Tax Efficiency Pre/Post RE

[DawgMan]

Looking for some suggestions/opinions... I may make my exit to RE at the end of this year (age 55) and have built up an upper 7 figure portfolio of which a little less than 1/2 is in taxable accounts with the balance in tax differed (primarily 401K accounts I could access without penalty if so desired). My current income puts me in the top income bracket and if I decide to work some for the next few years (somewhat part time), I suspect my income will come down, but I suspect it could still be high enough to keep me in one of the upper tier brackets. None the less, I really don't see myself tapping my portfolios for RE income until I pretty much shut off the machine (anytime between the end of this year and say age 60). In simple terms, I run a 60/40 AA and have tried to make my portfolio tax efficient, but none the less continue to create more taxable income from my taxable account every year. Not complaining, fortunate to be where I am, but wondering what tax efficient strategies you all are using both while working and once living off your portfolios in RE? In RE, I would expect my gross draw down to be $300K+/yr drawn in some combination from taxable and tax differed accounts.

 

[LOL!]

Your income is quite high and thus you cannot avail yourself of the usual 0% tax bracket on qualified dividend income and long-term capital gains.


Also your taxable account is large enough that even dividends alone will bump you up into a moderate tax bracket.

Nevertheless, here are a couple of things you can do:

1. In your taxable account, do not earn any taxable interest, so no CDs, no savings accounts, no money market funds, no cash anywhere. You can look at Schedule B (does it exist anymore?) and on the top half you should have no income.

2. In your taxable account, only have investments that pay either 100% qualified dividends or tax-exempt interest. That is, the bottom half of Schedule B does not have non-qualified dividend income. This means no actively managed mutual funds and only broad market index funds that pay 100% qualified dividend income. An exception might be broad market or large-cap foreign stock funds because one gets the foreign tax credit. But be careful with foreign dividends as once one is over about $20,000 in foreign qualified dividends, then IRS Form 1116 (foreign tax credit) gets more complicated.

3. Do tax loss harvesting in your taxable account. Also realize short-term losses each year in your taxable account.

4. Give away lots of appreciated shares to your donor-advised fund. Also when RMD time comes around, use the QCD feature to avoid RMDs.

I'll be following along to see what others have to write.

 

[GrayHare]

You can shed some of your high dividend payers and acquire growth stocks such as BRKB that do not pay a dividend. The growth is taxed more favorably as cap gains, which unlike dividends, for tax purposes can be offset by cap losses.

 

[HillCountry]

What works for me now:
After tax 401k then Roth rollover.
Rental depreciation.
Business expense.

After RE:
Roth conversation based on future tax. Btw, current tax code will sunset in 2026, and this will affect short term plan.
Maybe ACA subsidies but very slim chance, due to income.

 

[SecondCor521]

Relative to $300K, it's a small thing, but you could consider fully funding an HSA every year. You need to have a HSA-qualifying health plan, but you don't need income to contribute, and contributions are deducted from income. Withdrawals for health expenses are tax free, and withdrawals after a certain age regardless of use are tax free. If you're married, I think the max is about $7K per year.

You should project what your tax bracket will be at age 70 1/2 when you have RMDs from your traditional IRAs plus SS. Roth conversions in your 60s at say, 24%, may beat RMDs in your 70s at 35%.

Consider bunching deductions. Do things every year (RE taxes?) or every other year (like your DAF contributions that LOL! mentioned) to maximize your schedule A. Most plebes like me aren't at your level so have no use for it, but it still might be something you can squeeze a few thousand in deductions out of every year or every other year.

 

[LOL!]

Bunching charitable contributions will work, but because of the SALT limitations, bunching SALT items won't work, except for maybe state taxes.

Which reminds me: Move to a no-income-tax state.

 

[SecondCor521]

Bunching charitable contributions will work, but because of the SALT limitations, bunching SALT items won't work, except for maybe state taxes.

Right, which is why I listed RE taxes as an every year item with a question mark.

 

[pb4uski]

DawgMan, while you have received a lot of good advice that will help some, the reality is that you're going to get hosed with taxes for the rest of your life... an unfortunate consequence of your financial success.... so just get used to the idea and enjoy your retirement.

 

[DawgMan]

Thanks all, appreciate it. I suppose I need to tinker some, but I suppose in the end, the TAX MAN COMETH!

 

[SonofCohoes]

Thanks all, appreciate it. I suppose I need to tinker some, but I suppose in the end, the TAX MAN COMETH!

Even for us with a fraction of your retirement income.

 

[Jerry1]

Thanks all, appreciate it. I suppose I need to tinker some, but I suppose in the end, the TAX MAN COMETH!

Even for us with a fraction of your retirement income.

I have far less than the OP but once RMD’s kick in I’ll be paying taxes in the same bracket I was while working - 28% then and temporarily 24% currently. It makes me wonder if I should have just contributed to my 401K up to the company match max instead of fully maxing it out. I though I’d be able to pull most of the money out at the lower tax bracket (15/12), but it doesn’t look that way.

The only way it will be a great tax move is if tax rates increase significantly. I certainly don’t want to “win the game” by enduring that scenario.

 

[audreyh1]

Things will improve tax wise once you quite working at all, until RMD age that is. Then probably back to high tax bracket.

We have high income from investments, but most of it is qualified so we get the lower tax rates and even 0% cap gains rates on some of it. But SS alone will blow that out of the water, not to mentions RMDs.