The end of 2016 marks the completion of 4 full years of choosing leisure over labor.
It’s been a fun ride so far… we’ve seen a large swathe of the world, birthed a baby, and experienced 5 or 6 minutes of fame.
But how effective have these 4 years been in terms of implementing our tax minimization strategies? Are Roth IRA Conversions and Capital Gain Harvesting just fantasies we keep while working, or do they actually produce results in the real world?
Let’s do a financial check-up and see how we are doing.
Spoiler alert: In the years 2013 – 2016, we will have an effective income tax burden of minus $5. (Yes, the IRS paid us $5 last year.)
By itself a zero tax burden isn’t that impressive… I hear a Presidential candidate once claimed 47% of all Americans do the same, so this just makes us average.
But in all other metrics, our results are way off the charts.
Roth IRA Conversions
A Roth IRA conversion allows us to move $ from our Traditional IRA to a Roth IRA. This is a taxable event, but each year we only convert an amount such that we still have a 0% tax rate.
To date we have converted $23,811.26 completely tax free.
2013: $12,028
2014: $5,744
2015: $0
2016: $6,039.26 (potential to recharacterize a portion)
Total: $23,811.26
Roth IRA Contributions
Because we’ve accidentally earned some income these past few years, we’ve also been able to make normal Roth IRA contributions. With the blogging income, I’m also able to contribute to a solo 401k. Winnie’s book income has the same potential, depending on how we do our 2017 taxes. (Without blog or book income, I would have just increased the size of our Roth IRA conversions.)
In total, we have been able to contribute $59,846 to Roth accounts.
2013: $0
2014: $1,846
2015: $29,000
2016: $29,000
Total: $59,846
The beauty of these Roth accounts is that we’ve paid exactly zero taxes on any of these dollars, and now they will grow tax free forever.
Case in point:
While our contributions and conversions total only $83,657.26, the actual value of these Roth accounts has grown to $96,521.36. This was easy to figure out, because the value of our Roth accounts 4 years ago was exactly $0.
By the time we reach traditional retirement age, we will potentially have $500k in tax free dollars waiting for us in these Roth accounts, even without another contribution or conversion (assuming 7% annual growth, blah blah blah.)
Capital Gain Harvesting
Since the stock market has been generally headed northward these past 4 years, we have no shortage of capital gains to harvest. Without going into great detail, this basically means to sell a stock that has increased in value and then buy it back with increased basis. This is a taxable event, but with a tax rate of 0% it works out.
If you want a real world example of harvesting a capital gain, I’ve written a template based on the trades I executed in December 2016. Fill out this form and I’ll email it to you.
These past 4 years, I’ve harvested $143,459 in capital gains.
2013: $44,197
2014: $46,725
2015: $23,737
2016: $28,800
Total: $143,459
If I had done this while working, we would have been taxed 15% or more on this gain. Instead, we get to keep that $21,519+ (and future growth thereof) for our own use. This increase in basis is now tax-free forever, and even increases our ability to harvest a capital loss in the future if that is beneficial at the time.
Any future growth would still be subject to taxation if/when we sell, but we can always harvest more gains next year.
Summary
As every manager forced to read the works of Peter Drucker knows,”What gets measured gets done” and “What gets measured gets improved.”
I don’t know about improved, but in terms of tax minimization we definitely got it done.
In 4 years, we were able to harvest capital gains of $143,459, convert $23,811.26 of our Traditional IRA to a Roth IRA, and add $59,846 to Roth accounts.
This was all done completely tax free, and all of these dollars will be tax free forever.
Well what do you know! This stuff works!
Have you had success with Roth Conversions and Capital Gain Harvesting?
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Aus: 0% tax on pension earnings or payments. 0% tax on individual taxable Income to $A28,973.68 after Low Income Tax and Seniors & Pensioners Tax offsets. 0% tax on $A180,000 non-concession contribution per year. Allows $A151,026.32 excess pension and $A28,973.68 income to to be re-contributed to accumulation and commuted to pension each year at 0% tax. Transfer from accumulation to pension capped at $1,600,000 and $A100,000 non-concessional contribution from 2017/July/01.
Now I just need to get an Aussie pension
May I know what is “Aussie pension” ?
Thanks
An Australian pension?
” An Australian pension?” You ask me or answer me? My question was “What is Aussie pension?”
: )
I’m going to guess that it is a pension that people in Australia might have, but we can also ask Google. :)
OK. Then I think I don’t need to ask Google, because I am not in Australia.
