Getting my buckets in order

[Camas Lilly]

I have several things I am trying to get accomplished in the next year, so this is just kind of a general background. Hubby retired; I retire early in 2021.

First, in the tax-sheltered accounts, I have been working on building up dividend income, but not quite there to live completely off passive income, just a few thousand annually. I have shifted from a lot of growth to higher dividend paying blend and value funds, have increased my bonds and currently have some cash sitting yet uninvested.

Second, I have a debt I want to pay off with our next draw as this will keep me from retiring if not paid off.

Third, in our taxable account, I am wanting to build up cash to help fund moving expenses several states away. The taxable account is currently invested 100%, but at the moment is capable of funding 3-4 years living expenses, so needing to get that into safer investments.

Our current scenario for next year is going to probably entail buying a house/or property and building first, moving and then selling current home, so I am thinking I should just take on the debt to get through as much of that as possible and paying off when the current home is sold and we are moved.

Just did my taxes and we are right at the upper limit of the tax bracket and capital gains tax, if not over just a few so drawing any more than 3-4% would probably not be a good thing, although we’re probably not talking about a lot of money since we will have two SS and a pension and what I did take last draw didn’t involve a lot of capital gains.

Hope I have explained well enough so you can get the whole picture.

Suggestions on best ways to proceed would be appreciated.

Thanks,

 

[pb4uski]

Not a lot to go on but some things that you may or may not know about to consider.

For your taxes in retirement, you can get a decent idea of your taxes in retirement if you use Turbo Tax by using the What-If Worksheet and zero out your earnings since you won't be working and add in SS if you plan to start taking SS. Also, 15% or more of your SS is excluded from tax.

You may want to wait until you retire before selling those taxable account since long-term capital gains are 0% for a couple if your total income is under $104,400 in 2020. If you have equities in a tax-deferred or tax-free account you can mitigate the overall risk of holding equities in your taxable account by selling equities in your tax-deferred or tax-free account and going to cash there to mitigate the equity risk. Then later once you are retired, sell equities in your taxable account to raise cash and buy an equal amount of equities with the cash in your tax-deferred or tax-free account.

Can you elaborate on where you say:

I have a debt I want to pay off with our next draw as this will keep me from retiring if not paid off.

I'm curious what kind of debt would keep someone from retiring.

Would it be feasible to buy the new house with a contingency that you sell your current home? That is not uncommon and would make some bridge financing unnecessary.

For you best SS claiming strategy, visit opensocialsecurity.com. Check the advanced options checkbox at the top of the page and enter your info. For the discount rate I prefer to use my expected real rate of return on the assets that I will be using while delaying SS (3% IMO) rather than the TIPS rate suggested by the website's author.

 

[Camas Lilly]

For your taxes in retirement, you can get a decent idea of your taxes in retirement if you use Turbo Tax by using the What-If Worksheet and zero out your earnings since you won't be working and add in SS if you plan to start taking SS. Also, 15% or more of your SS is excluded from tax.
I have budgets and expenses worked out and have a good idea of where we will be, but will double check, thanks. Our income will drop roughly $20,000, allowing us plenty of wiggle room to draw more and stay under the limits. 85% SS is currently being taxed.

You may want to wait until you retire before selling those taxable account since long-term capital gains are 0% for a couple if your total income is under $104,400 in 2020. If you have equities in a tax-deferred or tax-free account you can mitigate the overall risk of holding equities in your taxable account by selling equities in your tax-deferred or tax-free account and going to cash there to mitigate the equity risk. Then later once you are retired, sell equities in your taxable account to raise cash and buy an equal amount of equities with the cash in your tax-deferred or tax-free account.
Oh that's a great idea!

Can you elaborate on where you say:
Quote:
I have a debt I want to pay off with our next draw as this will keep me from retiring if not paid off.
I'm curious what kind of debt would keep someone from retiring.
$26,000 Truck loan, 4.2%, but the problem is we will still have $50,000 on mortgage at 3.375%, so can't handle both payments at the same time as another mortgage payment. I am one of those scared to death of much debt, but know I will most likely have to borrow first to get there.

