The IRA Lightbulb just went on

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YikesHighFees
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The IRA Lightbulb just went on

Post by YikesHighFees » Tue Mar 26, 2019 1:15 pm

OK, this is a good problem to have, I guess. I am retired, age 63, and have reached the age and financial status where it looks like I will have a substantial amount of assets when I die, with no one to leave it to. I just did my taxes and got murdered with capital gains. My tax bill for 2018 and estimated payments is almost the same as my cost of living for 2018. It seems I need to slow down the growth of my assets and am setting up a plan to shift from equities to fixed income, muni, and other bonds in general. My traditional IRA, is a 60/40 equity/fixed. I just figured out that my income is already higher than when I was working, hence when I am forced to take RMD's, I will be paying a higher tax rate than if I had not had this IRA since it will all be taxed at ordinary income rates. I am planning to sell all the funds in my IRA and get into a bond ladder in the IRA, or some other more fixed-income focused investment. I know slowing down growth in our investments seems counter-intuitive, that's why I am posting here. I need a sounding board. I have turned off re-investment in my tax account mutual funds, most of which are growth funds, and plan to shift those div and cap gains into more tax friendly investments, perhaps ETF's or bonds. It feels like right now, my investments will be needed to pay for my investments because of taxes! Has anyone else been in this situation? Thanks in advance for any input :)

hicabob
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Re: The IRA Lightbulb just went on

Post by hicabob » Tue Mar 26, 2019 1:20 pm

Sounds like it might be time to do some Roth conversions before the RMD's hit?

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Wiggums
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Re: The IRA Lightbulb just went on

Post by Wiggums » Tue Mar 26, 2019 1:29 pm

Consider done charitable contributions using the funds instead of cash?

delamer
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Re: The IRA Lightbulb just went on

Post by delamer » Tue Mar 26, 2019 1:41 pm

I am having trouble understanding what the real problem is.

You are focused on taxes but your goal should be to maximize your after-tax income (given the level of risk you are comfortable taking), not to minimize your taxes.

Now if your risk profile has changed because you feel that you have “enough” that is a different issue.

And how will switching from being growth stock funds to bonds in your taxable account help your tax situation? The general rule is keep stocks in taxable and bonds in tax deferred because of the lower taxes on qualified dividends/capital gains.

All that said, what you should be looking at in terms of taxes in whether more of your Social Security benefits will be taxed and whether you’ll be subject to IRMAA: https://secure.ssa.gov/poms.nsf/lnx/0601101020

pkcrafter
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Re: The IRA Lightbulb just went on

Post by pkcrafter » Tue Mar 26, 2019 1:44 pm

Yes to charitable contributions.
Yes, to Roth conversions

All withdrawals from IRA will be taxed at regular income, no matter what you hold.

Please list what you are holding in taxable accounts.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

livesoft
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Re: The IRA Lightbulb just went on

Post by livesoft » Tue Mar 26, 2019 1:47 pm

Sounds like you simply are not invested tax-efficiently, but who knows because you didn't post your ENTIRE portfolio?

See this post for help: Asking Portfolio Questions
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Ybsybs
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Re: The IRA Lightbulb just went on

Post by Ybsybs » Tue Mar 26, 2019 1:57 pm

For the "no one to leave it to" issue, you might think about what you value and get involved with some charities that support those values. You may find one or several you like enough to leave the remainder or your estate to.

fposte
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Re: The IRA Lightbulb just went on

Post by fposte » Tue Mar 26, 2019 3:21 pm

Can you clarify where these capital gains are coming from? In earlier posts you mentioned living off of cash reserves and also considering leaving your current broker--did you incur capital gains when you left that broker and sold taxable assets?

BigJohn
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Re: The IRA Lightbulb just went on

Post by BigJohn » Tue Mar 26, 2019 4:14 pm

Curious as to why you incurred the capital gains? Did you need that as income to live on? If not, then you should probably sit on the gains as long as possible. Someday someone will inherit and either get a stepped up basis (if a person) or not care about the gains (if a charity).

Also, you can't do it yet but remember QCDs (Qualified Charitable Donations) when you turn 70.5. They allow you to take your RMDs without incurring taxable income. Until then Roth conversions and gifting appreciated shares are the best strategies.

