction be to avoid any dividends or capital gains? I plan to take 1M+ and start from scratch with my AA.

Coz

 

[ziggy29]

The "Burned by Capital Gains" thread got me to thinking...... When I RE I plan to withdraw $58,000 monthly from IRA's/401K. That amount will keep me below the ACA cliff in Oklahoma. What would my best direction be to avoid any dividends or capital gains? I plan to take 1M+ and start from scratch with my AA.

You mean a total of $58K a year taken out monthly, right?

If you are going to need to sell equities to generate the income, there will be capital gains (we hope) along the way. Dividends are easy to avoid by choosing stocks that pay no dividends (Berkshire Hathaway, for example). But if you eventually need to *sell* those shares, you're going to have some capital gains.

Am I understanding the situation correctly?

 

[GrayHare]

There are not many no-dividend, no-CG-until-you-want options beyond BRK.A and BRK.B.

 

[COZICAN]

You mean a total of $58K a year taken out monthly, right?

If you are going to need to sell equities to generate the income, there will be capital gains (we hope) along the way. Dividends are easy to avoid by choosing stocks that pay no dividends (Berkshire Hathaway, for example). But if you eventually need to *sell* those shares, you're going to have some capital gains.

Am I understanding the situation correctly?

Yes, yearly. I corrected the OP. I was just hoping that capital gains reinvested would not generate income (1099) but I guess when I start withdrawals there will be no avoiding CG's.

 

[ziggy29]

Yes, yearly. I corrected the OP. I was just hoping that capital gains reinvested would not generate income (1099) but I guess when I start withdrawals there will be no avoiding CG's.

Gains that are reinvested *within the tax-deferred account* will NOT generate 1099 income. Only when you have to withdraw from that account will a taxable event occur. And if reinvested in a taxable account, then dividends and CGs matter.

As long as you are ONLY withdrawing from an IRA or 401K plan, they can generate all the dividends and capital gains they want without impact, and you won't be hit with a taxable event every time a dividend is declared, or mutual funds pay out capital gains.

But if you have taxable accounts, these are the things to be careful about.

 

[Sunset]

OP - you only have to worry about CG's in taxable accounts.

All the following involves Taxable accounts only:

• BUT if you get some CG's from stocks (predictable because you sold them) then just take out less from IRA to manage income level.
• Stay away from MF's as they suddenly declare the capital gain, and surprise a lot of people now and then.
• You could invest in tax efficient ETF's like VTI, but understand that even here (I think) CG's could be declared but would be small, so it's not quite as predictable as stocks (which you control the CG's).

 

[COZICAN]

I'm sorry, I've always been good at saving so planning for withdrawing is a bit different. Will I be able to calculate in advance what the capital gains will be when I ask my financial institution (TD Ameritrade presently) for a distribution? I know "why not just ask them" but I'm really just in the planning process as my RE date has been pushed to 59.5 so I don't burn up my taxable assets.

 

[ziggy29]

I'm sorry, I've always been good at saving so planning for withdrawing is a bit different. Will I be able to calculate in advance what the capital gains will be when I ask my financial institution (TD Ameritrade presently) for a distribution? I know "why not just ask them" but I'm really just in the planning process as my RE date has been pushed to 59.5 so I don't burn up my taxable assets.

If you don't burn taxable assets, there is no worry with dividends and capital gains. You will NOT get a 1099-DIV or 1099-B because of capital gains or dividends in an IRA. You are in control (until age 70.5) of how much you withdraw from it. You will get a 1099-R for the withdrawn amount in a TIRA, and that is ordinary income. If you want $58K, take out $58K. It doesn't matter how the value inside the account grows.

If you burn taxable assets along the way, that is where selling stocks that generate capital gains -- or holding dividend stocks -- will hit you, and where you would have a 1099-B, and where you'd have dividend income to declare on a 1099-DIV. Not from IRA withdrawals.

That said, unless you are taking SEPP (72t) or are over 70.5 years old, you can control how much you withdraw year to year. So if you wind up taking $5K in taxable dividends and cap gains, you can withdraw $53K instead of $58K in the IRA and your MAGI for ACA purposes remains the same.

 

[COZICAN]

If you don't burn taxable assets, there is no worry with dividends and capital gains. You will NOT get a 1099-DIV or 1099-B because of capital gains or dividends in an IRA. You are in control (until age 70.5) of how much you withdraw from it. You will get a 1099-R for the withdrawn amount in a TIRA, and that is ordinary income. If you want $58K, take out $58K. It doesn't matter how the value inside the account grows.

If you burn taxable assets along the way, that is where selling stocks that generate capital gains -- or holding dividend stocks -- will hit you, and where you would have a 1099-B, and where you'd have dividend income to declare on a 1099-DIV. Not from IRA withdrawals.

That said, unless you are taking SEPP (72t) or are over 70.5 years old, you can control how much you withdraw year to year. So if you wind up taking $5K in taxable dividends and cap gains, you can withdraw $53K instead of $58K in the IRA and your MAGI for ACA purposes remains the same.

Thank you so much for taking the time for such a detailed reply. It really helps. Thanks to the rest of you also. Your input is valuable.

Coz

 

[RunningBum]

Think of your tax deferred accounts (401K/tIRA) as a black box. It almost* never matters what you are invested in there and what happens with purchases, sales, dividends, distributions, etc. When you withdraw from them you get taxed as regular income.

