The end of 2018 marked the completion of 6 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 6 years been in terms of implementing our tax minimization strategies? Are Roth IRA Conversions, Capital Gain Harvesting, and nomadic strategery 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.
These past 6 years I’ve worked to minimize our current and future tax burdens, legally and respectfully. Roth conversions, Capital Gain Harvesting, and zero-tax Roth contributions are all part of the tax optimization arsenal.
We’ve paid a small amount of tax on occasion, sure, but it helps to look at total tax burden as a matter of perspective.
Even with incomes of $100,000+ per year, our income tax bills have been fairly reasonable:
2013: $0 on $91,752
2014: $0 on $95,654
2015: -$5 on $102,663
2016: $1 on $101,519
2017: $0 on $109,140
2018: $1,187 on $136,866
Total: $1,183 on $637,594 (0.2% effective tax rate)
Not bad! But it gets better.
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
2018: $0
Total: $36,511
Good news! The Roth conversions from 2013 & 2014 now meet the 5-year seasoning rule. We can withdraw that $17,772 at any time, tax free and penalty free (but we won’t.)
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 (even while using the FEIE.)
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 $106,705 to Roth accounts over the past 6 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 If need be, these contributions can be withdrawn at any time, completely tax-free and penalty free.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.)
2013: $0
2014: $1,846
2015: $29,000
2016: $29,000
2017: $22,574
2018: $24,285
Total: $106,705
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.
It’s interesting because the value of our Roth accounts before we “retired” was exactly $0.
Capital Gain Harvesting
Since the stock market has been generally headed northward these past 6 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 6 years, I’ve harvested $173,057 in capital gains. If I had done this while working, we would have been taxed 15% or more with a tax bill of $25,959. Instead, we get to keep that money (and future growth thereof) for our own use.
It turns out I should have been a little less aggressive in 2018, as our $1,187 tax bill is related to realizing a smidge too many gains, which means I paid a $0.7% tax rate on these $173k gains.
With this higher basis, 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
2018: $25,850
Total: $173,057
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
2018: $9,663
Total: $26,699
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 $26,699 paid to date will give us an extra inflation-adjusted $199.43/month in about 18 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.)
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 6 years, we were able to harvest capital gains of $173,057, convert $36,511 of our Traditional IRA to a Roth IRA, and add $106,705 to Roth accounts.
This was all done nearly income tax-free, and growth on Roth IRAs 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, 2017, & 2018.
Have you had success with Roth Conversions and Capital Gain Harvesting?
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Can you please clarify, “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 now take the standard deduction… If we move $22k from traditional IRA to Roth that would be tax free – with no concern for income level?
No, not with no concern for income level. But if your ordinary income is less than the standard deduction plus other deductions, and total income is less than the 0% tax rate on qualified dividends / long-term capital gains, then sure.
The best way to clarify this is by looking at an example. See our 2014 tax return where I walked through one in detail.
I’m curious if your total portfolio size increased since retiring. Can you give a % increase in value without counting blog income?
If the last 6 years were a bear market, what would you do differently?
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Have you considered mega backdoor Roth? You would probably have to get a third-party administrator to do a “custom” plan, but I can recommend Nora Bethman from personal experience. As a plus, having your own plan could enable regular backdoor Roth if your income gets too high for regular Roth contributions.
Yes and no. Yes, it’s probably a good idea, but no, I haven’t bothered with it. I think what I’m doing currently is 80% of good enough. (not the best answer, I know.)
Sure, it depends on your priorities. Though it would be cool if you had 68K of Roth contributions this year :-) . But then again, just as you shouldn’t let the tax-tail wag the dog, you probably shouldn’t let your internet cred be the prime determinant of your financial decisions.
Yes, which could be beneficial for somebody with the intention of moving back to the US…
Moving $50k more into a Roth this year would cost me $2,632 ($52,632 * 1/3 cap gain * 15% tax = $2,632.)
