2019 was our 7th full year of this thing we do. It’s been an incredible ride – we’ve traveled, adventured, and procreated, with the best yet to come.

We’ve also done a fair amount of tax optimization, paying little tax each year while taking steps to minimize future taxes. How effective have we been with our tax optimization strategery?

Do these optimization efforts actually work, or is this just fantasy? (Caught in a landslide, no escape from reality…)

These past 7 years I’ve worked to minimize our current and future tax burdens, legally and respectfully. Roth conversions, Capital Gain Harvesting, zero-tax Roth contributions, and geographic arbitrage (Foreign Earned Income) 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
2019: $10,288 on $206,113
Total: $11,471on $843,707 (1.4% effective tax rate)

Not bad!

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
2019: $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.) Still, always nice to have the option.

Foreign Earned Income

Because we enjoy life in places outside the United States we are able to claim the Foreign Earned Income Exclusion, paying zero US income tax on any earned income we happen to make.

2017: $45,700 of foreign earned income saving $5,926 in tax
2018: $57,775 of foreign earned income saving $6,552 in tax
2019: $52,480 of foreign earned income saving $5,909 in tax

Total foreign earned income: $155,955
Total tax: $0
Total tax savings: $18,387

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 (US income only.)
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 $126,025 to Roth accounts over the past 7 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
2019: $19,320
Total: $126,025

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 7 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 7 years, I’ve harvested $274,316 in long-term capital gains.

$175,452 of this was done completely tax-free. If I had done this while working, we would have been taxed 15% or more with a tax bill of $26k+. Instead, we get to keep that money (and future growth thereof) for our own use.

The remaining $98,864 was taxed at 15%. This was done intentionally to avoid paying 18-22% later (or worse, paying $12,000 extra for going over the ACA subsidy cliff.)

With this higher basis, I’ve also increased 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
2019: $101,259
Total: $274,316

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
2019: $7,979
Total: $34,678

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 $34,678 paid to date will give us an extra inflation-adjusted $259/month in about 17 years. That’s nothing to sneeze at!

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


In 7 years, we were able to harvest capital gains of $274,316, convert $36,511 of our Traditional IRA to a Roth IRA, and add $126,0205 to Roth accounts. We’ve also earned $155,955 of foreign income.

This was all done nearly income tax-free (1.4% effective tax rate), 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 sweet.

Well, what do you know! This stuff works!

For more details, here are our complete tax returns for the past 7 years: 20132014201520162017, 2018, & 2019.

Have you had success with early retirement tax optimization?

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