Income stacking and tax loss harvesting and tax gain harvesting? Lions and tigers and bears, oh my! Thank you for breaking down these complex pieces of the retirement puzzle and showing how intertwined they really are by using easy to understand examples! You're right, I DO need a better plan!
In your comparison (3:20) between withdrawing $25k after investing $50k in a tax deferred and taxable account , you indicated that the tax deferred account pays $5,500 in taxes as oppose to the taxable only having to pay $3,750. But this is an unfair comparison because it does not take into consideration that the taxable accounts initial $50k was taxed already so rather than starting with $50k it would be $44,500 and with the time value of money compounding, the tax deferred account would end up with more dollars in the same time period.I understand that you qualified this by stating that this is a simplistic view. Thanks for reviewing these important concepts!
Excellent video, but I would add one more thing: within your taxable account, you can hold municipal bonds, which generate tax-free interest. That will allow you to add another step in the income ladder: capital gains at 0%, tax-free income (at least federal) using municipal bonds, social security, and then your IRA distributions.
Hi Eric, Thank you so much for this video and all the other videos on your UA-cam channel. You pack so much information into each video and the time I spend watching and rewatching your videos is time well invested. I found the nuggets of information that are related to the topic which you include are so helpful. For example, in this video, towards the end, you added information about not having mutual funds and dividend-paying stocks in a taxable account is helpful to a novice like me. Please consider expanding the topic of tax-loss harvesting. For example, the pros/cons and mechanics of using tax-loss harvesting to offset gains when stocks from a taxable account are sold to pay taxes on Roth conversions. I would also request a video on Revenue Ruling 2008-5 as it relates to how the wash-sale rules apply to IRA or Roth IRA accounts. Have a healthy and prosperous 2022.
Hi @Eric Sajdak - Thanks for the video. I’ve just come across the channel and am working my way through them. Speaking of taxable accounts, I’d like to get your opinion of Vanguard’s tax-managed funds VTMFX, VTCLX and VSMAX for a taxable account for a retired couple? They don’t appear to distribute ST or LT gains and they work to handle the tax loss harvesting inside the fund.
I'm single, plan to retire 12/15/22 at age 59 1/2 (I do not need to finish the year) so I can do my first Roth conversion (up to 24% bracket) before the end of the year and then do a conversion each year for a few years before I take SS. What do you think?
Could you please make a video about trading futures in a taxable account? Futures are taxed 60% long term and 40% short term. For the typical retail trader, that means about 18.5% rate
This was hugely helpful, thank you for sharing such great information. Would it be worth doing tax gain harvesting to fill the 0% bracket during employment years or does that potentially bump us up into another bracket for regular income?
Hey Eric, I may have missed it, but how many years are you able “carry forward” losses in a taxable account? It seems this could become very useful for long term withdrawal strategy if done right.
Hey Brad, You can carry forward losses indefinitely until they are exhausted but can use $3,000 in carry forward losses per year. Typically in the year you have the losses, there may better opportunities to cancel out gains vs. carrying losses forward. It all depends on the situation, however. Sometimes you are better off carrying forward.
So i get the whole concept around 19:00 regarding shift to capital gains tax however that assumes we are able to place our investing such that we have $41k in capital gains available to pull from in the first place right? So how do we position ourselves such that we have THAT MUCH capital gains to pull from each year?
The two biggest variables there will be the size of the account and the growth rate. Obviously generating $41,000 in capital gains is much more difficult on a $10,000 account than it would be on a $300,000 taxable account. Positioning yourself to have that much in capital gains is a layered discussion. We'll reach out inside the Facebook group to discuss further!
Great video! When looking at Scenario 2 starting at 18:51, wouldn't that $41k withdrawal from his taxable account have basis so that the entire $41k is not capital gains? I realize that this is just an example to show the concept, but he could also use the specific shares method to target less taxes owed?
Mark, you are correct. After reviewing, I agree the example should have been adjusted certainly to make sure everything matches up properly. Thanks for pointing out the error. You are correct in regards as well to targeting specific shares.
