LTCGS at 0% tax.

[Time2]

I'm contemplating selling shares of a mutual fund in a taxable account 2024, for income and to reset the price. I have been doing Roth Conversions for a few years and starting to wonder if I should have done this different.
If it matters, I expect our kids will inherit more assets than we have at present, (we over saved).
After 2024 we will start SS, This will add almost $60k of forced income,
reducing any Roth Conversions or LTCGs we may have while staying in a lower tax bracket.
We live well under the $117,000 of taxable account LTCGs that can be withdrawn at 0% tax rate. Of course we will have some Dividends and interest that must also be figured into the $117,000, to stay under the higher tax number. But I would reinvest $40k to $50k back into the market.


My question is, Should I do one more year of Roth Conversions or sell LTCGs and pay $0 on the gains?



Also, How does it work, Do you pay 0% up to the number and then 15% after that or does going over the number trigger 15% on all the withdrawal?


https://www.cnbc.com/2023/02/15/her...023-and-pay-0percent-capital-gains-taxes.html

 

[Sunset]

The LTCGs will transfer tax free due to the step up in basis upon death of the owner.
Since you said your kids will inherit some $$.
Leaving them tax free money will be better than an IRA.

The first X amount of LTCGs is 0%, then the next Y amount is 15%, the next Z amount is 20% , so going over the 0% bracket by $1.00 means you pay 15 cents in total.

 

[Sunset]

Just thinking about it,

it's probably most tax efficient to do a mix of Conversion and LTCG's.

You could convert and stay in the 10% bracket and then LTCG's above that. When you start RMD's you will be higher than 10% probably.

 

[Time2]

The LTCGs will transfer tax free due to the step up in basis upon death of the owner.
Since you said your kids will inherit some $$.
Leaving them tax free money will be better than an IRA.

So, inheriting LTCGs are even better than a Roth inheritance?
One clarification, when you say, "The LTCGs will transfer tax free due to the step up in basis upon death of the owner."
Does that include the original contribution?

The first X amount of LTCGs is 0%, then the next Y amount is 15%, the next Z amount is 20% , so going over the 0% bracket by $1.00 means you pay 15 cents in total.

Thanks for that.

 

[Sunset]

So, inheriting LTCGs are even better than a Roth inheritance?
One clarification, when you say, "The LTCGs will transfer tax free due to the step up in basis upon death of the owner."
Does that include the original contribution?

.....

I would say a Roth inherited is best, then LTCGs, only because a Roth can earn tax free even for a high income earner, where the inherited LTCGs as they start to earn dividends or go up in value and are sold will add to income, which could be taxable for someone earning a good amount.

The step up in basis means, I bought Apple for $1 and when I die it's worth $200 , it transfers to my child with a basis for them of $200 and no taxes paid.
If it goes up to $220 and they sell, then then have a gain of $20.

 

[Time2]

I would say a Roth inherited is best, then LTCGs, only because a Roth can earn tax free even for a high income earner, where the inherited LTCGs as they start to earn dividends or go up in value and are sold will add to income, which could be taxable for someone earning a good amount.

Doesn't the Inherited Roth have to be liquidated after 10 years and taxes paid?

 

[pb4uski]

So, inheriting LTCGs are even better than a Roth inheritance?...

Inheriting a Roth is better because the assets grow tax-free until they are withdrawn.

Assets that get stepped up basis are a close second because the basis is reset to fair value at the date of death, but future income or growth from those assets is taxable (unlike the Roth).

So I would prioritize Roth conversions over taking LTCG on taxable account money. The other reason for doing so is because the surviving spouse is likely to be vaulted into a higher tax bracket so less tIRA left the better.

 

[GrayHare]

Yes, Roth funds must be withdrawn within a period but there is no tax because that's the defining characteristic of a Roth.

 

[CardsFan]

OP,

If your mutual fund has large and erratic cap gains distributions, that could be a reason to sell, take the gains, and re-invest in an ETF with no cap gains (I did this in 2023, though it did have a tax impact for us). For us, that had the impact of lowering future forced income by $10k to 40K.

DS will get the future stepped-up basis on the ETF, and we will have lower income. After all part of the purpose of Roth conversions is to lower future forced income.

Maybe not perfect, but it made sense to me.

 

[Time2]

OP,

If your mutual fund has large and erratic cap gains distributions, that could be a reason to sell, take the gains, and re-invest in an ETF with no cap gains (I did this in 2023, though it did have a tax impact for us). For us, that had the impact of lowering future forced income by $10k to 40K.

DS will get the future stepped-up basis on the ETF, and we will have lower income. After all part of the purpose of Roth conversions is to lower future forced income.

Maybe not perfect, but it made sense to me.

I'm thinking in 2025 when we have SS, the dividends from our taxable account will just about be enough to cover our spending.
Thanks, this info helps me.

 

[CardsFan]

I'm thinking in 2025 when we have SS, the dividends from our taxable account will just about be enough to cover our spending.
Thanks, this info helps me.

An ETF can still spin off divvies, but if you want the cap gains too, for spending, then I would sit pat.

 

[audreyh1]

OP,

If your mutual fund has large and erratic cap gains distributions, that could be a reason to sell, take the gains, and re-invest in an ETF with no cap gains (I did this in 2023, though it did have a tax impact for us). For us, that had the impact of lowering future forced income by $10k to 40K.

DS will get the future stepped-up basis on the ETF, and we will have lower income. After all part of the purpose of Roth conversions is to lower future forced income.

Maybe not perfect, but it made sense to me.

I have been switching from active funds to index funds over many years now to avoid these erratic and sometimes outsized cap gains. It has tax consequences so I have to be opportunistic and careful. However I have little left in these legacy active funds now.

 

[Time2]

I have been switching from active funds to index funds over many years now to avoid these erratic and sometimes outsized cap gains. It has tax consequences so I have to be opportunistic and careful. However I have little left in these legacy active funds now.

We have only index funds VTSAX, VFIAX, VTI and VOO, about 10% in REITs,
and near 20% in MM funds, VMFXX. (too much)

The mix of our Stock Market money is 23% tIRA, 39% Roth IRA and 37% taxable account. We have whittled the tIRAs down pretty well over the years between stopping work and before starting SS, with spending and Roth Conversions. I probably won't be able to Roth convert any money this year as I have a property under contract for sale, But, I don't expect it to close until June. Another Dollar General is expected to go on the property, I might have sold it to cheap. I'm going to try to stretch left over money from last year and any dividends I get until June, it might be close!

 

[thefist]

Remember that the 12% bracket *could* disappear in 2026. So another shot or 2 at 12% conversions might be nice.