Would it be feasible to buy the new house with a contingency that you sell your current home? That is not uncommon and would make some bridge financing unnecessary.
Could, but I wouldn't want to miss out on a great house when where we are going, homes are difficult to come by, so may have to come up with cash for land and build. We missed the last one two years ago to a cash buyer, but we really weren't quite ready.

For you best SS claiming strategy, visit opensocialsecurity.com. Check the advanced options checkbox at the top of the page and enter your info. For the discount rate I prefer to use my expected real rate of return on the assets that I will be using while delaying SS (3% IMO) rather than the TIPS rate suggested by the website's author.
Will do. It's been a while, but I think I have done that. Also Firecalc many times says go go go.....

 

[OldShooter]

... in the tax-sheltered accounts, I have been working on building up dividend income, but not quite there to live completely off passive income, just a few thousand annually. I have shifted from a lot of growth to higher dividend paying blend and value funds ...

This statement neatly highlights the problem with a dividend-seeking approach to investments. Such a portfolio is very likely to suffer on a total-return basis due to the stocks excluded.

Re your request for suggestions, I suggest this video: https://famafrench.dimensional.com/videos/homemade-dividends.aspx. It's titled "Homemade Dividends." The "Merton Miller" that Dr. French mentions is a Nobel prize winner in finance.

Receiving dividends in a tax-sheltered account, then paying them out, will result in ordinary income. You might want to research the term "qualified dividends" to see what your tax ramifications might be. This is not an area where I am knowledgeable, but there are a lot of people here who may jump into explain in more detail.

 

[Camas Lilly]

This statement neatly highlights the problem with a dividend-seeking approach to investments. Such a portfolio is very likely to suffer on a total-return basis due to the stocks excluded.

Re your request for suggestions, I suggest this video: https://famafrench.dimensional.com/videos/homemade-dividends.aspx. It's titled "Homemade Dividends." The "Merton Miller" that Dr. French mentions is a Nobel prize winner in finance.

Receiving dividends in a tax-sheltered account, then paying them out, will result in ordinary income. You might want to research the term "qualified dividends" to see what your tax ramifications might be. This is not an area where I am knowledgeable, but there are a lot of people here who may jump into explain in more detail.

Thanks OldShooter. Interesting video. I understand the tradeoffs between value and growth, and I am one of those who have chosen to remain very growth oriented for a long time now. Just recently I have been growing a little more diversified and adding some lower risk, dividend payers to the mix. A good example is VMVFX Vanguard Minimum Volatility Fund. It is an interesting fund that offers me a little diversification. I also like VEIPX Vanguard Equity Income and VDIGX Vanguard Dividend Growth Fund. Growth funds, large and small cap will always have a place in my portfolio - I love them!

 

[OldShooter]

Thanks OldShooter. Interesting video. I understand the tradeoffs between value and growth, and I am one of those who have chosen to remain very growth oriented for a long time now. Just recently I have been growing a little more diversified and adding some lower risk, dividend payers to the mix. A good example is VMVFX Vanguard Minimum Volatility Fund. It is an interesting fund that offers me a little diversification. I also like VEIPX Vanguard Equity Income and VDIGX Vanguard Dividend Growth Fund. Growth funds, large and small cap will always have a place in my portfolio - I love them!

OK. I would suggest that you set up your portfolio at https://www.portfoliovisualizer.com/ and compare it to a simple total US market fund. From what you say here, my guess is that your approach will be highly correlated to the total market; IOW having all those funds may not be getting you anything. That's just a guess, of course, since I don't know proportions but I have seen this type of thing before.

