Pay ZERO Capital Gains Tax vs Roth Conversions in Retirement: How to Determine Which is Best
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- Опубликовано: 10 июн 2024
- Listener Drew asks about a tax strategy for juggling capital gains and Roth conversions. While it can be a complicated question - especially when large accounts are involved - James provides some general guidelines that can be helpful for anyone with similar gnarly tax strategy challenges in retirement.
In this episode, we’ll cover the extent to which required distributions will be an issue, what you need to alleviate that issue, and the timeframe within which you have to do that.
James explains how to work backward to project your various tax brackets and determine how to prioritize tax gain harvesting, Roth conversions, and other tax strategies.
Questions Answered:
What is tax gain harvesting?
What is the tax planning window and how do I use it to my advantage?
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⏱Timestamps:⏱
0:00 - Drew’s question
2:50 - Determine use for each asset
5:59 - Tax gain harvesting
11:10 - Back to Drew
15:30 - James’ priorities for Drew
18:41 - Usually not either/or
20:07 - Working backwards
24:50 - General principles
29:50 - Tax planning window
32:16 - Summary
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"Now all of you, with the exception of Drew, are of course not Drew." I don't know why but I found this line very funny.
For those wondering, it’s at 24:52. 😊
Hi James. Great video! This is where tax planning gets really challenging. I've been working through this very issue for the past few years with the added issue that our taxable account had some older mutual funds which have been throwing off capital gains distributions with are very hard to tax plan around. I made the decision to do tax gain harvesting and convert those mutual funds into ETF's which allows me much more control over my tax planning. Now the focus will be on spending down and/or converting our traditional IRAs to minimize future RMD issues while we are in the window before drawing social security. Fun times! I just remind myself that it is a great problem to have.
Some graphs and diagrams would greatly help these explanations and examples, including the ease of showing windows in which these topics become an issue.
This is technically a podcast but James has made it available on RUclips.
That was a lot of numbers, but you did a great breakdown, James. I really enjoy these case studies. They often highlight areas of my own planning that I hadn't properly considered. Thanks for your time and efforts put into these videos.
Thanks James. One of the issue that may affect the strategies for early retirees are the ACA premiums: you may keep you taxable income even lower than LTCG 15% threshold to keep the ACA premiums low.
Very timely video. My portfolio mix is pretty similar to Drew’s, I have large gains in my brokerage and sizable 401k and Ira accounts and I agonize over this same question. I’m planning to retire soon (at 60). The info in this video is really important as I try to plan for RMDs in 15 years. Thanks, James!
Thanks for the info James--always appreciative of your tax strategies! 🙌🏻🙌🏻🙌🏻
Great content, thanks James! Always learning something on our path to retirement.
Good stuff James. Thanks for the education.
James, thanks for another great video! This was extremely helpful because I'm thinking of the same things (Roth conversion and/or tax gain harvasting), the only difference is that I do have enough cash for living and paying for taxes when doing the roth conversions.
Great video and explanation
Great commentary James. Would love to see the same but with your software and visual illustrations. Thank you!
You are great at explaining
Very helpful. Thanks
James, I listen every week and this was timely. This took some concentration but you did well explaining complicated concepts. Im in the same boat BUT no heirs so doing roth conversions will be overpaying Uncle Sam when my full estate goes to charity. It did occur to me that i should take some out of my pretax IRA each year just to try to stop the bump into some crazy bracket when RMDs come along. But still a lot to consider. Thank you for your podcast. Keep us thinking!
Hey James I just found your channel and find the information excellent. I'm the type that likes to really dig into the details and learn much more. Are there some Financial Planning/Retirement books you could recommend?
This case study was really beneficial for us. We are in a similar position already retired with assets spread between the IRAs, Roths, and brokerage. We have been using the 10 yrs we have prior to SS to perform conversions, but the gains in the brokerage need addressing too. This was helpful for me to get a better plan together.
Another great video. I have a different but related issue. I have about 20k in dividends in zero tax rate as I manage to the top of the 12% bracket in retirement. If I convert to Roth I would be converting into the 22.% bracket and make the dividends taxable at 15%. To make it worth while I would need to covert over $100k which impacts Medicare part B. I do have very large pre tax balances so not sure I can make a meaningful dent without impacting both issues.
Have loved the videos, and happy to see the link to your RPA in details.
Did have one question about the many videos you've done detailing the advantages of early Roth conversions and the impact on lifetime residual assets, which in many examples is dramatic. Isn't one other factor to consider in that decision the break-even point or age for one strategy vs. the other?
