Hello,
I was just reading this thread http://www.early-retirement.org/forums/f28/dividends-and-cgs-96466.html and got me thinking:
How do people structure their investments before retirement so they can qualify for subsidies on ACA (pre-Medicare) and then not pay high premiums once on Medicare? Or to reap some other tax related goodies?
One poster on that thread mentioned to not let taxes wag investments which is a great point but I think getting a minor subsidy due to good investment choices instead of paying an extra $12-15K/year for health insurance is also a great thing. If the amount taxable investments generate gets eaten by the additional payments on ACA due to 'a cliff', it would make me upset that I was dumb in planning.
How are dividend producing stocks worse to hold in taxable accounts vs. an index fund? You get dividends or you must sell shares of the index fund to cover your living expenses. Then there's a psychological obstacle... Dividend lovers claim that money keeps rolling even when the value of stocks drop whereas it could be mentally hard to sell shares of $1M portfolio that's become $600K now (after exhausting 2-4 years of cash).
If you don't get divvies or sell shares of index fund, where does money come from then? Unless you have a huge stash in a checking account, how can one limit that tax wagging?
I think my issue is that we are still a few years away from RE (if we want to retire in early 50's) and I haven't paid attention to such topics until now.
Now I started noticing words like "tax planning for retirement", "didn't structure investments very well before retirement", or "painful to reorganize my investments for ACA and taxes purposes post FIRE" that it's getting me a little worried that perhaps I haven't done a good job from the tax angle because I never really thought about them.
Another issue is that in order to understand better, I need visual not verbal explanation. So, a few questions to the board:
- Where could I read the explanations with mathematical presentations for different scenarios that would show the difference in consequences of holding index funds vs. dividend stocks in taxable accounts?
- Could members of this board provide some real life examples (not necessarily sharing your numbers) showing how brightly or poorly you planned finances because now you reap subsidies of ACA or must pay the full freight?
- How do the numbers change when the planning is done for a couple with 2 children or a couple with no children?
- Any chances for this couple to do Roth conversions or would it be not worth it (or a wash) considering a 'cliff' for ACA which I'm clueless about?
Let's assume that this couple lives in the Southern side of the US and the state tax is in the 5-7% range.
They have saved $1M in taxable and $2M in 401k's before the market's drop (hopefully not 40% drop but what do we know).
I don't think we would benefit in muni fund investments (at least not on the state level)
Children would be in high school or freshmen in college at our assumed FIRE ages.
At this point I am having difficulty understanding why LTCG would be better vs. receiving dividends. If you've held a fund for a long time, the cost basis will be very low, no? What points are dividend lovers missing that they cling to their DG stocks?
So, I think I need to understand the basic math on this topic. If you could provide examples and/or guide me to easily understandable material on this topic I would appreciate it.
Thank you.
PS. For a full disclosure, we do own dividend paying stocks in the taxable account (roughly 50% of the hypothetical $1M) but we also own VTSAX, VFWAX, and DODGX . We stopped contributing to the latter fund once I noticed those large CG's in the last few years. I've been reinvesting them, but now I think it would be more prudent to take them in cash and invest in VTSAX. What do you think?
401k's and Roth IRA's contain index funds mostly.
I was just reading this thread http://www.early-retirement.org/forums/f28/dividends-and-cgs-96466.html and got me thinking:
How do people structure their investments before retirement so they can qualify for subsidies on ACA (pre-Medicare) and then not pay high premiums once on Medicare? Or to reap some other tax related goodies?
One poster on that thread mentioned to not let taxes wag investments which is a great point but I think getting a minor subsidy due to good investment choices instead of paying an extra $12-15K/year for health insurance is also a great thing. If the amount taxable investments generate gets eaten by the additional payments on ACA due to 'a cliff', it would make me upset that I was dumb in planning.
How are dividend producing stocks worse to hold in taxable accounts vs. an index fund? You get dividends or you must sell shares of the index fund to cover your living expenses. Then there's a psychological obstacle... Dividend lovers claim that money keeps rolling even when the value of stocks drop whereas it could be mentally hard to sell shares of $1M portfolio that's become $600K now (after exhausting 2-4 years of cash).
If you don't get divvies or sell shares of index fund, where does money come from then? Unless you have a huge stash in a checking account, how can one limit that tax wagging?
I think my issue is that we are still a few years away from RE (if we want to retire in early 50's) and I haven't paid attention to such topics until now.
Now I started noticing words like "tax planning for retirement", "didn't structure investments very well before retirement", or "painful to reorganize my investments for ACA and taxes purposes post FIRE" that it's getting me a little worried that perhaps I haven't done a good job from the tax angle because I never really thought about them.
Another issue is that in order to understand better, I need visual not verbal explanation. So, a few questions to the board:
- Where could I read the explanations with mathematical presentations for different scenarios that would show the difference in consequences of holding index funds vs. dividend stocks in taxable accounts?
- Could members of this board provide some real life examples (not necessarily sharing your numbers) showing how brightly or poorly you planned finances because now you reap subsidies of ACA or must pay the full freight?
- How do the numbers change when the planning is done for a couple with 2 children or a couple with no children?
- Any chances for this couple to do Roth conversions or would it be not worth it (or a wash) considering a 'cliff' for ACA which I'm clueless about?
Let's assume that this couple lives in the Southern side of the US and the state tax is in the 5-7% range.
They have saved $1M in taxable and $2M in 401k's before the market's drop (hopefully not 40% drop but what do we know).
I don't think we would benefit in muni fund investments (at least not on the state level)
Children would be in high school or freshmen in college at our assumed FIRE ages.
At this point I am having difficulty understanding why LTCG would be better vs. receiving dividends. If you've held a fund for a long time, the cost basis will be very low, no? What points are dividend lovers missing that they cling to their DG stocks?
So, I think I need to understand the basic math on this topic. If you could provide examples and/or guide me to easily understandable material on this topic I would appreciate it.
Thank you.
PS. For a full disclosure, we do own dividend paying stocks in the taxable account (roughly 50% of the hypothetical $1M) but we also own VTSAX, VFWAX, and DODGX . We stopped contributing to the latter fund once I noticed those large CG's in the last few years. I've been reinvesting them, but now I think it would be more prudent to take them in cash and invest in VTSAX. What do you think?
401k's and Roth IRA's contain index funds mostly.