Yes, it would cost you if you sell assets specifically to move the proceeds to a Roth vehicle. But if you do it as part of the capital gains harvesting you said you were planning on doing in preparation for repatriation, then the additional “marginal cost” of the Roth move would be zero. The plan does need to be established before year-end, but contributions can be made through April 15 of the next year. And from my experience, it does take a while to get the plan documents in order, so if you are thinking about it, over the next few months might be a good time to reach out to Nora.
Yes this stuff works! I wished more people would learn how to do their own taxes to learn this very useful and economic skill. I have always done my own taxes since earning money in the US in 1999. No federal or state income tax (but some SE) for us either since FIREing in 2015.
Well played, sir.
You guys killed it over these last 6 years. I assume the main key is living outside of the US, right?
We haven’t done as well with taxes. We paid a bunch over the last few years.
Hopefully, we’ll be where you are someday.
Good work.
It’s more being outside the ACA than being outside the US, with the exception of these last 2 years claiming the FEIE.
Congrats once again Jeremy. You are definitely far along the efficient frontier of optimizing to a zero/near zero tax rate. Advanced degree material. Although you may want to be careful publicizing this. There is a certain political group in the US Congress which would rabidly seize upon your example of ‘rich people’ not paying taxes.. You are just at the right income level/composition to take advantage of the tax code. As for me, not so much. My effective tax rate remains stubbornly in the 40%+ . With a 7 figure W2 income it is quite difficult to get lower, Now retired and a Fl resident, but with mid 6 figure unearned income the best I can probably do is around 25%+ ETR. Sure, I could shift my 8 figure portfolio all into muni’s to reduce my tax rate, but that would be putting the cart before the horse in terms of reducing taxes paid at the expense of good portfolio management.. At the current rate and efficiency level you are on track to become very wealthy indeed…
Nice work Jeremy.
I do occasionally worry about a FICA like tax hitting the ‘unearned income’ bucket like capital gain/dividends one day. Seems like the latest headline is Medicare will run out of money by 2026, but then again, that always seems to get extended somehow without explanation. So, I usually go back to drinking my coffee knowing we can adjust to just about anything.
It’s kind of already happened, albeit inefficiently. See this.
Congrats on your financial success!
I would vote for those politicians, and would consider running as one.
I was waiting to see how you would reply to that comment and I’m not disappointed. I enjoyed your response. Fellow Minnesotan living elsewhere.
Thanks for another great post! You mention that you can still contribute to a Roth Solo 401k with business income and take the FEIE credit…? I had no idea! Are there any stipulations?
I set up an LLC two years ago & took the FEIE. Paid $0 in taxes but contributed $0 to retirement funds. I set up my Roth Solo 401K this year but did not take the FEIE as I was in the USA for a longer period. However, I purposely didn’t pay attention to dates as I wanted to contribute more to my Roth IRAs…. haha I guess I could have stayed in Thailand longer! Any posts directly related Roth contributions and taking the FEIE?
I plan on staying abroad for much of the next couple years so this could be a game changer. My retirement funds are lagging as I haven’t really worked in the USA except for all of high school & college so I’m trying to catch up while still keeping up on my travel and living abroad. :)
Always consult with a tax attorney… I’m just some random guy on the Internet with zero credentials or expertise.
I haven’t written about this specifically, but here are a couple of relevant comments:
For.
Against.
Awesome thanks! Discovered your blog from the first post a couple years ago…:) I’ll check out the second!
YOur thoughts? I’ve owned BMY for many years, so lost of cap gains taxes to pay if I keep and sell it. WHat hapens if I gift that to a child? SHe’s in a lower tax bracket.
Google “kiddie tax”
I’m still in the learning phase and I can’t seem to wrap my head around capital gains harvesting and exactly how to do that. Also, tax loss harvesting. I’ve requested your template but is there an article or something where it can be explained in a super simplified and dumbed down way? Also, why do you now contribute to a Roth instead of a traditional IRA? Is it because you’ve retired? Thanks!
The Bogleheads Wiki is often a good source. Here is their article on capital gain harvesting.
IRA contributions are often a choice of what tax rate to pay. I could save 15% now by contributing to Traditional instead of Roth, but would probably pay more than 15% on withdrawal due to other income.