Have a good day. : )
G’day mate
I’m in Australia. To clarify, we have super, which your employer makes contributions into each year, and you can make additional contributions to. We also have the aged pension, which is an allowance you are entitled to after retirement age as long as you don’t have too many assets. Many Aussies struggle to get by on a pension, and strive to accumulate enough super to not need to rely on it. I’m a little paranoid, but being 33, I don’t really trust the government to not spend my money before I’m 65 and hit the age when I can access it, and only put the minimum into super.
We do have good tax concessions for low income earners, but once you are over $87,000 a year you get slammed.
Jeremy, thanks again for sharing these techniques. They have definitely helped us save more of our hard earned $. Can I ask how you were able to contribute those larger amounts to your Roth IRA? I was under the impression the limits were much lower.
Hi Chris
The contribution limit to a Roth IRA is $5500. For two of us, that is $11k.
I can also contribute $18k to my GCC solo Roth 401k. This brings the total to $29k.
There is no limit on the size of conversions.
What is this ” contribute $18k to my GCC solo Roth 401k” ? Beside normal Roth IRA $5500 a person’s contribution?
Thanks and Happy Rooster New Year.
If you have a business you can setup a solo 401k for it. Contribution limits are $18k.
Do you also contribute to the solo 401k as the business owner too or just as the employee? Seems like a way to reduce your income or to grow your Roth conversion latter pipeline.
My effective tax rate is already 0% so more contributions to a Traditional account wouldn’t be beneficial. Any excess I just save in my brokerage account for tax free dividends and gains.
And that is a 18K roth 401K limit? Or a traditional 401K limit? I was thinking it was traditional. (Thanks for the well written article / resource!)
Limit is the same.
Jeremy – you are the tax free living Zen Master! Very impressive numbers and great to see that you’re able to do all of this without paying any taxes. I guess that’s because your “W2 income” is 0 and as long as you shelter other earnings in vehicles like 401k / IRA you can avoid the tax? Not sure I fully understand it all quite yet – but very intriguing.
Have you seen our 2015 tax return? It probably explains most clearly the zero tax thing.
We have earned income, it is just low enough such that it doesn’t have a tax burden due to deductions and exemptions.
That’s why I recommend people download IRS File 1040 and just study it. If one has a question, say on line 22, just “google” “1040 line 22” and lots of links explaining line 22. I have done taxes before for VITA, but after doing this last month, I have learned so much.
Good for you too Curry Cracker, it’s inspirational and a learning experience for me. Anyone reading thinking this is some hocus-pocus, it’s not. He’s the real deal. Thank you so much for sharing your knowledge and what you’re doing.
On a similar vein: I’m in a pool league. The room is one of the nicest upscale pool halls in the country. I assume the guy who runs the league either keeps all the fees ($10/person) or splits with pool room owner. Pool room owner counts on people buying food and beverages. Since I don’t drink anything but water, and I don’t eat fried foods or meat, I never order anything. IOW, he’s providing a service with an implied contract, but I don’t choose to contribute. Can this be a similar metaphor for being US citizen but have no skin in the game?
I love it! Using the system to beat the system. My only concern is how these strategies would affect my Obamacare subsidies (or future Trumpcare subsidies). Right now our income entitles us to a $1,900/month premium subsidy. Would the tax savings from Roth conversions and capital gain harvesting be offset by a reduced Obamacare subsidy?
Yes, subsidies would be reduced.
(At least with ACA… who knows what the future holds.)
Such a beautiful thing :) Last year we still had too much income for any tax gain harvesting. But with my income gone, we should be able to do some harvesting in 2017. We don’t get a ton of dividend income because most of our investments are already in pre-tax retirement accounts. Right now we are planning to pay some small level of income tax on Mrs CKs retirement gig income so we don’t have to drain our brokerage accounts for living expenses.
Love the numbers, and best of luck to you and the family in 2017!
Ahhh, the joys of retirement life :)
If I recall correctly, you live in CT? Be sure to watch out for that State income tax on capital gains…
You’re right! I’ll have to keep that on my radar when we decide how much we want to harvest. I think we will have to settle on paying a some level of tax for now. Maybe one day it will be zero. Thanks for the tips :)
Very wise choice to do the Cap Gains harvesting! It looks like the 0% tax rate in the first two tax brackets might be coming to an end. It might be replaced with a (still low) 6% tax if the new administration gets its tax reform through…
Cheers!
ERN
I guess it depends on which part of the new administration comes out on top for tax reform.
