Recently FIREd, need Capitol gains financial advice.

[Gotaudio]

Hello all,

I am a single 53 year old male. I retired 3 months ago. Due to bonuses and severance I will report over $200K for this year so my 2016 tax bracket will be ~33%.

My question is, what is the best way to get a handle on minimizing my tax liability for the next 18-40 years? I have read quite a few posts about withdrawal strategies but I'm afraid I will get off track trying to navigate through this on my own.

My financial situation is this.

1) $1 million in MLP stock awards granted through my previous employers incentive program.
2) $800K in a Fidelity IRA created when my tax deferred 401K was rolled over to it 10 weeks ago.

I live very modestly and have zero debt, and about $3000 per year property and school taxes. No state income tax here in Texas. I am getting 4.5% annual dividend from the energy MLP or about $45,000, which is more than enough to live comfortably on.

I have evenly divided the IRA funds among 12 divested large cap non-energy stocks.

My problem is Capitol gains on the MLP. I have accumulated those shares over 10 years and some of them will generate 50% Capitol gains. Overall I estimate $300K will be taxed at 15% unless I can do something to prevent it.

Am I correct in that if I am in a 15% tax bracket I will pay zero Capitol gains? That means I need to keep my income below $37K right? Some (<10%) of the MLP stock will actually sell at a loss due to oil prices, so I could pair it with sale of some gain share lots to cancel each other out and reduce my share count, thereby reducing my dividend payments and convert those funds to CDs or MMs without generating any Capitol gains in the process. Mostly I need to figure out how to liquidate these shares and pay the minimum taxes possible. I love the stock and I'll probably turn around and buy it right back, setting a new base cost in the process.

I also hold out hope for managing to get some benefit from ACA enrollment next year without paying a fortune for it. I'm in perfect health at the moment.

Maybe this is a job for a financial advisor, but one guy quoted me $1800 to develop a plan. This is complicated for me but it seems like someone familiar with the rules should be able to figure it out with a spreadsheet.

Then I will need to deal with the intricacies of managing the IRA, when to start withdrawing it, and when to start social security.

I don't know what I don't know.

Thanks!
Allen

[pb4uski]

You can have $47,750 of income in 2015 and still stay in the 15% tax bracket because the income will be reduced by the standard deduction of $6,300 and personal exemption of $4,000, resulting in $37,450 of taxable income (the top of the 15% tax bracket).

I would be more concerned about diversification than taxes. If your MLP goes into Enron mode, you're screwed and 12 large-cap, non-energy tickers is far from a diversified portfolio.

I would elect the specific identification method and sell any losers you have and then sell what you can to offset the losses and incest the proceeds from those sales in a low-cost diversified mutual fund as a start. That will reduce the dividends and provide more leeway to realize gains in the 15% tax bracket, but the reality is that you'll probably need to pay 15% on some gains.

healthsherpa.com can give you an idea of health insurance plans available to you and what your subsidies might be.

[Fermion]

One thing you should keep in mind for this year is the extra 3.8% ACA tax you may have to pay on investment returns over $200k. Just something to keep in mind.

[eroscott]

Quote:

Originally Posted by Gotaudio <snip> Maybe this is a job for a financial advisor, but one guy quoted me $1800 to develop a plan. This is complicated for me but it seems like someone familiar with the rules should be able to figure it out with a spreadsheet. Then I will need to deal with the intricacies of managing the IRA, when to start withdrawing it, and when to start social security. <snip>

That price is not bad and could give you a lot of comfort for years to come. Be very careful with financial advisers -- FeeOnly and within that category ones that charge specifically for a plan and/or by the hour. When I was looking I found FeeOnly ones that still wanted to charge me a % of my "assets under management/AUM"

[MBAustin]

Given your assets, $1800 for a plan that addresses your specific issues (minimizing taxes and increasing diversification) sounds well worth it. I would interview multiple advisors and be very specific about what you are looking for in a plan and also make it clear you are not looking to put any assets under management.