IOW, if starting with a $3MM portfolio and conservative planning with and without Roth conversions may leave me with projected assets of $7MM vs. $4MM (just general estimates, not precise). If one of my main objectives is not necessarily creating additional wealth for my kids at the risk of having taken an earlier tax hit if I only live to, say, 75, my decision might be different. One factor in trying to really assess that is to know the breakeven point of the Roth conversion strategy.
Is that breakeven something that can be easily determined using the tools available in RPA?
Great show! There’s one additional twist I’ve been wondering about that I would love to get your take on. Does it ever make sense to take tax free money from your Roth IRA to live on early in retirement in order to save money elsewhere, such as tax gain harvesting, qualify for healthcare subsidies or avoid IRMMA charges?
I think it's better to take from taxable traditional IRA or 401k funds early before social security. Take up to the tax bracket you want to stay under so you don't hit Irmaa nor the next higher income tax bracket. Then live off money and any extra put into brokerage acct which will have gains taxed at a lower amount. Try to bring down these taxable accounts early before adding social security to your tax return increasing taxable income and potential Irmaa problems. Spend the Roth last or use it after social security starts to mix and match with taxable accounts to stay within the brackets you want to stay within.
Thanks for the video, although this was a lot of information to digest. Even after watching the video twice, I am still foggy at best. My taxable account is almost the same value as my IRA/ROTH accounts. I retired early at age 53 and have been living off the dividends and selling small bits of my taxable account. Any discussions of ROTH conversions or tax gain harvesting for "early retirees", (like the 60 year-old retiree example provided near the end of the video), must address the potential loss of an ACA health insurance subsidy. This can amount to thousands of dollars per year in additional health insurance costs.
great introduction to the complexities of multiple impacts faced as SS, RMD, and IRMAA approach. What spreadsheets or models are available to the 'do-it-yourself'er to minimize taxes over time?
James, I am looking at the retirement planning academy and it appears include the software and your guidance working through various scenarios. I assume this software is either in the cloud or downloaded on our computer. Is this an annual fee to maintain access to the software or a one time fee. Thanks in advance! My husband and I love all your videos!
Notes on a biard behind you would be helpful. This was a lot if numbers. Please do this with your software and a single person example. ❤
Great introduction to the complexities faced as we approach SSN, RMD, IRMAA, etc. What spreadsheets or models are available so a "do-it-yourself"er can minimize taxes based on Roth conversions and gain harvesting across time?
Hey James -- Quick question, if I join RPA, will I have access to the Right Capital software to create and tweak my own financial plan? Thanks! -Chris
Ty
Great vídeo greetings from Brazil 🇧🇷 I work with retirement plans and it was great for me I didnt know how it works in US
Retirement lol😊
isn’t the IRA withdrawal for Roth conversion ordinary income? If so why are you considering the remaining balance of the 0% long term capital gain bracket when looking at Roth conversion?
What if we are married, retired already, ages 58 and 60, receive a large ACA subsidy, and have $2.5M in both IRA’s and Brokerage (with large Capital Gains). Should we wait to do Roth conversions until we are both on Medicare, and hold off on Social Security until age 70?
Do a QCD from your IRA that is a no brainer if you give to charity.
Dude I put my own money in a IRA so what if I have zero gains - will I still be taxed??? My own money being taxed again? Taxes makes all investments suck!
What about rolling 5 years Roth withdrawals. So say convert 100K and take 100K of 5 years old Roth.
this podcast was confusing. You are normally concise and clear
Is capital gains on selling stock LONG term or SHORT term capital gains? I thought we were told long ago “you will always pay 15% on your capital gains on stock sales.”
That is with a “if”
If you sell your stock within a year, then it’s a short term. Otherwise its long-term
Long term if you held the stock for at least a year. Short term gain if held less than a year.
Tax gain harvesting always refers to long term capital gains (held over one year) since you are right that short term capital gains are taxed as ordinary income. The long term capital gains tax rates are 0%, 15 % and 20%. The 15% bracket is the one people most often fall into, but if you are in the lower income tax brackets of 10 or 12%, then you will be in the 0% capital gains rate bracket, until your gains push your AGI above the top of that bracket.
when u r talking for 30+ mins, whats the use of just seeing your face?.. When dealing with #s, pl share the screen or PPT or whiteboard!!
Usually I don't mind, but this topic really needed visuals so a podcast may not be the best medium.
This is technically a podcast; he has made it available on RUclips as a video.
How bout a question from someone who doesn't have a lot. Like a total of 700,000
Very helpful. Thanks