Man, I’m quite jealous of the 0% tax rate. Being able to do a roth conversion and take some capital gains is just icing on the cake. I have a W2 so I’m a long way from being able to leverage much of this, but still it just goes to show if you know what your doing with tax law you can really save a lot of money. I currently discount my tax advantaged savings for the purposes of calculating net worth, but the reality is I know if I’m smart most estimates I use will provide a very conservative estimate.
Best of luck in 2017.
Thanks FTF, best of luck in ’17 to you too.
I wasn’t anywhere close to a 0% tax rate while I had a W2 either, unfortunately. Although if I had known then what I know now… I may have become nomadic a bit sooner to get the FEIE.
Don’t know what is ” FEIE” ?
Thanks.
Foreign Earned Income Exclusion
And this is why you are my favorite blogger. Well done, my friend. Keep on killing it. Hope to join your ranks in a few years.
Thanks man! I see you got a new logo too, very nice
I’m paying the IRS over 40%, so at least I can take voyeuristic satisfaction sitting in the sidelines and watching you stick it to them. Nicely done.
We will get a nice $31500 into Roth IRAs this year though, thanks to one backdoor Roth and one mega backdoor Roth. So, small yay.
I was in much the same boat… different tools/strategies for different times.
I never did the backdoor Roths cuz I was happy to let the $ accumulate in my brokerage account with the 0% tax on cap gains / qualified dividends. The Roths are a good hedge if that changes and if you have state income tax though.
Any reason you’re not contributing to the employer portion of the Solo 401k? Seems like that might also increase the amount that you can convert from tradtional accounts into roth! :D
I think this would just be 6 of one, half dozen of the other.
Employer contributions are always Traditional. I could add $1 to my Traditional solo 401k and thereby convert an extra $1 from my existing Traditional IRA to my Roth, but the net result is no change to the size of my traditional accounts. I’m working on reducing their size before I reach age 70.5.
I could enable post-tax contributions which would allow a mega-backdoor Roth conversion, but that would cost me some management dollars and I already pay zero tax on my brokerage account.
Yes but no FICA on employer contribution, this changes things. I’d also like to see you add FICA considerations into all of this.
There is FICA on employer contribution.
Not for c-corp.
Sure. What are your thoughts on creating a C-corp for a part time blog with 1 employee?
You are owning it (as usual) with a capital P.
Not to be one of those nagging internet readers, but do you have plans to release your full 1040 this year as you’ve done in the past? I ask only since the financial voyeur in me loves poring over the details (and they are great learning tools, too!).
If so, thanks in advance. If not, obviously your prerogative.
Thank you kindly :)
I’ll post our 2016 tax return. This year I was a bit more focused on travel and parenting vs tax research, so I’m more excited about what we will share with the 2017 return.
Love all your posts, but especially these types. We have income (greatly reduced from past years when our tax bill was horrific), but enough deductions to pay 0 federal (actually may be as low as -2000 with child credit and IRA decision). Took some gains, but live in NY, so had to balance the state tax burden. 5 more years here to get the kids through school and hopefully on to somewhere else. Was tough to determine proper strategy this year, weighing between the state issues and whether we think the future will allow more flexible options. Took about 1/2 the gains we could have and still determining whether to go deductible or Roth with IRAs (probably 1 of each…). Thanks again for sharing these strategies!
Thanks CF.
With the State tax burden it is definitely a harder set of choices. Sounds like you did a good balancing act.
Since ER three tax years ago we have been in a zero tax situation as well. I will be interested if that changes in 2017 since I decided not to wait any longer and will take SS somewhat early, along with working with the wife’s existing early SS and pension payments. When it gets hairy will be down the road when we have to take RMDs. Regardless, continued success to you and Winnie in your endeavours, my friend.
With a pension and two SS payments, it will definitely be harder to be at zero tax. On the other hand, you have a pension and two SS payments :)
Jeremy, thanks for this great summary! How do you decide how much to convert from your IRA’s vs harvesting capital gains?
Hi Liz
I do Roth conversions up to the value of the standard deduction, personal exemptions, and foreign tax credit. Then harvest gains up to top of 15% tax bracket, which is 0% tax for long-term capital gains.
See 2015 tax return for a detailed example.
Im new to investing outside the IRA I grew during my working years(retired 2010).I was told by the broker that I could take RMDs in a year or two in small bunches. Im reading about 0% interest and need to know more, it sounds like an answer to my anxious concern about taxes.
There are many examples of tax optimization on this site. Just ask if you have any questions.
Way to emulate billionaires, Jeremy :)
Our household is finally in the “we’re all retired” club in 2016 (other than a couple thousand $ earned in January before the wifey quit). Very nice tax picture. I managed to take several thousand in cap gains (offset completely by 2008-2009 cap losses) plus convert $4000+ from trad IRAs to Roth accounts. And make $29000 in new Roth contributions (thereby more than doubling my “roth space”).
