tax gain harvest and Roth conversion ladder in early retirement

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tax gain harvest and Roth conversion ladder in early retirement

Post by btownguy » Mon Feb 12, 2018 11:43 pm

I'm still a good 10-15 years away from early retirement but I'm trying to wrap my head around what my withdrawal strategy will be once I get there.

As I understand it, if I have zero earned income in my first year of early retirement I can sell funds in my taxable account with $77,200 in long-term gains (married filing jointly) and pay zero taxes. I believe this is called a tax gain harvest.

Alternatively, I believe I could do a conversion of the same $77,200 from my traditional IRA to a Roth IRA and have those funds available as income within 5 years regardless of my age. Is that correct? Doing this for a sequence of years is called a Roth conversion ladder?

Basically my situation is this. I've got significant funds both in a taxable account and in traditional IRA's. I want to retire early within 10-15 years which would leave about 10-15 years of zero earned income before I start taking Social Security at 67. What's the best strategy when it comes to tax gain harvesting and Roth conversions?

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Re: tax gain harvest and Roth conversion ladder in early retirement

Post by Rom1b » Tue Feb 13, 2018 8:15 am


Cant say too much, but there are 'retirement' calculations you could Google (i dont have a link with me).

Also about the taxes cant help you too much there, maybe somebody else and there are articles in another sub-section.

How much do you have invested ? these 77k ?

I think they say the 4% rule is a good approximation: ie. you can 'withdraw' safely and sustainably about 4% of your total capital per year (if it is invested in a sustainable way too).

I recommend good summary articles in the Investment Theory forum subsection, on top (so called 'sticky' threads), like the one about the 3-Funds or the Collective Thought ones; theres probably a part about retirement and withdrawals
Dr Bernstein - If You Can / free PDF, google it | 3Fund Portfolio | CollectiveThought

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Re: tax gain harvest and Roth conversion ladder in early retirement

Post by kramer » Tue Feb 13, 2018 8:22 am

You are correct and you also get a 24,000 standard deduction on top of the 77K. As to how you proceed with IRA to Roth conversions and tax gain harvesting, it will be necessary to model your marginal tax rates in the future, particularly after you and your spouse take Social Security.

I found the MarginalRates spreadsheet freely downloadable from Bogleheads user #cruncher web site particularly valuable for this. (I don't have the link handy at the moment)

Some things to keep in mind:
* When you or your spouse die, the survivor will be faced with higher tax rates due to brackets (usually) being halved
* When you or your spouse die, the survivor may get the deceased assets with a higher tax basis
* The brackets for taxation of Social Security are not inflation-adjusted (personally, I assumed this state of affairs will continue and modified the spreadsheet)
* If you have a bequest motive, that can change your strategy, so it's good to have thought that through
* Individual Tax rates are scheduled to go back up in 2026, but we don't really know what will happen then
* Look up the IRMMA income limits -- basically, if you make too much money, your Medicare rates go up 2 years later (e.g., a big income year when you are 63 will raise your Medicare premiums when you are 65). I think there is no effect for MFJ couple if income below 170,000

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Re: tax gain harvest and Roth conversion ladder in early retirement

Post by eli80 » Tue Feb 13, 2018 9:00 am

btownguy - If you are 10-15 years from retirement, my suggestion is don't worry about it now. I am a year or two from retirement now and a couple of years ago I drove myself crazy looking for an absolute answer. The problem is there is none.

There are too many assumptions to be certain. What will tax rates be? What will the market do over time?

You have to assume what how much your portfolio will grow. If you do Roth conversions early on and the portfolio doesn't grow, it is possible you paid a higher tax than you would have if you waited. In your taxable portfolio, if you pay the capital gains tax and you end up leaving something behind when you pass, you may have paid a tax when your beneficiary would have received a stepped up basis.

With the change in tax rates, I am looking to stay in the 22% or 24% bracket. Not much of a difference and I don't want to pay a bunch of taxes early in order to avoid a 2% marginal change. In running some of the financial calculators, I concluded that Roth conversions help your heirs but really don't boost your allowable spending in retirement. I will probably do both tax loss harvesting and Roth conversions early on in retirement. Maybe alternating each year.

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Re: tax gain harvest and Roth conversion ladder in early retirement

Post by Svensk Anga » Tue Feb 13, 2018 11:01 am

We are in your future situation now. What it looks like for us is tax-gain harvest one year to raise funds for living expenses then Roth convert for 2 or 3 years, probably to the top of the 22% bracket. You will have dividends and maybe other income using up some of that very low tax space. You will want to use specific ID to sell shares so that you can optimize income versus tax space used. In our case, we do not intend to spend down the Roth accounts as there may be enough taxable account plus pension income to get us to 70. If we have to make a traditional IRA withdrawal in our late 60's, no real harm done.

You may want to Roth convert up to the standard deduction amount (or top of the 10% or 12% bracket) every year. No point in wasting that zero tax ordinary income space on tax gain harvesting.

I would second the comment to not get too concerned with it this far out. Tax policy on dividends and long term capital gains has changed several times over my career. Invest for tax efficiency under the current rules and keep spec ID functional. That is, do not sell mutual fund shares according to average cost basis.

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