"Substantially different" ... It would be interesting to gain a better understanding of when the wash sale would catch you. For example, would trading one Vanguard ETF for another trigger it given its the same company?
just found a few of your videos - great info... maybe you cover this elsewhere - but you advise against mutual funds for taxable account because of fund managers (and ability to control tax impacts) - but what about index funds? What is your opinion on using index funds (both in taxable and tax defer accounts). We have retired early at 50 and are balancing income and ACA subsidies....
Beth S - I am 64 and on my last (partial) year of ACA. Got hit with huge capital gains last December. I have been switching to an index fund (S&P 500) for low expenses and hopefully low turnover/taxable gains. I had some funds that took a hit, so I had losses to offset gains - making it a little less painful to pull money out of those taxable accounts. I think Eric (on another video) said that we should keep our taxable funds - so we can take advantage of long term capital gains. After I finish my Roth conversions, I will be doing some tax harvesting with a 0% tax - due to income below $83,850. That's before I take SS at 70. Eric and Tony share a LOT of great information. Futher: I think Eric mentions taxable accounts in tip #7 in the following: ua-cam.com/video/KWcMC2Q2qqU/v-deo.html. I do believe that he said that index funds are a safer choice for taxable accounts (in one of his other videos).
if you have 50k in a tax deferred account (pre tax) then you can't have the same amount in a Taxable account (after tax) because you have to substract the taxes you paid on the 50k before investing in a Taxable account, so the math doesn't work (time stamp 4:10)
I think your slightly misunderstanding the example. The focus isn’t on contribution, it’s on the distribution. Which account you can or should contribute in a given year depends on a number of factors. What I’m focusing on here is the tax implications of withdrawal. Advisors will often have their clients withdraw from taxable accounts first because they are an “inefficient” account. We show why they can actually be a very powerful retirement account.
I like your take on dividends especially because it's counter to most popular finance recommendations. However, because of the preferential 0% rate on qualified dividends, I disagree that you shouldn't hold them in a taxable account. Having some qualified dividend income allows me to take advantage of the 0% rate AND tax-loss harvest $3k/yr against my Roth conversions. 100% agree that REIT or bond income should be in tax-deferred accounts.
Thank you. You are correct that taking advantage of qualified dividends in the 0% is a great idea. And if you're certain you won't ever rise into the next bracket, you may be able to hold dividend stocks successfully. This can be accomplished with a well built plan. Typically, however, we see enough uncertainties (RMDs for example) for most families that avoiding dividends makes the most sense in a taxable account. The other consideration... what happens as the taxable account grows larger and those dividends therefore grow larger? If those are long term positions, exiting a large dividend stock position may be difficult. Thanks for the comment!
@@SafeguardWealthManagement thanks for the reply. I agree. As dividends have grown, they've become more problematic for me especially as I try to balance maximizing ACA PTCs, stretch IRA withdrawals, Roth conversions AND possible FAFSA aid all while being conscious of today's marginal and effective tax rates vs what they could be when I collect SS. It's a great problem to have but it's no longer simple. The marginal rates on "22%" ordinary income hits ~40% when I include lost PTCs, CA state tax that is no longer deductible (probably higher because of phased out tax credits). And what should be "0% LTCG rates" are actually ~30% with lost PTCs, LTCG bump (as you've discussed) and state tax. Keep up the good work. You are truly the 0.01% of advisors who get this stuff.
Income stacking and tax loss harvesting and tax gain harvesting? Lions and tigers and bears, oh my! Thank you for breaking down these complex pieces of the retirement puzzle and showing how intertwined they really are by using easy to understand examples! You're right, I DO need a better plan!
Haha, thanks Peter!