We would receive $3000 in refundable child tax credits (aka tax bill of -$3000 or a marginal rate of NEGATIVE 7% of AGI!!) but the self employment tax will consume all of the child tax credits (I’m still laughing all the way to the bank on this one because I feel like such a fat cat high roller when it comes to tax time).
And here I thought the billionaires were emulating me :p
I have some “minimize SE tax” posts coming…
SE tax minimization would be handy :)
Love it GCC! I almost can’t wait to fall into that 0% tax bracket!
Thanks for sharing all these wonderful ideas, and the consistent openness about your finances. You definitely played a role in inspiring my own FIRE!
Happy New Year!
Relatively new to the blog and love all your posts. Just read through your step by step instructions on Tax Gain Harvesting and it was awesome. My income is currently too high for that but I was wondering how this would apply to my young child. I know there are rules regarding a “kiddie tax” and I’m not sure how this would apply. It would be great to have a future post regarding this. I’d love to continue my 529 contributions but that have a separate account for him that can be used on weddings, cars, investing…whatever he wants but have almost no capital gains b/c of tax gain harvesting each year since an infant. Thanks!
I’ve been asked a few times to expand on child based tax optimization… I’ll put it on the list.
The kiddie tax says that if your kid has investment income it gets taxed at the marginal rate of the parents. It would apply here. Having his own assets would also reduce eligibility for university financial aid. It’s probably better for Jr to earn an income and contribute to a Roth IRA, but I haven’t thought it through in detail.
Take that, government (aka Trump)! Blegh. It still messed me up to say it. Well, at least now you have even LESS reason to pay taxes.
I’m wondering how Winnie’s book income gets taxed if she has dual citizenship? Does she have to pay taxes in Taiwan?
Winnie’s book income will be taxed in Taiwan because the income is earned in Taiwan, and also in the US (unless we choose to file taxes separately, as she is not a US citizen.) If we file jointly, any tax paid in Taiwan will offset our US taxes thanks to the Foreign Tax Credit.
Good to know! I still don’t know how she’s able to accomplish so much. OCD or no OCD ;)
I have a day job that doesn’t offer a 401k. I also have an internet business in its infancy that’s not making money . Is it possible to do some sort of 401k with my money losing business? (I’m guessing no.)
You need profit to contribute to a solo 401k. But you can use some business losses to offset earned income, for a time. Google “startup business expense deduction” for an intro.
This is very well presented. I am going to send this to Mrs. Grumby to read. She was skeptical when I tried to explain your process of tax avoidance so this will be very helpful! We are about a year from jumping off of the employment gravy train and have not done any Roth conversions yet due to our income. But once we stop working and begin living on our taxable accounts (at a level that allows us to avoid taxes, or course) we will start converting our tax deferred accounts to Roths as we can.
There is no success greater than cutting through the skepticism of a spouse :)
Hi – Very interesting post. Quick question: in the pdf LTCG Harvest doc you said that “Long Term Capital Gains are taxed at 0% as long as total income is still within the 15% Federal
marginal income tax rate. In 2016 for a Married Couple Filing Jointly, this was $96,000”. But the 15% federal tax rate applied to married joint filers of $18,500 – $75,300 according to my research. Where do you get the $96k limit?
Thanks so much!
. Table 1. 2016 Taxable Income Brackets and Rates (Estimate)
Rate
Married Joint Filers
15%
$18,550 to $75,300
Add in a standard deduction and 2 personal exemptions
Ok so I’m pretty new to the whole capital gains harvesting thing.
In order for investments to qualify for long-term capital gains the investment has to be held for over a year, correct? So how do you harvest capital gains at the long term capital gains rate for the current year investment income?
I’m wondering so I can use this strategy myself!
Yes, 1 year.
Most of your shares will be held for more than one year, except the ones you harvested for gains last year.
Considering you live all over the place, what US state are you ‘associated’ with that has no state income tax? Not a technical term, but when I moved to Denmark I remember having to tell the last state I lived in to F off because of the FEIE, but I assume you have US-based income from the blog…
Washington
Love the extra effort. It’s always struck me how people are so loathe to plan out tax efficiency, but will work so hard in other areas. Steep learning curve at the beginning and then coast from there on.
Congrats on another successful year.