[haha]

Quote:

Originally Posted by Gotaudio Hello all, . My problem is Capitol gains on the MLP. I have accumulated those shares over 10 years and some of them will generate 50% Capitol gains. Overall I estimate $300K will be taxed at 15% unless I can do something to prevent it. Am I correct in that if I am in a 15% tax bracket I will pay zero Capitol gains? That means I need to keep my income below $37K right? Some (<10%) of the MLP stock will actually sell at a loss due to oil prices, so I could pair it with sale of some gain share lots to cancel each other out and reduce my share count, thereby reducing my dividend payments and convert those funds to CDs or MMs without generating any Capitol gains in the process. Mostly I need to figure out how to liquidate these shares and pay the minimum taxes possible. I love the stock and I'll probably turn around and buy it right back, setting a new base cost in the process. Thanks! Allen

I am not clear on what is your goal in selling and rebuying your MLP.

One thing I do know is that MLP taxation is a very involved topic, including possible liability for state income taxes in states where your MLP is active, and federal recapture of apparent ltcgs as ordinary income, due to the write- offs that holders receive along the way.

I doubt that 1 of 1000 FAs would know anything about this topic, but you should be able to find a qualified CPA or other experienced tax preparer in Texas who understands energy partnerships in general and MLPs in particular. I would make this your first call.

Ha

[Siestatime]

Quote:

Originally Posted by MBAustin Given your assets, $1800 for a plan that addresses your specific issues (minimizing taxes and increasing diversification) sounds well worth it. I would interview multiple advisors and be very specific about what you are looking for in a plan and also make it clear you are not looking to put any assets under management.

1+. Look for Fee Only financial advisors. When you write to the FA's, use "capital gains" not "capitol gains". Capitol refers only to our seats of government. You're in good shape and with a little guidance you should be on easy street.


Sent from my iPad using Early Retirement Forum

[Gotaudio]

Quote:

Originally Posted by Siestatime ...use "capital gains" not "capitol gains"...

Doh!

Quote:

Originally Posted by pb4uski You can have $47,750 of income in 2015 and still stay in the 15% tax bracket... ... I would be more concerned about diversification than taxes.

I have been reading about MLPs today. I always assumed my dividends were taxed but somehow reported by my employer as income on my 1099. As it turns out, MLP "dividends" are not really dividends. They are "distributions" and your basis cost of the stock is reduced by the dividend and over time that basis cost can become zero. When you sell some of your gains are taxed at regular income tax levels and some at capital gains level. I have never sold any of the MLP stock so I never had to deal with this. MLP owners can also be required to pay state income taxes for states in which they don't live. This has never been a problem because my MLP does most of it's business in TX where there are no state income taxes and the liability in other states has always been negative or below the minimum filing requirement.

But as I understand it, that means the $45K annual distributions are not "income" so I can still get another $47,750 of income through selling units before it causes my capital gains bracket to increase.

Quote:

Originally Posted by Fermion One thing you should keep in mind for this year is the extra 3.8% ACA tax you may have to pay on investment returns over $200k. Just something to keep in mind.

I had no idea. I did look into signing up for ACA but apparently 2015 enrolment is over and I only had 60 days after loosing my employer insurance coverage to apply and I waited 68 days. But I did have coverage during the time the $200K was earned. Also, if the $45K annual MLP distributions I receive are not "income" then I guess on paper I qualify as having no income at all, which should bode well for ACA subsidies right? Does not seem right, but I guess I can't do anything about it until 2016. I was told I could purchase COBRA insurance for $9000 per 6 months when I quit my job. I thought "Are you insane?" I pay cash for everything and hold only the insurance required by law (auto collision). If I need a doctor I will go to one of the cash-only emergency centers. For catastrophic illness, hopefully I will have enough time to get to Costa Rica and pay cash. Yes I take my chances, but screw the American medical/insurance/pharma establishment who suck the savings from regular folks at the ends of their lives just because they can.