(* I say almost because wash sales can involve tax deferred accounts if you sell at a loss in a taxable account and buy back too soon in tax deferred. There may be other unusual events like this.)

A Roth IRA is a similar black box, only when you withdraw, there is no tax.

A taxable account is where you have to worry about dividends, CG distributions, etc. I keep my taxable account in broad index funds, which are usually very predictable in dividends and rarely throw CG distributions. I keep bonds and other investments that do throw more income and distributions in my IRAs, where those things to do directly and immediately affect income.

If you've got all or most of your funds in tax deferred, you don't really have to worry about what type of investment you have, just optimize it for return. You'll pay taxes and add to your MAGI whatever you withdraw from it, no matter what happens inside the black box.

 

[audreyh1]

The "Burned by Capital Gains" thread got me to thinking...... When I RE I plan to withdraw $58,000 yearly from IRA's/401K. That amount will keep me below the ACA cliff in Oklahoma. What would my best direction be to avoid any dividends or capital gains? I plan to take 1M+ and start from scratch with my AA.

Coz

You don’t need to worry about dividends and capital gains inside your IRA.

If you invest in mutual funds in taxable outside your IRA, you may wish to invest in muni bond funds and very tax efficient stock mutual funds to keep capital gains distributions and taxable interest income low. You will still receive dividends.

 

[ziggy29]

You don’t need to worry about dividends and capital gains inside your IRA.

If you invest in mutual funds in taxable outside your IRA, you may wish to invest in muni bond funds and very tax efficient stock mutual funds to keep capital gains distributions and taxable interest income low. You will still receive dividends.

And although MAGI for ACA purposes adds another wrinkle, in the general case you'd be better off generating LTCGs and qualified dividends in the taxable account than in a traditional IRA/401K, because they receive preferred rates in a taxable account (including 0% for dividends in the 12% bracket and below) but are fully taxed as ordinary income when taken from an TIRA. But even dividends taxed at 0% hit the MAGI for ACA purposes, so there's the monkey wrench thrown into the machine.

That means that if the subsidy is still worth it, it may take some suboptimal allocation of resources across taxable and tax-deferred.

 

[kite_rider]

There are not many no-dividend, no-CG-until-you-want options beyond BRK.A and BRK.B.

What? Tech stocks have been my 'go to' for this category for decades now. Think AMZN, ADBE, AMD, ANET, and GOOG to name a few. That's just looking at the top of my portfolio (alphabetically) near the bottom there are names like ROKU, UBNT, and XLNX. Occasionally, you'll get stocks that change their tune on dividends along the way like INTC and AAPL; but then the biggest issue is dealing with the large appreciation when you sell them off (not a bad problem to have really).

I don't know the OP's total situation is, but the paranoid people of the world had me convinced me (a provider for a young family of 4) that I should have some reliable income during FIRE. So I created a good stream of bond like interest payments from owner carried real-estate contracts and healthy dividends from quality companies. That screwed any hope an ACA subsidy and raised my taxes just to produce excess income that we never really needed in the first place! Backing myself out of those investments has been the most challenging thing I've had to deal with post FIRE.

 

[kaneohe]

...................... So if you wind up taking $5K in taxable dividends and cap gains, you can withdraw $53K instead of $58K in the IRA and your MAGI for ACA purposes remains the same.

ziggy.......wondering if this is true........if you w/d $58K from IRA, MAGI is basically 58K; if you w/d 53K from taxable,only some fraction would be gains contributing to AGI so AGI would be less?

 

[audreyh1]

If the OP has taxable investments generating income, then he should be able to withdraw less from the IRA. Tax-wise this might be a better situation.

 

[OldShooter]

Be careful that you do not let the tax tail wag the investment dog.

For example, an easy way to avoid CGs and dividends would be to put your money in a safe deposit box. Not smart but easy.

Another way would be to invest in a really unsuccessful mutual fund. Not smart, though.

So just remember your goal is to have the most money possible in your pocket after paying taxes. This may involve investments that are not "tax efficient" but which are very profitable.

The first goal is to make money, then worry about minimizing taxes. Dog, then tail.

 

[SecondCor521]

ziggy.......wondering if this is true........if you w/d $58K from IRA, MAGI is basically 58K; if you w/d 53K from taxable,only some fraction would be gains contributing to AGI so AGI would be less?

I am fairly certain that what ziggy was talking about was that the two scenarios below are essentially equivalent wrt MAGI/ACA:

Scenario A:

Withdraw $58K from IRA

Scenario B:

Receive $5K from dividends and/or capital gains in a taxable account
Withdraw $53K from IRA

 

[FinancialDave]

It sounds like you have both a taxable account and a tax deferred account (IRA / 401k).

If you have a taxable account, depending on the size you do need to worry about how much income in the form of dividends and capital gains it throws off. Because you don't want to be getting "taxed" and not spending the money, you should try and spend the taxable distributions first and then spend down the IRA, unless your IRA is quite large, in which case spend down the IRA and reinvest the taxable dividends.

There are a number of ways to get the taxable account distributions below 1%, which usually makes its "tax drag" less of a problem.

 

[ziggy29]

I am fairly certain that what ziggy was talking about was that the two scenarios below are essentially equivalent wrt MAGI/ACA:

Scenario A:

Withdraw $58K from IRA

Scenario B:

Receive $5K from dividends and/or capital gains in a taxable account
Withdraw $53K from IRA

Right. These are the same for ACA MAGI purposes, assuming the IRA is not a Roth.