In your comparison (3:20) between withdrawing $25k after investing $50k in a tax deferred and taxable account , you indicated that the tax deferred account pays $5,500 in taxes as oppose to the taxable only having to pay $3,750. But this is an unfair comparison because it does not take into consideration that the taxable accounts initial $50k was taxed already so rather than starting with $50k it would be $44,500 and with the time value of money compounding, the tax deferred account would end up with more dollars in the same time period.I understand that you qualified this by stating that this is a simplistic view. Thanks for reviewing these important concepts!
I thought the same thing, also that actual taxes paid at the end would be less since you're only paying taxes on the growth.
This is excellent!! What a great teacher you are! So glad I found your channel!
Excellent video, but I would add one more thing: within your taxable account, you can hold municipal bonds, which generate tax-free interest. That will allow you to add another step in the income ladder: capital gains at 0%, tax-free income (at least federal) using municipal bonds, social security, and then your IRA distributions.
Wow. This is so helpful. I’m not even close to retirement age yet, but I’m learning so much. Thanks.
Hi Eric, Thank you so much for this video and all the other videos on your UA-cam channel. You pack so much information into each video and the time I spend watching and rewatching your videos is time well invested. I found the nuggets of information that are related to the topic which you include are so helpful. For example, in this video, towards the end, you added information about not having mutual funds and dividend-paying stocks in a taxable account is helpful to a novice like me. Please consider expanding the topic of tax-loss harvesting. For example, the pros/cons and mechanics of using tax-loss harvesting to offset gains when stocks from a taxable account are sold to pay taxes on Roth conversions. I would also request a video on Revenue Ruling 2008-5 as it relates to how the wash-sale rules apply to IRA or Roth IRA accounts. Have a healthy and prosperous 2022.
Hi @Eric Sajdak - Thanks for the video. I’ve just come across the channel and am working my way through them. Speaking of taxable accounts, I’d like to get your opinion of Vanguard’s tax-managed funds VTMFX, VTCLX and VSMAX for a taxable account for a retired couple? They don’t appear to distribute ST or LT gains and they work to handle the tax loss harvesting inside the fund.
I'm single, plan to retire 12/15/22 at age 59 1/2 (I do not need to finish the year) so I can do my first Roth conversion (up to 24% bracket) before the end of the year and then do a conversion each year for a few years before I take SS. What do you think?
I could see why step up in basis is being considered as a loop hole.
Certainly is a powerful as an estate planning tool! Will be interesting to see if tax laws target this in the coming years
Could you please make a video about trading futures in a taxable account? Futures are taxed 60% long term and 40% short term. For the typical retail trader, that means about 18.5% rate
This was hugely helpful, thank you for sharing such great information. Would it be worth doing tax gain harvesting to fill the 0% bracket during employment years or does that potentially bump us up into another bracket for regular income?
Hey Eric,
I may have missed it, but how many years are you able “carry forward” losses in a taxable account? It seems this could become very useful for long term withdrawal strategy if done right.
Hey Brad,
You can carry forward losses indefinitely until they are exhausted but can use $3,000 in carry forward losses per year. Typically in the year you have the losses, there may better opportunities to cancel out gains vs. carrying losses forward. It all depends on the situation, however. Sometimes you are better off carrying forward.
Do I still have to pay taxes on the dividend if the stock is not sold and the dividends are automatically reinvested?
Yes, because it is distributed then reinvested.
So i get the whole concept around 19:00 regarding shift to capital gains tax however that assumes we are able to place our investing such that we have $41k in capital gains available to pull from in the first place right? So how do we position ourselves such that we have THAT MUCH capital gains to pull from each year?
The two biggest variables there will be the size of the account and the growth rate. Obviously generating $41,000 in capital gains is much more difficult on a $10,000 account than it would be on a $300,000 taxable account.
Positioning yourself to have that much in capital gains is a layered discussion. We'll reach out inside the Facebook group to discuss further!
Great video! When looking at Scenario 2 starting at 18:51, wouldn't that $41k withdrawal from his taxable account have basis so that the entire $41k is not capital gains? I realize that this is just an example to show the concept, but he could also use the specific shares method to target less taxes owed?