Topic Author
YikesHighFees
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Re: The IRA Lightbulb just went on

Post by YikesHighFees » Tue Mar 26, 2019 4:19 pm

I should have clarified, capital gains distributions, not from any sales. Distributions come whether you like them or not, and the more shares of a given fund, the more distributions. Hence, in Dec 2018, my distributions were all reinvested making more shares for next year’s tax hit. The cap gains distributions I got in December were equal to 2 years of living expenses, minus the taxes I have to pay for them!

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Electron
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Re: The IRA Lightbulb just went on

Post by Electron » Tue Mar 26, 2019 4:22 pm

YikesHighFees wrote:
Tue Mar 26, 2019 1:15 pm
It feels like right now, my investments will be needed to pay for my investments because of taxes! Has anyone else been in this situation?
I was in the same situation this year with Investment Income (including large capital gains distributions), Social Security, and RMDs. Taxes are always paid from our income so these types of income are no different. I live in a high tax state and my total Federal and state taxes this year totaled almost 25% of income. The extra payments with my tax returns seemed like a lot but overall I'm happy with the remaining 75%.

I stopped all dividend and capital gains reinvestments in taxable accounts quite a few years ago.
Last edited by Electron on Fri Mar 29, 2019 2:48 pm, edited 1 time in total.
Electron

fposte
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Re: The IRA Lightbulb just went on

Post by fposte » Tue Mar 26, 2019 4:49 pm

YikesHighFees wrote:
Tue Mar 26, 2019 4:19 pm
I should have clarified, capital gains distributions, not from any sales. Distributions come whether you like them or not, and the more shares of a given fund, the more distributions. Hence, in Dec 2018, my distributions were all reinvested making more shares for next year’s tax hit. The cap gains distributions I got in December were equal to 2 years of living expenses, minus the taxes I have to pay for them!
What funds are you in that got you a year's living expenses in a capital gains distribution? It sounds like livesoft may be right about you being in tax-inefficient assets. I would focus on that before focusing on slowing growth.

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BL
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Re: The IRA Lightbulb just went on

Post by BL » Tue Mar 26, 2019 5:05 pm

Vanguard's Total Stock Market fund has not had any capital gains distributions in the decade + that I have held it. Neither has Total International Stock fund. That is probably why they are among the recommended tax-efficient funds here. Also dividends are about 2%, mostly qualified, so that is also fairly low. If you are in active funds, which is usually the case with advisers, then I would expect them to be higher, or much higher, while also paying a higher ER so FA can get his/her 12b-1 kickback. Try looking up expenses on a fund in Morningstar.com.

livesoft
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Re: The IRA Lightbulb just went on

Post by livesoft » Tue Mar 26, 2019 6:00 pm

YikesHighFees wrote:
Tue Mar 26, 2019 4:19 pm
I should have clarified, capital gains distributions, not from any sales. Distributions come whether you like them or not, and the more shares of a given fund, the more distributions. Hence, in Dec 2018, my distributions were all reinvested making more shares for next year’s tax hit. The cap gains distributions I got in December were equal to 2 years of living expenses, minus the taxes I have to pay for them!
:oops: I'm glad your lightbulb went off. Funds that distribute capital gains distributions don't sound tax efficient at all. Stop reinvesting the distributions in tax-inefficient funds. Determine if selling them will realize too many cap gains for you such that you do not wish to exchange them into tax-efficient index funds.

Basically, capital gains distributions only come to folks who like them because they bought funds that distribute them. It is very easy to avoid such funds and only buy funds that do not distribute capital gains distributions.
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miket29
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Re: The IRA Lightbulb just went on

Post by miket29 » Tue Mar 26, 2019 9:24 pm

YikesHighFees wrote:
Tue Mar 26, 2019 1:15 pm
I know slowing down growth in our investments seems counter-intuitive, that's why I am posting here.
If it is painful to pay taxes and you'd rather earn less then you can always switch to a TIPS fund or bonds since they are paying almost nothing in interest and you'd preserve the value of your holdings against inflation.

Leesbro63
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Re: The IRA Lightbulb just went on

Post by Leesbro63 » Tue Mar 26, 2019 9:36 pm

Maybe the original poster is including qualified dividends as a misunderstanding of capital gains. Since they are often discussed together/taxed similarly.