Quote:

Originally Posted by haha I am not clear on what is your goal in selling and re-buying your MLP

I was trying to realize the gains I already have in a way that minimizes capital gains tax rates. So I might sell a few thousand shares every year as long as I kept my capital gains rate below 15%. Re-buying the shares would allow annual distributions to continue but when I sell those new shares the gains would be much less than if I had not sold and re-bought them. Or at least that’s how I assumed it would work, but now after reading more about MLPs and seeing the consensus from all of you informed folks is "Get a financial advisor!";

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Originally Posted by MBAustin ..interview multiple advisors

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Originally Posted by haha ...find a qualified CPA... I would make this your first call.

Quote:

Originally Posted by Siestatime Look for Fee Only financial advisors...

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Originally Posted by eroscott That price is not bad... FeeOnly and within that category ones that charge specifically for a plan and/or by the hour.

So I guess that is exactly what I will do. Although this sounds like the perfect job for telecommuting. There is no reason I should have to meet this person, and its unlikely a good one will live near me anyway. I guess that means Googleing for someone and hoping I pick a good one. Can any of you make a recommendation?

Cheers!
Allen

[fishboat]

I'm all eyes & ears if you find someone fee-only to run the numbers. I've met with several local people that I thought might be qualified for a similar 'set-up' plan and no luck. Either they were unwilling to do it, or not qualified. I talked with a decent guy a couple days ago that was qualified, but what I was asking(a 1x only plan) was outside his 'model' (he was at 1% up to $1M, 0.5% added between $1M-$2M, 0.25% >$2M) and he wouldn't know how to price it, nor did he believe it would be valid for very long as life and the resulting short-long term tax implications change. He also mentioned, in his 25 year+ experience, that 75% or more of the financial advisers out there have little real appreciation for taxes..most are salesmen-women looking to generate fees within standardized templates of management. The $1800 fee mentioned above is reasonable...but I'd be real sure you understand what that offers. Like most any model..it'll spit out a number...how good that number (plan) is..is the real question. He did say he thought I'd be hard-pressed to find someone to do what I want done (my questions are similar to the OP) on a fee-only basis, that would be valid/accurate for any length of time. This is a self-serving statement on his part..but he was very open and gave me lots of good info. He said flat out.."I'm not trying to sell you anything..it's your decision on what you want to do..just offering what I think.." I think he was being honest.

I'd probably hire the guy I talked to...if I were to go with the fee schedule...I'm just not there yet. I know I can figure such things out given time..which, like the OP, I'm going to have before long.

[Fermion]

Quote:

Originally Posted by Gotaudio I had no idea. I did look into signing up for ACA but apparently 2015 enrolment is over and I only had 60 days after loosing my employer insurance coverage to apply and I waited 68 days. But I did have coverage during the time the $200K was earned. Also, if the $45K annual MLP distributions I receive are not "income" then I guess on paper I qualify as having no income at all, which should bode well for ACA subsidies right? Does not seem right, but I guess I can't do anything about it until 2016.

I wasn't referring to subsidies or penalties for not having insurance, but rather the add on bonus tax you get to pay on income above a certain amount. It is just something to be aware of if you think this year you will be in the >33% bracket.

[haha]

Quote:

Originally Posted by Gotaudio Doh! I have been reading about MLPs today. I always assumed my dividends were taxed but somehow reported by my employer as income on my 1099. As it turns out, MLP "dividends" are not really dividends. They are "distributions" and your basis cost of the stock is reduced by the dividend and over time that basis cost can become zero. When you sell some of your gains are taxed at regular income tax levels and some at capital gains level. I have never sold any of the MLP stock so I never had to deal with this. MLP owners can also be required to pay state income taxes for states in which they don't live. This has never been a problem because my MLP does most of it's business in TX where there are no state income taxes and the liability in other states has always been negative or below the minimum filing requirement. But as I understand it, that means the $45K annual distributions are not "income" so I can still get another $47,750 of income through selling units before it causes my capital gains bracket to increase.