Hi GCC, Great post! Advanced tax question here:
When you contribute $29000 to your retirement account through solo Roth 401k and Roth IRAs, does that increase or decrease the amount of Roth IRA conversion you can do in the same year tax free? I intuitively think of available tax free Roth conversions as (simplistically) the amount of personal exemption plus deductions minus earnings (pre-tax?), I’m not sure how that changes if retirement contributions are made in the same year and would it make a difference if the contribution was to a standard 401k?
There are no restrictions on Roth conversions. You can convert as much or as little as you want at any time, with no limitations.
The taxation issue is not one of contributions to solo 401k or Roth IRA, but one of how much earned income we might have. If earned income is “too high” then you simply can’t do a tax-free Roth conversion. This was the case with us last year.
You could choose to make Traditional contributions to IRA or 401k or HSA, thereby reducing current year taxable income in order to enable larger tax-free Roth conversions. But the net result is mathematically the same as if you just contributed to Roth directly
Thanks so much for all your writing here Jeremy! Your site is such a valuable resource.
I see in this post that you contribute the maximum to your Roth accounts. I also have some self employment income. After your Roth sucks post addendum and comments, I was convinced to leave money in my taxable account rather than move the maximum to Roth accounts.
Would you mind explaining your thinking on this? Thanks!
Absolutely.
In The Great Roth Controversy I make a few points:
– With extremely early retirement, we have 25+ years before traditional retirement ages and normal access to IRAs. Access to earnings is more valuable than access to contributions (which Roth allows.)
– With 0% tax on long term capital gains and qualified dividends, a brokerage account already has most of the benefits of a Roth but with none of the restrictions.
My reasons for contributing to Roth accounts now are:
– We already have enough funds in our brokerage account to fund our lifestyle with tax-free income. We don’t need to save more.
– Tax law changes, and indeed there is discussion in the new administration to tax dividends and gains at 6%. Putting extra money into a Roth is a hedge against those changes.
– We don’t know if we will return to the US in the long term. If we do, and a system of health insurance premium tax credits exists at that time (as they do under the current ACA), then Roth conversions may have an effective tax rate of 25%+. The ACA has effectively killed the Roth IRA conversion pipeline for US residents. Roth contributions provide a source of funds that don’t impact ACA subsidies.
The above factors are all part of the consideration, but the strongest for me is that our dividend/gain income is already enough.
Make sense?
Makes perfect sense. Thanks for such a comprehensive response. It’s very helpful!
I couldn’t navigate this stuff without the wisdom in your posts to help. I’m sure I’m not the only one. You just lay these complex topics out so clearly. You enable a guy with average intelligence like myself to make really smart decisions. I owe you so much.
I wish you and your family the best. Thank you!
Great! Thanks Eric. I’m just figuring this stuff out myself too, the blog just keeps me focused and gives me a bit of accountability to get it right.
Awesome! That’s exactly what we’re planning to do once Mrs. RB40 retires. She still isn’t ready, though. Oh well, someday we’ll get there.
WA is a great state to have as a home base. How do you do that? Do you use a relative’s address or something like that? We’ll probably go with WA when we go travel too. OR is terrible because we have high state income tax.
We were in Seattle, and since we’ve not established residency in any other State that continues to be our residence.
For mail, we use a great mailing service: Traveling Mailbox.
Oregon is definitely a terrible State for taxation… even worse than California.
How about Tallahassee, FL. ? Very nice place and no state tax.
We don’t plan to establish US residency anywhere (I don’t think.)
But my sister used to live in St. Petersburg. It was nice.
Why not Puerto Rico? I heard that you don’t pay any federal income tax if you are a residence.
I already pay zero tax living everywhere
Thanks for the tip on Traveling Mailbox!
My pleasure. We’ve been using it for almost a year now and it is fantastic.
Man, I’m always motivated to try and save on taxes each 1Q, and every year I can’t seem to squeeze any more tax savings legally. Like squeezing blood from a stone.
For example, one can contribute $53,000 in a Solo 401k for 2016, but that’s based off only 20% of yoru operating profit after an $18,000 employee contribution. So that still leaves 70-80% of your operating profit subject to tax. Hence, there’s just no way to pay no taxes unless I make no operating profits.
Maybe one day I’ll get to pay no taxes. But as of now, it’s still a six figure tax bill every year!
S-corp.
Got an S-corp. Still paying $50,000+ a year in income taxes after business expenses, solo 401k for me as a freelancer, SEP IRA for my s-corp. And, I’ve got an accountant too. Hmmmm………
This is a great way to stay tax free. Do you do most of the tax strategies or hire out? IT is imperative to understand where you are financially and how taxes can affect outcomes. Good luck in 2017.