Did you ever know that you’re my hero,
And everything I would like to be?
I can fly higher than an eagle,
For you are the wind beneath my wings.
Seriously, you are my hero.
Awww, thanks bro
I totally love this. Very inspiring. Your writing on taxes has influenced how I think about taxable and non-taxable accounts considerably. Thanks!
It’s an honor and a privilege
Still hovering income at 138% FPL to maximise ACA subsidies and CSRs – these benefits are equivalent to 3/4s our income (Silver PPO/ $150 Family deductible/ 2,250 out of pocket max) So, no IRA>Roth conversions. Self employment taxes, yes – but with the new standard deduction, we get to play in the 0% bracket. There is still room from some small Individual Roth contributions, but I remain concerned they will mess up my MAGI – which is what the ACA subsidies are based upon – so I’m being extra cautious and skipping them. (We don’t want to fall below 138%FPL and drop into Medicaid (Illinois) – we played that game one year and the stress of coverage uncertainty was not worth it!).
Wouldn’t Roth conversions help make sure you didn’t drop below 138% FPL? Roth contributions don’t change your MAGI at all.
Yeah, roth conversions add income – but we need to keep income as estimated for the ACA subsidy application. Reconciling a bit higher is ok – clawback/penalties are not terrible – just don’t dip below 138% and risk being shunted to medicaid.
Roth contributions are fine – we just didn’t feel like swapping cash to fund them this year. I know, not rational – just vestigial inhibitions about keeping a cash buffer and not considering “retirement” roth $ as available for emergency situations. We’re FI and yet still accumulating, but I guess we’re gonna spend it all down at some point… right? Aiming to better optimize next year…
Jeremy, how does your Blog income affect your capital gains 0 tax rate? I figured you can’t have any “earned income” if you want to get the full 0% taxes benefit under 78k passive income limits? Do you still pay zero tax on your passive income and a seperate business tax on that blog income?
Did you see our 2018 tax return? I think it addresses this point?
I remember reading your “never pay taxes again” and I’ve been hooked ever since.
Although I love your technical posts, it’s been so cool seeing your life transform. You’ve done so well these last 6 years and I can’t wait to see what the next 6 bring.
Thanks man, it has been a fun ride. It seems more and more like we are evolving towards normalcy, just without having jobs.
Your posts on taxes are very helpful. We travel full-time and have no permanent residence anywhere. I just did my taxes for the first year on the road, without physically receiving any statements nor carrying any paperwork with me. I used TurboTax on my iPad (rather than on a PC as I used to) and used the tax statements that were sent to my mail dropbox online after they had scanned them. It was a new experience for someone used to laying out stacks of paper on a desk to organize the process. It worked great.
I am not quite to where you are in minimizing taxes, but working on it. Thanks for all of the food for thought.
The paperless office is real :)
Wow, those are some impressive numbers over six years. It makes me realize how much more I need to learn about tax optimization before I pull the retirement trigger in a few years. A good focus during the latter part of our accumulation phase. Thanks for the inspiration!
This is 80% of what you need to know.
There is a lot of time to learn stuff once you stop working. Most of what I know about taxes came after retiring.
“Self-Employment taxes”, “Total: $26,699”: Why exclude?
Aus pays a means tested Age Pension funded from consolidated revenue and Medicare funded in part by a income tested levy.
My tax rate 1.5%.
Mostly because the tax code distinguishes between the 2. The SE taxes are more of an involuntary annuity purchase.
I was not able to escape having to write a check to the US Treasury when I did my taxes this year, unfortunately. With two SS checks, the wife’s pension, converting some monies from a traditional to a Roth IRA, and having a more successful year with the options trading in a taxable account, I could not escape it this year. I’ll have to see how the trading goes in 2019 before converting to the Roth account, leaving that for years that I have less success. Funny how people can “complain” about being successful at making $, like I am here. Best of luck.
It’s almost always better (financially) to earn a dollar and pay tax on it than to have no dollar at all.
Congratulations on your financial success!