 

[Camas Lilly]

Thanks, I love and frequent PortfolioVisualizer.com. Ironically, I have been able to keep my CAGR up with a lower STD Dev and improved other technicals on our investments as a whole. I don't claim to be an expert, but I have studied this site, Morningstar and some other sites extensively until I know what most of the information means. PortfolioVisualizer.com actually is what I use to determine my AA across 3 retirement accounts combined as a whole.

Now that I am turning from saving to spending, there's a whole new set of parameters (taxes) that sometimes feel like a moving target.

 

[pb4uski]

.... Receiving dividends in a tax-sheltered account, then paying them out, will result in ordinary income. You might want to research the term "qualified dividends" to see what your tax ramifications might be. This is not an area where I am knowledgeable, but there are a lot of people here who may jump into explain in more detail.

Yes, OldShooter.... if their total income (including qualified dividends and long-term capital gains) in 2020 is less than $104,400 then qualified dividends are tax-free... as are long-term capital gains!

That is why it is preferable to track what your income and taxable income will be and if it is under $104,400 then do enough sales to generate enough gains to fill it up. Even if you buy the exact same securities back the same day you get a step-up in basis to reduce the gain on any future sales. That is also why it is recommended that taxable accounts be filled with equities. Also, for foreign equities there may be some dividends that are not qualified and taxed, there are also foreign tax credits that can be used to offset taxes and go to waste in a tax-deferred or tax-free account.

For example, for 2020 for VTIAX, ~$35 of each $100 of dividend income was not-qualified and in my case, taxed at 12%... so $4.20 in tax.... but the foreign tax credit was $6.88 per $100 of dividend income... so it more than offset the tax on the nonqualified dividends.

So in effect, all my domestic and foreign equity taxable investment income was tax-free.

 

[Camas Lilly]

Yes, OldShooter.... if their total income (including qualified dividends and long-term capital gains) in 2020 is less than $104,400 then qualified dividends are tax-free... as are long-term capital gains!

That is why it is preferable to track what your income and taxable income will be and if it is under $104,400 then do enough sales to generate enough gains to fill it up. Even if you buy the exact same securities back the same day you get a step-up in basis to reduce the gain on any future sales.

Oh, I would have never thought of that one either. What a great idea! Duly noted.

So if paying down debt takes me over that mark, it would probably be better for me to wait until after I retire to pay the debts. Capital gains tax is not prorated like income, right? It's either not taxed or ALL taxed, right?

The other thing I am not real clear on is how rebalancing affects capital gains. If I "exchange" between funds inside the IRA and end up selling some of those before 12 months have passed, are those short term capital gains? First in first out? If I add an entirely new fund, that means I don't want to"sell" any of that fund for a draw before 12 months have passed?

 

[pb4uski]

Long-term capital gains included in taxable income that is up to $80k (for 2020 MFJ) is taxed at 0%.... capital gains above the $80k taxable income level are taxed at 15%. So for example, let's say that your taxable income is $100k and that includes $65k of ordinary income (that would be taxed at ordinary rates and $35k of preferenced income (qualified dividends and LTCG)... $15k of preferenced income would be at 0% and $20k would be at 15%.

Exchanges within an IRA don't count... withdrawals from IRAs are ordinary income (or a portion of withdrawals if contributions were not deductble).... so you can do all the trading between funds within an IRA account that you want to. Only qualified dividends and LTCG arising from taxable account count.

 

[Camas Lilly]

Long-term capital gains included in taxable income that is up to $80k (for 2020 MFJ) is taxed at 0%.... capital gains above the $80k taxable income level are taxed at 15%. So for example, let's say that your taxable income is $100k and that includes $65k of ordinary income (that would be taxed at ordinary rates and $35k of preferenced income (qualified dividends and LTCG)... $15k of preferenced income would be at 0% and $20k would be at 15%.

Exchanges within an IRA don't count... withdrawals from IRAs are ordinary income (or a portion of withdrawals if contributions were not deductble).... so you can do all the trading between funds within an IRA account that you want to. Only qualified dividends and LTCG arising from taxable account count.

Got it, thanks. I think it is all starting to make sense now.