A great 2017 to you too good sir.
As for who does my taxes… I’ll give you one guess ;)
I thought that the maximum IRA contribution whether Roth or Traditional was capped at $5,500/year. Maybe I don’t understand it fully, but how were you able to contribute nearly $60k over the course of 3 years?
Solo 401k limits are 18k.
This article completely blew my mind. Funny thing is I used to work as a retirement specialist and I would have customers convert to Roth IRAs all the time. The receiving company seemed to only be concerned with gaining a new account holder (commission). I always warned them their conversion amount is subject to taxes and it will increase your tax bracket. The advisor would quickly explain away “taxable income” and the retiree would continue with the conversation.
I’m glad I came across your blog. I don’t plan to retire for another 10 years but when I do I will have a plan to not pay taxes.
Hi Jeremy
On several posts you mention the foreign tax credit allowed by the IRS and even suggest the IRS is making it too easy. In my case, I potentially have the following scenario in 2017: earned income (20k), qualifying dividends in US (20k) and long-term capital gains in a foreign bank account (70k from a forced account closure). Being a family of 3, I figure this means not only I will have a very low tax bill in US, but also a foreign tax credit of around 20k (from taxes paid abroad). If the FTC is refundable (no sure here), then the IRS will almost pay my foreign taxes entirely by returning me almost 20k. Is this line of thought correct?
Thanks, PDS
the Foreign Tax Credit isn’t refundable, it can only be used to offset US tax burden. If your US tax burden is zero, which seems to be the case, then the FTC doesn’t help.
However, you can carry forward the credit up to 10 years. You can even create this tax burden next year by doing a large Roth conversion. You can also carryback 1 year if you had non-zero US taxes last year.
https://www.irs.gov/taxtopics/tc856.html
I’ve not done carry forward or carryback, but that is how I read the rules.
A solo Roth 401k for a business? I hadn’t even thought of that!! Genius! And because there are no income limits for Roth 401k’s, this is an elegant solution to a problem I have — which is my inability to convert Traditional IRA to Roth IRA because I’ll make too much in retirement (because pension). But my plan is to set up a climbing guide business after I retire, in which case it now appears I can set up a solo 401k. Related question for you, Jeremy — if the business only makes $18k/year, and I contribute it ALL to a Roth 401k, does the business get to write off those contributions as an expense? If you know.
Getting paid to go climbing is a good gig.
Roth contributions are after-tax, so no deduction. You can make employer contributions, which are always pre-tax/traditional, which will reduce income tax but not self-employment taxes.
If we’re in the 15% bracket and with all deductions we have an AGI of $50k. Could I have sold some appreciated stock for a $25k gain and not paid any tax since capital gains in the 15% bracket are $0 tax?
Maybe. You still have to watch out for State taxes, and any AGI based rebates / credits, e.g. ACA, EITC, etc…
Ya CO imposes taxes, but once we move to TX this summer we won’t have state income tax. Neither of us had health insurance so we sadly had to pay the $1,400 “penalty”. I tried to force this in TaxAct for next year but it wouldn’t work. This is what happens when I try to save a few bucks.
Jeremy, I searched back to this article, because I remembered you talk about Havest gain here. I am wondering are these gains mainly on individual stocks? Or is it the Vanguard VTSAX? I’m curious how often people harvest gain on the vanguard mutual funds, either to catch the so called “melt up”, or to set a new higher cost base. BTW, what do you think of the steven sjuggerud/stansberry reserach? I saw it on facebook, not going to buy his book for sure. But does his theory using the history melt up chart on today’s market make any sense?
We don’t own individual stocks, so all of our harvested gains are on ETFs. You have to hold assets 1 year for the gains to be long term, so it can’t be done more often than that.
re: melt up; trying to use charts to predict the future is a fool’s errand.
Thank you Jeremy. Yes you have to wait for a year to qualify long term gain. So, every year, you do look at the qualified ETFs to harvest the max gain to actual cash in your hands? And then buy more ETFs? Otherwise, the “increased” share value is only on paper, besides the dividends.
It’s always just on paper. I have about 50 Euros in cash, which is also paper.
Haha, good one! I meant that if you bought ETF at $100 per share, now it’s $130 per share. If you don’t sell, this $30 per share won’t be in your pocket, as “actual” money that you can use to buy more or spend. Otherwise if the price drops in the future, this gain won’t be yours. I hope I am making sense of my question and concern. I guess my point is that you want to harvest the gain not just to take advantage the amount of allowed without paying tax, but also to “realize” this gain as your actual earning.