Mark, you are correct. After reviewing, I agree the example should have been adjusted certainly to make sure everything matches up properly. Thanks for pointing out the error.
You are correct in regards as well to targeting specific shares.
"Substantially different" ... It would be interesting to gain a better understanding of when the wash sale would catch you. For example, would trading one Vanguard ETF for another trigger it given its the same company?
We are planning on doing a video on wash sales rules within the next couple weeks!
If someone has over $3,000 of real estate losses, does that mean there’s no need to do tax loss harvesting from brokerage accounts?
just found a few of your videos - great info... maybe you cover this elsewhere - but you advise against mutual funds for taxable account because of fund managers (and ability to control tax impacts) - but what about index funds? What is your opinion on using index funds (both in taxable and tax defer accounts). We have retired early at 50 and are balancing income and ACA subsidies....
Beth S - I am 64 and on my last (partial) year of ACA. Got hit with huge capital gains last December. I have been switching to an index fund (S&P 500) for low expenses and hopefully low turnover/taxable gains. I had some funds that took a hit, so I had losses to offset gains - making it a little less painful to pull money out of those taxable accounts. I think Eric (on another video) said that we should keep our taxable funds - so we can take advantage of long term capital gains. After I finish my Roth conversions, I will be doing some tax harvesting with a 0% tax - due to income below $83,850. That's before I take SS at 70. Eric and Tony share a LOT of great information. Futher: I think Eric mentions taxable accounts in tip #7 in the following: ua-cam.com/video/KWcMC2Q2qqU/v-deo.html. I do believe that he said that index funds are a safer choice for taxable accounts (in one of his other videos).
ALways choose index funds. In any account.
if you have 50k in a tax deferred account (pre tax) then you can't have the same amount in a Taxable account (after tax) because you have to substract the taxes you paid on the 50k before investing in a Taxable account, so the math doesn't work (time stamp 4:10)
I think your slightly misunderstanding the example. The focus isn’t on contribution, it’s on the distribution. Which account you can or should contribute in a given year depends on a number of factors.
What I’m focusing on here is the tax implications of withdrawal. Advisors will often have their clients withdraw from taxable accounts first because they are an “inefficient” account. We show why they can actually be a very powerful retirement account.
Our error for not making that clearer
I like your take on dividends especially because it's counter to most popular finance recommendations. However, because of the preferential 0% rate on qualified dividends, I disagree that you shouldn't hold them in a taxable account.
Having some qualified dividend income allows me to take advantage of the 0% rate AND tax-loss harvest $3k/yr against my Roth conversions.
100% agree that REIT or bond income should be in tax-deferred accounts.
Thank you. You are correct that taking advantage of qualified dividends in the 0% is a great idea. And if you're certain you won't ever rise into the next bracket, you may be able to hold dividend stocks successfully. This can be accomplished with a well built plan.
Typically, however, we see enough uncertainties (RMDs for example) for most families that avoiding dividends makes the most sense in a taxable account.
The other consideration... what happens as the taxable account grows larger and those dividends therefore grow larger? If those are long term positions, exiting a large dividend stock position may be difficult.
Thanks for the comment!
@@SafeguardWealthManagement thanks for the reply.
I agree. As dividends have grown, they've become more problematic for me especially as I try to balance maximizing ACA PTCs, stretch IRA withdrawals, Roth conversions AND possible FAFSA aid all while being conscious of today's marginal and effective tax rates vs what they could be when I collect SS.
It's a great problem to have but it's no longer simple. The marginal rates on "22%" ordinary income hits ~40% when I include lost PTCs, CA state tax that is no longer deductible (probably higher because of phased out tax credits). And what should be "0% LTCG rates" are actually ~30% with lost PTCs, LTCG bump (as you've discussed) and state tax.
Keep up the good work. You are truly the 0.01% of advisors who get this stuff.
… but $50,000 invested in taxable account were AFTER TAX WAS TAKEN! Again, dog chasing his tail…