Take The Tax Hit At Once?

[ItsTime]

Hi All,

FIRED a few years ago and having a blast! DW and I were fortunate to have company sponsored health care for a bit but this is ending and we will be utilizing the ACA starting January 1st.

That said, I am also updating my asset allocation which includes increasing my fixed income percentage. I have a brokerage account (large percentage in Vanguard Total Stock Market - VTI) and would like to sell a market value amount of $300K with long term capital gains exposure of $81K to meet my new asset allocation goal.

Being that next year will be targeting below the ACA subsidy cliff and managing our MAGI accordingly, does it make sense to sell the VTI in 2024 and just take the tax hit all at once?

Thanks in advance for any feedback and opinions.

 

[SecondCor521]

Maybe. Not really enough information to say either way with certainty.

Two questions come to mind:

1. Why such a sizeable change in your target AA all at once? I think it is better in most cases to make gradual shifts in AA over time.

2. Can you make the AA shift in tax deferred accounts? Doing so would avoid CG taxes and ACA subsidy impacts. It would also have the longer term benefit of having your fixed income portion being in your tax deferred rather than taxable space (see Tax-efficient fund placement - Bogleheads).

 

[ItsTime]

Maybe. Not really enough information to say either way with certainty.

Two questions come to mind:

1. Why such a sizeable change in your target AA all at once? I think it is better in most cases to make gradual shifts in AA over time.

2. Can you make the AA shift in tax deferred accounts? Doing so would avoid CG taxes and ACA subsidy impacts. It would also have the longer term benefit of having your fixed income portion being in your tax deferred rather than taxable space (see Tax-efficient fund placement - Bogleheads).

Appreciate the questions.

1) Valid point. I agree gradual shifts are ideal but with the ACA subsidy in mind and a goal to have an increased cash position, I am evaluating this sale in 2024. I am also viewing this somewhat as "pruning the tree" as VTI has experienced some nice growth over the past several months.

2) Good question and I am also factoring in adjustments to my IRA to align with my AA so the potential VTI brokerage account sales is part of this overall goal.

 

[JoeWras]

Don't forget IRMAA in your big-hit-at-once plan. If you two turn 65 in 2027 or later, then you are OK if you do the big hit this year.

 

[RunningBum]

It is better to take the hit now and pay 15% cap gains than to take some of it later while getting for ACA subsidies and paying 15% cap gains + at least 8% in loss of subsidies. And if the subsidy cap comes back you could lose a lot more if you go over the cap.

Watch out for IRMAA as JoeWras says. IRMAA has a lower impact than ACA subsidies but if you can stop just before the next IRMAA tier it's probably worth it.

This all assumes you are in 15% cap gains now and selling all won't put you at 20%. If you will have space in 0% cap gains later it probably makes sense to hold off on some sales to use that space in future years. 0% cap gains and 8% subsidy loss is not a bad rate. Hope that makes sense.

 

[ItsTime]

Don't forget IRMAA in your big-hit-at-once plan. If you two turn 65 in 2027 or later, then you are OK if you do the big hit this year.

Good reminder. DW and I are mid 50’s so a little ways to go until 65.

 

[ItsTime]

It is better to take the hit now and pay 15% cap gains than to take some of it later while getting for ACA subsidies and paying 15% cap gains + at least 8% in loss of subsidies. And if the subsidy cap comes back you could lose a lot more if you go over the cap.

Watch out for IRMAA as JoeWras says. IRMAA has a lower impact than ACA subsidies but if you can stop just before the next IRMAA tier it's probably worth it.

This all assumes you are in 15% cap gains now and selling all won't put you at 20%. If you will have space in 0% cap gains later it probably makes sense to hold off on some sales to use that space in future years. 0% cap gains and 8% subsidy loss is not a bad rate. Hope that makes sense.

Appreciate it. This is along the lines of my thinking and this sale would keep us in the 15% LTCG rate.

 

[Exchme]

ACA premium credits phase out very quickly, see the graph. This in on top of the ordinary tax bracket, so your marginal rates are up to 30%.

SecondCor has the key point though, which is that, cash flow permitting, try to avoid selling at all. Fill your IRA with bonds first.

Also, make sure you are not playing small ball with trying to get ACA premium credits. If your tax deferred balance is large enough, Roth Conversions will be more valuable than ACA premium credits.

 

[ItsTime]

ACA premium credits phase out very quickly, see the graph. This in on top of the ordinary tax bracket, so your marginal rates are up to 30%.

SecondCor has the key point though, which is that, cash flow permitting, try to avoid selling at all. Fill your IRA with bonds first.

Also, make sure you are not playing small ball with trying to get ACA premium credits. If your tax deferred balance is large enough, Roth Conversions will be more valuable than ACA premium credits.

Very helpful and good perspective.

 

[TickTock]

Being that next year will be targeting below the ACA subsidy cliff and managing our MAGI accordingly, does it make sense to sell the VTI in 2024 and just take the tax hit all at once?

We are in a similar situation. DW has an inherited IRA which we will be completely draining next year and taking the tax hit/ACA PTC reduction. That should let us stay under the cliff going forward - not sure if the cliff will be pushed out or not, so taking the sure hit to avoid a possible larger hit in the future.

With incomplete information, you have to make some choice...

"If you choose not to decide, you still have made a choice", Rush, Free Will

 

[ItsTime]

Any reference to Rush lyrics is worth listening to!