Basically, I have the VTSAX for long term growth and return. And the advice I learned from you, JCollin and MadFientist is that you buy the shares, and forget about it, except to readjust once a year . I read and understand the readjustment of the allocation yearly, but I haven’t read much about harvest gains on a regular base ( once year like you pointed out in this article to take the allowed amount of long term gain or more often on older shares?), so the gains will actually become “real” money in your account. Or do people normally just leave the ETF or VTSAX be as is, no matter it’s on a rise or drop? The only earnings is to get the dividends?
Sorry if my wording is not that accurate, but please do let me know if question is not very clear to you. I really appreciate your sharing your experiences and advice, and learned a lot from you. Just want to dig deeper into understanding and managing my brokerage account. I have about $400k in Vangurad including my 401k, I want to be smart about it, to learn more to make the most growth. Any suggestions and advice are appreciated from you. Thank you again!
Capital gain harvesting only changes your future tax burden. Everything else remains the same.
This post outlines our overall tax strategy, and includes details on harvesting capital gains.
Jr has a small Roth IRA. We don’t use 529s, UMTAs, or UGMAs. The Roth IRA is his, he can use it how he sees fit.
Minors with income file their own tax return and get their own Standard Deduction, which is about $6k today for a single filer.
So if Jr only has an income of $100/year can they still use the $6k deduction to add to a Roth tax free to fill up their 0% bracket?
If anybody has an annual income of $100, they can only make a Roth contribution of $100.
So how do you fill up the 0% bracket for tax free contributions? You’d have to have an income lower than your deduction?
Sorry, Ken, I don’t follow. Are you referring to Roth IRA conversions? In that case, yes, you would need income lower than deductions. Then you could do a Roth conversion for the rest. At 2 years old, Jr doesn’t yet have any tax-deferred assets to convert.
Yes, sorry. Still trying to wrap my head around all of these tax possibilities.
Mr. GCC, do you pay state income tax anywhere? And if not, how did you arrange that?
It’s easy. Just domicile in a state without income tax like FL/NV/TX/WY/AK/etc. And have your mail sent to one of the aggregaters like Traveling Mailbox.
love all this stuff! great info. but…damn risky…you self insure (one big problem and you guys could be a real pickle). on your portfolio…what % bonds vs stocks are you? you have to be stock heavy right to maintain a $75k/yr harvest? cant have much dividends or bond interest to push you > $20k/yr? (i just started reading your blogs..keep up the great work!)
We probably have different perceptions about risk, but diversity is the spice of life, no?
Stock/bond info here.
re: health insurance. I’ve paid $50 for an EKG and a chest X-ray, $3 for a medical exam, and $30 for the dentist. ymmv
You guys are absolutely amazing and thank you for having this blog!!!! I am surprised I only accidentally stumbled across your blog a few days ago.
3 main areas of questions around US tax filing type and ROTH conversions.
1) Is Winnie a US greencard holder or US citizen? Does Winnie still need to file taxes with Taiwan, in addition to the US? Do you (Jeremy) need to file taxes in Taiwan?
My family relocated to Asia for my husband’s job. Since I am a US citizen, I still file my US tax returns, which seems silly since I have been a stay at home mom overseas and have no ordinary income and have not owed any taxes or received and refunds in the last 4 years. My European husband is not a US citizen, hence my US tax filing status is Married Filing Separately. I see that Married filing separately for 2018 can have an income of up to $9,250 for the 10% tax bracket. Does that mean I can earn $9,249 of ordinary income taxfree? Therefore, I can convert $9249 of my existing IRA money into a ROTH for 2018? Then this leads into the next topic….
2) This ROTH conversion thing is very interesting. So can you only do this with traditional IRAs? What about other types of retirement accounts such as Rollover IRAs or brokerage IRAs?
When I was working in the US, every time I changed jobs, my employer forced me to pull out my 401k and roll it over into some other ‘rollover IRA’ account or ‘brokerage IRA’ account to avoid penalties. This has left retirement money in 3 random accounts. In my attempts to simplify all my scattered bank accounts, I stumbled across your blog. Anyhow, this is the first I am reading about converting traditional IRAs into ROTH accounts tax free. Since I have no income for the past 4 years, I am interested in converting as much of my existing IRAs into ROTHs. Although I am now kicking myself for not knowing about this sooner where I could have converted the max amount each year for the past 4 years. Is there a maximum amount that can be converted from an IRA to ROTH each year?