Thanks for sharing and this is super helpful! I have a question about the mechanics of your Roth IRA conversion. On line 15(a) in your 2017 tax returns, you said you had $12,700 taxable IRA distribution, but where on the form did you say these $12,700 are going into a Roth IRA/401K? Is this just a simple journal entry with your IRA custodian/401K administrator?
You use form 8606.
Fellow Taiwan-based expat here. I love your site Jeremy!
What are people’s thoughts on paying a 15% marginal rate to put money in a Roth 401(k) which my employer just began offering vs. taking the same income tax free (sheltering it FEIE) and putting it into stocks now but paying a steady 15% on dividends while I hold it and also the same amount (or more) on any gains in 10-20 years. I assume the calculation would be whether I think the capital gain + dividends would exceed 100% of my initial investment (discounting for inflation etc.) but am I missing anything?
Does anyone know if you can convert a rolled-over traditional IRA (from past employers) to a Roth. I’ve never received a satisfactory answer to this.
An IRA can be converted to Roth. A rolled-over IRA is an IRA.
Paying 0% is better than paying 15%. Consult with your CPA and corporate HR about the possibility of contributing to Roth 401k while claiming FEIE.
I’ve been kicking this idea around lately that folks, like yourself, who are successful with retirement through investments aren’t really retired but instead, consuming info and applying their skill to make money and avoid taxes (where possible). How much time, in a given year, do you spend actually managing your program vs. having to research for what you post?
Probably less time than some people spend kicking ideas around
In my case I personally spend an hour or two/day dealing directly with my investments and another hour or two/day reading general information regarding investing, such as the book “Irrational Exuberance” by Robert Shiller, or the Wall Street Journal. I don’t mind as I find that sort of thing interesting. Before retiring and traveling full time I had jobs (or a business) I just did for money, that I didn’t find especially interesting. I feel exceptionally lucky to spend time doing something I find interesting in whatever time I choose to devote to it, anywhere I am in the world (right now I am overlooking a beach in Bali). It is also always on my mind that if I lose my nest egg I would have to go back to one of those jobs (even if it is my own business) and do something I don’t find interesting, be at a certain place at a certain time, and answer to someone, somewhere. Sadly, I don’t think is is easy to find someone else you can trust to manage your money for you and I feel most comfortable knowing where every single dollar of my net worth is and why it is there, because I personally put it there. Note that if you don’t find investing interesting there are ways to automate most of the process, though it is always necessary to spend some time dealing with the financial portion of life.
I might spend an hour or two / YEAR.
That is pretty amazing since I spend more time than that just fling my personal taxes each year. On the other hand, we have been fully-retired for more than six years. Our website, whereintheworldaremikeandjan.com, is only to tell friends and family where we are and what we are up to and to assist and encourage others interested in pursuing the same lifestyle. We make no money on it and have made no earned income at all during that time. Over the last six years these are the number of hours we have spent on various activities:
Dealing with employees = 0
Dealing with clients or customers = 0
Collecting accounts receivable = 0
Paying accounts payable = 0
Dealing with self-employment taxes = 0
Dealing with business taxes = 0
Doing anything in an attempt to earn money outside of passive investing = 0
But I think we both make the same point. It is all about choices and doing what you want from wherever you want to do it. We both achieve that goal in different ways. As I have said before in previous posts, I am glad you do what you do and appreciate the information you provide, especially with regard to taxes. Your website has provided me with lots of food for thought. I hope you continue for a long time.
Yessir, same point – do what you like. Some income might materialize while doing things you like, but it is just extra.
You’d file personal taxes whether retired or not, so that is probably a safe/approved activity of the so-called Internet Retirement Police… (or at least I assume so.)
I run a fully passive portfolio with a sprinkle of tax minimization on top, so I just do one or two trades per year. Only takes a few minutes.
I like to think of it in the context of other daily retirement activities:
– sleep: 8-9 hours
– naps: 0-2 hours
– eating or preparing food – 2-3 hours
– biking or swimming – 1-2 hours
– reading – 1-2 hours
– playing guitar – 1-2 hours
– playing with kid – 1-2 hours, although often overlaps w/ biking, swimming, eating, guitar, reading, etc…
– showers – 1 hour
– blog related – writing, replying to comments – 1 hour
– sitting on the crapper – 0.25 hours
– managing our portfolio – 0 hours
– checking stock prices – 0 hours
– doing taxes – 0 hours
Living outside the US, is your tax home still in the US? How do you avoid paying tax on this income from the POV of the tax code of the country you’re in?
