Cap gains strategy

[Curmudgeon]

My current equities/bonds AA is about 65/35. About half of my investments are in a taxable account. Within that account, about one-third of the vaIue is unrealized LTCG. I also have an overweight position in 2 stocks, one from previous Megacorp employer and the other in a somewhat-related-industry stock.

All of the above makes me uncomfortable from a diversification and tax liability standpoint. My goal had been to wait for retirement, and then harvest cap gains at the 0% tax rate. I did some of that this year, though not as much as I had planned because I am minimizing income for ACA purposes.

Next year I plan to harvest gains right to the top of the 12% tax bracket. My plan is to use the specific shares cost basis, and sell off first those shares with the lowest gain. This will allow me to sell off more of the shares earlier, achieving quicker diversification. (For example, next year, I will be able to sell off about 40% of my two most highly concentrated positions, while only seeing about 25% of the cap gains from those). Thus, I'll be able to get out of these 2 positions entirely over the next 4 years, and harvest all of my cap gains (if desired) within the next 8. That then gives me another 9 or 10 years to do Roth conversions before RMDs kick in. Any comments on this, does it seem a reasonable approach?

One thing I'm not sure of is a tIRA contribution this year. Putting the max into tIRA would enable me to sell off more stock, and keep AGI the same (or, I could sell it and reduce AGI further and get that much more from ACA credit). But this feels a bit wrong, since I know that's money that I'll just be trying to convert to Roth at some point in the future.

iORP is not good at handling all the pieces here - 15% bracket changing to 12% changing back to 15% in the future; income vs ACA credits, the value of minimizing taxes vs accomplishing portfolio diversification. Also trying to take into account that the two stocks I'm working to get out of have appreciated even faster than the overall market this year, and so this feels like a good time to sell. Any thoughts or guidance from the experts here?

 

[Sunset]

That's the plan I would do, the only question would by how much you have in IRA that you want to convert to ROTH.
If the IRA is low then not much is gained by conversion.

I am not contributing to IRA as we are doing conversions, so it seems to me counter productive to empty some while putting more into the same bucket. If I had to think about ACA as a benefit, I would figure out the amount and that could sway me to do it (in your case, as mine does not make any sense, as there is no time delay).

 

[Curmudgeon]

I have 800K plus in tax-deferred accounts. iORP tells me I should max out the 15% (now 12%) brack to get it all converted to Roth.

 

[gerntz]

My current equities/bonds AA is about 65/35. About half of my investments are in a taxable account. Within that account, about one-third of the vaIue is unrealized LTCG. I also have an overweight position in 2 stocks, one from previous Megacorp employer and the other in a somewhat-related-industry stock.

Low cost basis stock is a good source of whatever gifting you may do. I gifted some to grandkids and they can sell $2.1K of LTCG each year at 0% taxes.

 

[LOL!]

FWIW, we contribute the max possible to our tax-deferred accounts (401(k)) while also doing Roth conversions of old tIRAs. They seem to be opposing forces, but not quite since we have had some non-deductible tIRA contributions in the past.

It also helps with account simplification. For instance, I have already converted all my tIRA, so those are closed AND I didn't have to open a Roth 401(k) in addition to a regular 401(k). Working on the spouse's tIRAs now.

The 0%/15% LTCG tax brackets are still in effect and unchanged I think, while ordinary income gets the new brackets including the 12% and 22% ones.

I don't think my comments help you, but I don't see anything wrong with what you are doing.

 

[Huston55]

OP-

Your approach makes good sense to me. We are in a similar position (although more income/yr thus, less LTCG headroom/yr; but, without the single stock risk) with the ratio of our taxable/deferred accounts & LTCG, and are filling up the LTCG bucket each year [instead of doing Roth conversions].

Looking at your post above (and some of your earlier posts), your LTCG strategy would look something like this:

Status: 55yo, married
$1M Taxable x 33% = $333k LTCG
Assume only Income is 2% Int/Dvd Income/yr = $20k
Annual ZERO LTCG Headroom ~= $95k-$20k = $75k

$333k/$75k = 4.5 ==>> Say 5 yrs

I don’t need to worry about ACA so, did not evaluate or address that. But, the LTCG approach makes sense to me

 

[pb4uski]

Seems like you have a number of things going on. The first would be concentration risk... at one point Enron employees were fat, dumb and happy... a year later they were screwed. Perhaps you can protect your concentration exposure by buying a put... or prioritize selling.

We were in a similar position... about 44/53/3 taxable/tax-deferred and tax-free when we retired.... but we didn't have any concentration risk to worry about.

Since we are living off of taxable funds from ER at 56 to SS at 66 or 70, we would "naturally" harvest some gains each year as we replenish cash for spending. Then I fill the rest of the 15% tax bracket with Roth conversions. Absent Roth conversions we would pay no tax because our ordinary income is less than deductions/exemptions and our qualified dividends and LCG at 0%... so we pay about 7-10% on the amounts that are Roth converted... I intend to continue doing this as long as we can.

The way I figure it, I only have a short 10-14 year window to do low cost Roth conversions... 7-10% vs 22% or more later on and save 12-15% .... I can always do LTCG at 15% later on and to the extent that I don't, my heirs will get a stepped up basis... they can't get that with my tIRA.

 

[FIREd]

OP-

Your approach makes good sense to me. We are in a similar position (...) with the ratio of our taxable/deferred accounts & LTCG, and are filling up the LTCG bucket each year [instead of doing Roth conversions].

+1

We try to harvest LTCGs at 0% whenever possible as don’t have much in tIRAs to convert. For getting a quicker diversification benefit, it makes sense to sell the shares with the lowest cap gain first.

Only 15% of our taxable account value is unrealized gains at this point. Low enough that I may have no gains to harvest in a down year to max out the 0% bracket. That’s when we’ll do some Roth conversions.