Also, how do I go about converting these things? Do I ask the company that I would like to open the ROTH account in to just send some sort of form for me to fill out that will allow me to transfer money from the other brokerage (or rollover) IRA? To clarify, I would prefer to consolidate all my retirement money to a Vanguard account that I can manage easily online without having to talk to an advisor. Ideally, I would convert this all into a Vanguard ROTH account. My other retirement accounts are in managed brokerage IRA (stupid fees!!!), a rollover IRA that has funds that have literally earned nothing after sitting in there for 15 years. How do I go about starting a ROTH conversion? Can I only convert within the same company or can I switch retirement companies without penalty or having to pay taxes on transferring these funds across banks?
3) And not to complicate things, I do have regular investment brokerage accounts that earn dividends and capital gains, etc. I feel like the amounts are rather nominal at this point (less than $1000), but will that affect the amount I convert my IRA into ROTH taxfree?
Not sure if these questions are getting too specific or confusing, but I am rather clueless in these investment account things and the logistics of simplifying my accounts. And apologies if you already covered these topics in other posts as I have only read a few of your posts thus far, but any direction on where to find them would be very helpful, too! In the meantime, I will continue reading up on all the posts of your blog!
Thank you!
JaY
1 – no, not a US citizen or green card holder (anymore.)
1a – you can claim the standard deduction ($12k) so can do Roth conversion up to that amount tax free. You an also harvest long term capital gains up to an additional ~$40k.
2 – Rollover IRAs and Brokerage IRAs are Traditional IRAs.
3 – No, but it will reduce the amount of cap gain harvesting you can do.
See overview of all of this here.
Thank you for the response and clarifications! I am going to get started on that Roth conversion. My husband had to give up his US greencard and we could not go further on that path due to our overseas residence, but think it worked to our favor. Anyhow, will keep reading your blog for more info. Thanks again! JaY
No problem. Be sure to look at your country of residence to make sure they won’t tax your US conversions or gain harvesting.
Jeremy, please keep up the amazingly inspirational work. We’re FIREing back to the States soon and will be getting to grips with the immense tax optimisation problems/opportunities created by the byzantine US tax code, ACA, IRAs, State tax, et al.
Jeremy, I read in a couple places that you can’t flip Vanguard index funds on the same day and you have to wait a month or two. Is that true? If it’s not and you can just execute a sell/buy of the same fund in 24 hours, is there a pro/con to doing it before or after a dividend payout?
Hi Jeremy! Just finding you now through JL Collins and ChooseFI Podcast….although I’ve been doing the frugal life/traveling/investing for 15+ years now before I ever heard of FI!
I quit my job in 2006 to travel around the world. :)
Anyway, I appreciate this next level stuff and am voraciously reading about Index funds, Cap Gains harvesting, etc. I need to unload some old funds that have high fees (some with loses but most with large gains as I’ve held them a long time).
I do still make income on my blog and other freelance work, but since you wrote this (and that download) haven’t the tax laws changed and cap gains have their own tables (15% for over $39,376)? I think it’s harder to get that 0 tax rate now, am I correct?
Do you have any new posts or info on this? Trying to figure out what’s best for me now. Thank you!
Living the dream, Lisa! :)
The tax laws are still the same.
On our 2017 tax return I use the FEIE, harvest some capital gains, and do a Roth conversion, all while paying $0 in income tax.
Thanks Jeremy!
I know that in 2018, after the The Tax Cuts and Jobs Act (TCJA), the gains are no longer tied to the ordinary income brackets.
https://www.marketwatch.com/story/your-simple-guide-to-the-new-capital-gains-tax-rates-2018-04-16
Since I file single, am I right in saying it’s harder for me to stay at 0% bc I’d have to keep my taxable income under $39,375, which also includes capital gains? I’m also finding contradictory info…are capital gains taxed progressively? SO I’d only pay 15% on any income that goes above $39,375? Thanks again!
Yes, all correct.
Taxable income is after applying the Standard Deduction and other deductions, e.g. 1/2 of SE taxes and SE Health Insurance. Std deduction for single filers in 2019 is $12,200. So if less than ~$50k total income for single filers then some tax-free cap gain space to work with.
Married filers get 2x that amount, so perhaps easier if only one is working but equally difficult if both are.
Tax on all income is progressive. Qualified dividends or long term capital gains above ~$40k taxable income are taxed at 15%, below that threshold at 0%.
The fact that it is possible to live with a 0% tax rate makes me extremely relieved. Knowing it’s possible to save thousands of dollars of my income can possible help e with student loans. Just how difficult of process is it to moving money from a traditional IRA to a Roth IRA?
It’s a simple transfer like moving cash between any other accounts. Your banks will send you relevant tax forms.