You could either spend time in several different countries, or live in a tax-friendly country that has no income tax or doesn’t tax overseas income.
Hi! I have been following your blog for a while now. I have a question: how do you deal with the taxes in the place you are a resident of?
The reason I ask is because the wife, the baby daughter arriving next month and I are currently living in the US (G4 visa, non-resident alien, very specific tax situation), but probably leaving by late 2021. We left once already for 2.5 years of traveling, it was awesome. I didn;t pay any taxes then, as I was effectively a resident of nowhere. But next time around we will probably stay put in order to create a little life somewhere for half a decade or so before picking a new place. Yes, we are slow travellers.
We love Spain (did the Camino pilgrimage twice already), we are both fluent, but I dislike the Spanish tax rules, so will probably figure out a legal way to decrease taxation (they have taxation on wealth, and I want to figure out if an offshore trust or Sociedad Anonima in Panama would be a legal way of doing it).
Big text, I know, but I wanted to give a bit more context to my question: how do you approach the tax issue from the perspective of where you live (as opposed to the US, where you are a citizen).
Many thanks for writing your blog, I read all articles when they ping on my e-mail!
ok, nevermind my last comment. I jumped to the bottom and only now saw your reply (with a post link nonetheless) to the last published question.
So, Taiwan is your specific “secret” ingredient. Got it.
Thanks for writing, and thanks for all the information you share.
Best,
L.
Try Portugal.
Yeah, I know. We spent a reasonable amount of time there during our 2.5y mini-retirement/sabbatical/adventure. It is nice, but it feels too sleepy for me. Plus, the language is not exciting, it is just a version of my own. But it might have to do. Thanks for the suggestion, though. We still, with a bit of luck, have another 2 years to put a strategy together.
Yep capital losses to offset future gains…. = you lost money in order to save on tax….
Well played. Not!!!!!!
Aside from tax free income in retirement, paying taxes means you are making money. Why would anyone burn a dollar only to get 30c back? Unless its to boast about how little tax they pay.
And finally if its truly about minimizing your taxes… donate to your favorite charity! Donations are nearly always 100% deductible and you will be deciding where your money is spent rather than the government deciding fro you!
Hi Jeremy,
I am new to your blogger and i am fascinating by the idea tax free living.
I just finished reading “Template: Harvest Long Term Capital Gains”.
some of the points in the article cannot understand.
1. what is the point of selling 500 shares of VTI and buy back ITOT?
2. why target $27500?
3. I understand the idea of transferring fund to Roth to buy Stocks and whatever capital gain generated by Roth is tax fee, which is great idea.
I am from Taiwan and non-citizen of US.
do you have suggestions or idea if we citizens from Taiwan can do the same?
Thank you so much for reading my questions.
There is no capital gains tax in Taiwan so you can basically disregard all of this
This is very helpful. I just did a hypothetical tax return for my friend’s mom who takes a $29,850 RMD from her IRA and would like to harvest some capital gains. I was confused about whether she could harvest $40,000 of capital gains before being taxed, or whether she could harvest $40,000 – her RMD – std deduction. It is the latter. So, if one wants to realize long term capital gains, one can do so as long as the sum of their wage income (immediate wage or delayed wage from RMD) + capital gains < $40,000 for single filer.
You may have made this clear above, but if not for other readers, that is the equation. An outcome of this equation is that if your wage income – STD deduction is < $40,000 and you have capital gains, it makes sense to harvest them like Mr. GCC did above, but only to the point where your tax rate is zero. This will require a little work on your part gentle reader.
Thanks again GCC for bringing up this point and for hosting a great website.
b
It’s neither
$40k-ish – her RMD + Standard Deduction
I wrote a calculator to help with this type of scenario: Federal Income Tax Calculator