The end of 2017 marked the completion of 5 full years of early retirement and world travel.

It’s been a fun ride so far… we’ve traveled a bit, had a few good meals, and taken many naps.

But how effective have these 5 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 – 2017, we will have an effective income tax burden of negative $4. (Yes, the IRS paid us $5 in 2015 and we paid $1 in 2016.)

By itself a zero tax burden isn’t that impressive… I hear a Presidential candidate once claimed 47% of all Americans do the same (which is true only if you ignore payroll taxes), 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 is the process of moving $ from a Traditional IRA to a Roth IRA, a taxable event. However, the Standard Deduction gives everybody some amount of 0% tax bracket. If the Roth conversion is smaller than total deductions…. it is tax free.

We have enjoyed these tax free conversions to the sum of $36,511.

2013: $12,028
2014: $5,744
2015: $0
2016: $6,039
2017: $12,700
Total: $36,511

Good news! The Roth conversion from 2013 now meets the 5-year seasoning rule. We can withdraw that $12,028 at any time, tax free and penalty free.

Roth IRA Contributions

Because we’ve earned some income via blogging these past few years, we’ve been able to make normal Roth IRA contributions.
Additionally, business income can be contributed to a Roth solo 401k.

Without this income we could increase the size of our Roth IRA conversions, resulting in the same taxable income and same $0 tax bill. In that regard, earning income hurts our long term battle with the RMD.

In total, we have been able to contribute $82,420 to Roth accounts over the past 5 years. If need be, these contributions can be withdrawn at any time, completely tax free and penalty free. (Roth 401k would first need to be rolled over to a Roth IRA. Source: 2019 Quickbooks Self-Employed Review: What You Need to Know)

2013: $0
2014: $1,846
2015: $29,000
2016: $29,000
2017: $22,574
Total: $82,420 (Roth 401k: $54,000; Roth IRA: $28,420)

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 $118,931, the actual value of these Roth accounts has grown to more than $150,000. This was easy to figure out, because the value of our Roth accounts before we “retired” was exactly $0.

By the time we reach traditional retirement age, we will potentially have $600k 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 5 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 just functions as a basis reset.

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.

Over the last 5 years, I’ve harvested $147,207 in capital gains. If I had done this while working, we would have been taxed 15% or more. Instead, we get to keep that $22,081+ (and future growth thereof) for our own use. This increase in basis is now tax-free forever, and even increases the likelihood of being able to harvest a capital loss in the future if that is beneficial.

2013: $44,197
2014: $46,725
2015: $23,737
2016: $28,800
2017: $3,748
Total: $147,207

Any future growth would still be subject to taxation if/when we sell, but we can always harvest more gains next year.

Self-Employment Taxes

No review of tax optimization would be complete without mentioning Self-Employment taxes. All blog income is self-employment income, which is taxed at 15.3% (or slightly lower since half is deductible.) People who work a W2 job pay a similar tax, with the employee paying half and the employer paying the other half.

So… because we violated the 1st Principle of the Never Pay Taxes Again philosophy (Choose Leisure over Labor) we have to pay this “tax.”

2013: $0
2014: $281
2015: $5,146
2016: $3,965
2017: $7,644
Total: $17,036

Normally a tax is a tax, you pay it and the money is gone forever. But these payroll taxes are a little different… every $64.26 we pay in SE taxes increases the amount of Social Security income we will receive by $0.48 ($0.32 for me and $0.16 for spousal benefit.) Our $17,036 paid to date will give us an extra inflation-adjusted $127.25/month in about 20 years. That’s nothing to sneeze at!

In other words, this is more like a (slightly involuntary) annuity payment than a tax, as all of this money will be returned to us. (For more details, I calculated the ROI here.)


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 5 years, we were able to harvest capital gains of $147,207, convert $36,511 of our Traditional IRA to a Roth IRA, and add $82,420 to Roth accounts.

This was all done completely income tax free, and all of these dollars will be tax free forever. Sprinkle in a little SE taxes and corresponding higher Social Security income, and this tax deal is still pretty decent.

Well what do you know! This stuff works!

For more details, here are our complete tax returns for 2013, 2014, 2015, 2016, and 2017.

Have you had success with Roth Conversions and Capital Gain Harvesting?

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