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For 2024, individuals with taxable income below $47,025 ($94,050 for married couples) pay 0% tax for long-term capital gains (LTCG). In years when you’re under the threshold you could effectively lock in tax-free long-term gains. The idea would be to realize just enough LTCG to stay within the 0% tax bracket. You also have to tack on the standard deduction which is $15,000 for individuals or $30,000 for a married couple. That means don’t have to pay federal income taxes on your long-term capital gains until your income exceeds a little more than $63,000 (single) or $126,000 (married couple). So you could realize more than $63,000 ($126,000) in capital gains and dividends without paying any federal income tax.
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A few techniques to bundle ordinary income
- Do Roth conversions in "ordinary income years".
- Buy short term (1 year or less) CDs/T-bills in "cap gains years" that mature in "ordinary income years"
- Invest in muni (MM, bond) funds in "cap gains years", and taxable (Treasury, corporate) funds in "ordinary income years"
A couple of techniques to bundle cap gains
- Accelerate recognition of gains (sell and repurchase if desired) in "cap gains years"
- Sell "around" annual distributions - avoid distributions of ordinary income (if any) and repurchase after record date (recognizes additional cap gains)
Depending on how much space you have in your 0% cap gains bracket, creating more cap gains may or may not work out for you. In any case, the added cap gains are state-taxable, so that should be kept in mind as well.
On the flip side, Roth conversions may be partially or fully state tax-exempt, depending on the state. That's motivation to convert some money even if it eats into the 0% cap gains bracket.
Note that the numbers presented in the graph are incorrect.
Cap gains: $47,025 (top of 0% bracket) + $14,600 (std ded.) = $61,625, not $63,475
Ordinary inc: $47,150 (top of 12% bracket) + $14,600 (std ded.) = $61,750, not $63,475
Note also that the cap gains bracket does not line up exactly with the ordinary income bracket (as given by the IRS). Close, but different.
It looks like the author may have been adding in the 2023 extra deduction ($1,850) for being over age 65 (or blind). That would make the cap gains figure come out to $63,475.
RMDs are taking as early as possible to potentially provide a LT capital gain (from the RMD WD date + 1 year) AKA "Capital Gains Years". Conversely, In years where these RMDs suffered a loss, one would sell (by Dec 31st of that year) to harvest a tax loss which would help offset future gains in "Capital Gains Years".
Not to beat a dead horse, but as a retired bean counter I've posted many times that tax planning is, or should be, a lifelong process.
When we started our professional careers in 1980 we adopted our "Avoid, Delay, Minimize" tax plan and have executed it with relentless precision. We prefer to pay our income taxes on our own schedule.
Result? We have not paid a dime in FIT/SIT since the year after our retirements in 2012, and will likely continue to choose to pay ZERO until RMDs are required at Age 73, a tax-free period of 16 years.
Some cool features of the strategy are ZERO taxes on otherwise taxable Cap Gains, SS and pensions, and (effectively) annual tax-free withdrawals from IRAs up to the taxable threshold. We choose to take the cash in lieu of Roth conversions to fund our smallish, annual income gap.
There are three phases to an investor's life: Accumulation, Maintenance and Disbursement. Our lifelong tax strategy and retirement investment strategy have allowed our portfolio to continue to grow significantly annually and we remain in the Accumulation phase.
Please indulges us with your "pay no tax" strategies.
With your RMDs being 16 years away and retirement starting in 2012 or at age 45, I am all ears.
Congratulations.
RMDs are taking as early as possible to potentially provide a LT capital gain (from the RMD WD date + 1 year) AKA "Capital Gains Years". Conversely, In years where these RMDs suffered a loss, one would sell (by Dec 31st of that year) to harvest a tax loss which would help offset future gains in "Capital Gains Years".
I don't believe TLH is legal in IRA. Maybe I'm missing the boat?
I no longer take RMDs early after I got burned in 2020.
We plan on making QCDs when we're finally subject to RMDs. So had we been subject to RMDs by 2020, we would not have been very upset at having taken a distribution that wasn't required. The money would have gone to some good causes (at least we think so).
We make partial Roth conversions annually. Since those are generally best done early in the year, and since they cannot be done prior to taking RMDs, we plan on taking RMDs (for QCDs) early each year.
In 2009, RMDs were also waived. But this was announced at the end of 2008. So there was no confusion about what to do with 2009 RMDs already taken. Only two waivers in 50 years (RMDs started in 1974 with ERISA), and only one of those without advance warning. Those are pretty good odds of it not happening again in our lifetimes.
Let me correct your dates. Sorry if my post was confusing on that!:
Retired in 2012 at Age 56
RMDs will start in 2029 at Age 73 (unless gov't pushes back further)
Paid ZERO FIT 2013-2024 (12 years)
Plan to (and very likely will) pay ZERO FIT/SIT 2025-2028 (4 years)
Total ZERO FIT/SIT period (16 years)
Strategy was pretty simple (but takes a while to explain!):
Starting with first professional employments in 1980, got as much $ as humanly possible into tax-deferred accounts. We were DINKS, Double Income, No Kids.
Got very lucky in my first job - had a Manager who was a poor mid-western farmer turned self-made multi-millionaire who taught me everything I needed to know about finances and investments that I didn't learn any of in bizness school!
ONLY worked for companies that had defined benefit pension plans as a bene. Collectively had four professional jobs and four defined benefit pension plans between the two of us between 1980-2012. Annually maxed out 401k's and 403b's and all other investable monies went to Roth IRAs.
Rolled all possible Pension monies to IRAs upon termination of service to control when we receive income. Final employers provided lovely parting gifts of Retiree Health Insurance, Retiree Dental Insurance and a RHSA (Retiree Health Savings Account).
Retired with just enough $ outside the umbrella (in taxable a/c's) to bridge income gap in years until early SS began for both at Age 62 in 2018.
Started taking (effectively) tax-free IRA w/d's in 2013 to fully defray annual income gaps and/or maximize tax savings.
Currently, SS and remaining pensions (that could not be rolled) cover all but a couple grand of annual living expenses.
Currently 98% of liquid net worth is in IRAs and only 2% is in taxable accounts. We have generated negligible taxable income other than early SS starting in 2018 and remaining Pensions that weren't rolled starting in 2013. We have ALWAYS since 2013 kept total taxable income UNDER the taxable MFJ threshold.
The common criticism of this plan is that we will REALLY get hit hard and effectively pay MORE in total taxes if we delay taking $ from IRAs until RMDs start in 2029. That assumption is incorrect. That criticism is akin to the fallacies about when to take SS. IMO, these questions can only be correctly answered with individual-specific data. I created an EXCEL spreadsheet way back in 2005 to map out the $ flows. I worked with several CPA buddies who reviewed and approved the math. In our case, with our specific ages, income, met work, allocations of monies, IF we were to have started taking IRA w/d's earlier or now, we ALWAYS end up with LESS $ age advanced ages than if we wait. I understand that MANY won't believe that. I assure you it is correct, as do my CPA buddies! And that's even WITHOUT accounting for the time value of money!
And to answer question by @derf:
No formal employment since both retired in 2012. We do however have some friends and relatives throw at us a little cash, dinners, event tix and the like for our otherwise gratuitous mgmt of their ports. I have also done some landscaping work for some neighbors to keep busy and active for a ridiculously smallish hourly fee. Currently down to just one neighbor as I've tired somewhat of all that.