This really doesn't quite make sense. You know enough that you have checked your non-resident tax exposures, yet you apparently don't know enough to ask "where is my K-1? Your distributions do not map one for one onto income, but they are not exactly tax free. The holder or his agent must know how to report this on the 1040. It can be done with Turbo-Tax, but you may already owe back taxes, and this is a lot of money, and you may want to sell units anyway- so find and hire an experienced CPA. Do not try to go cheap on this task. If you got these units from your employer, you will have co-workers who have been in this situation, get referrals from them or from a quality banker or attorney. Believe what the other poster relayed to you from an FA- they don't want this kind of work, and they will botch it anyway if someone is foolish enough to give it to them.

I'm signing off here, so good luck and let us know what you find out.

Ha

[dallas27]

To have that portfolio going into retirement.....well..... Steel, Giant Balls of Steel.

I'd keep your industry skills up to date.

[RE2Boys]

What HaHa has pointed out.

The distributions from an MLP can be a combination of business profits, dividends, return of basis, royalties, etc. Each business is unique. The K1 spells out what is taxable on a yearly basis and what needs to be reported on your income tax return. (who's been doing your taxes all these years?) The taxable income seldom matches up with your distributions.

When selling an MLP, the MLP will provide with the K-1 a table that lists the adjustments that need to be made for each sale. There is usually an adjustment to your basis (usually but not always adjusting your basis lower). Then you compute your total gains. And the table will show how much of the total gains are reported as ordinary gains and the remainder is reported as a capital gain (or loss).

I've no idea if the relevant numbers are generally available prior to the sale as I suspect they are based on the specific time period that you owned the relevant MLP shares. I doubt an FA could reasonably model the tax implications of your MLPs without a LOT of research.

[Gotaudio]

Quote:

Originally Posted by haha This really doesn't quite make sense. You know enough that you have checked your non-resident tax exposures, yet you apparently don't know enough to ask "where is my K-1? Your distributions do not map one for one onto income, but they are not exactly tax free. The holder or his agent must know how to report this on the 1040. It can be done with Turbo-Tax, but you may already owe back taxes, and this is a lot of money, and you may want to sell units anyway- so find and hire an experienced CPA. Do not try to go cheap on this task. If you got these units from your employer, you will have co-workers who have been in this situation, get referrals from them or from a quality banker or attorney. Believe what the other poster relayed to you from an FA- they don't want this kind of work, and they will botch it anyway if someone is foolish enough to give it to them. I'm signing off here, so good luck and let us know what you find out. Ha

I have an accountant that does my taxes. Or at least he did up to 2014. He is the guy who quoted me $1800 for financial planning but that was actually a quote for pre-retirement financial planing last year. I have not talked to him since I retired. I did look at my K-1. That's how I know my 2014 state tax liabilities are all negative.

This year I did my taxes with TurboTax. I entered the details from form 1065 which is how some co-workers have been doing it. The only effect it had was raising my taxes $12 due to $45 earned interest income. Maybe the MLP holdings have had a greater effect in past years but I am sure my accountant never filed any state income taxes because of it. Then again, neither did he have to deal with the implications of selling any of this stock.

Thanks

[Gotaudio]

Quote:

Originally Posted by dallas27 To have that portfolio going into retirement.....well..... Steel, Giant Balls of Steel. I'd keep your industry skills up to date.

I'm a software developer and wizard of all things database. I'm working on some open source projects to pass the time. Unfortunately there is little chance of stepping back into an employment situation nearly as lucrative as the one I left given my tenure, and acquired benefits, but I have little doubt I could re-enter the market in the low 6 figures. It's even possible I could return to my previous employer, but at what compensation is up in the air. Probably as a contractor.

[Fermion]

Quote:

Originally Posted by Gotaudio I'm a software developer and wizard of all things database. I'm working on some open source projects to pass the time. Unfortunately there is little chance of stepping back into an employment situation nearly as lucrative as the one I left given my tenure, and acquired benefits, but I have little doubt I could re-enter the market in the low 6 figures. It's even possible I could return to my previous employer, but at what compensation is up in the air. Probably as a contractor.

Similar boat. Could go back to the software market for low mid 6 figures as a contactor (maybe a bit higher).

On the positive side, wouldn't have to pay 3.8% ACA tax like we did in 2014