Topic Author
YikesHighFees
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Re: The IRA Lightbulb just went on

Post by YikesHighFees » Wed Mar 27, 2019 6:54 am

Thanks to all of you who replied. Very helpful advice and comments! To clarify, in addition to cap gain distributions, there were qualified dividends.

Sanity check needed. If I sell all the funds within my traditional IRA, there will be no tax events or consequences, correct? Also, what ever types of investments I use those proceeds for, be they equities, corporate bonds (was told no muni bonds in an IRA allowed), treasury bonds, mortgage-backed securities, ETF’s, etc., what ever growth, qualified or non-qual dividends, capital gains, interest from bonds, bottom line, all will be taxed at my ordinary income rate upon withdrawal. Do I have this correct! Thanks!

3-20Characters
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Re: The IRA Lightbulb just went on

Post by 3-20Characters » Wed Mar 27, 2019 7:03 am

If you sell within tax advantaged accounts like IRA, there is no tax consequence unless you withdraw the funds. Withdrawals are treated as ordinary income unless from Roth or HSA. If you haven’t read this, take a look.

https://www.bogleheads.org/wiki/Tax-eff ... _placement
Last edited by 3-20Characters on Wed Mar 27, 2019 7:06 am, edited 1 time in total.

inverter
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Re: The IRA Lightbulb just went on

Post by inverter » Wed Mar 27, 2019 7:06 am

Please post your full portfolio per the regular format so we can help.

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Electron
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Re: The IRA Lightbulb just went on

Post by Electron » Wed Mar 27, 2019 4:09 pm

I'd suggest reviewing all actively managed stock funds held in taxable accounts. Take a look at the size of recent distributions and also any capital gains that would be realized on sale of the fund. You'll need the most recent cost basis for each fund. You can then think about upgrading to more tax efficient funds in the future. Morningstar is a good reference with information on portfolio turnover and tax exposure.

If capital gains tax exposure is high, it might be a good idea to initially create a sell list. I've taken advantage of market declines and sold funds with minimal impact. Note that growth in NAV is often limited in funds with high portfolio turnover. In some cases you can even realize a tax loss in selling a fund that overall produced positive investment results.

There are many investors who bought actively managed funds years ago based on magazine recommendations. Today they are getting hit with large taxable distributions and in many cases have a significant tax cost to sell.
Electron

TropikThunder
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Re: The IRA Lightbulb just went on

Post by TropikThunder » Wed Mar 27, 2019 6:45 pm

+1 to those saying we need to know what OP is invested in. I suspect the tax hit is not due to assets "growing too fast" but rather to excessive capital gains (like from high turnover in active funds). VTSAX's total distribution last year was 1.88% (all dividends, no capital gains). If I had invested $1,000,000 in VTSAX on Jan 2, 2018, I would have received $18,819 in distributions by Dec 31. Two years living expenses from VTSAX distributions alone ($100,000 conservatively?) would require a portfolio of well over $5,000,000. If I had >$5M, I would not describe a $15k tax bill as "murdered" but we're all just speculating.

sport
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Re: The IRA Lightbulb just went on

Post by sport » Wed Mar 27, 2019 7:11 pm

Electron wrote:
Wed Mar 27, 2019 4:09 pm
There are many investors who bought actively managed funds years ago based on magazine recommendations. Today they are getting hit with large taxable distributions and in many cases have a significant tax cost to sell.
I had one of those funds, and the taxable distributions were terrible. Then came 2008. I sold the fund at a loss and reinvested in an equivalent index fund. The value came back, I still have some of the tax loss carryover to use, and the distributions are much lower. Win, win, win. :moneybag

Carl53
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Re: The IRA Lightbulb just went on

Post by Carl53 » Wed Mar 27, 2019 7:28 pm

YikesHighFees wrote:
Wed Mar 27, 2019 6:54 am
Thanks to all of you who replied. Very helpful advice and comments! To clarify, in addition to cap gain distributions, there were qualified dividends.

Sanity check needed. If I sell all the funds within my traditional IRA, there will be no tax events or consequences, correct? Also, what ever types of investments I use those proceeds for, be they equities, corporate bonds (was told no muni bonds in an IRA allowed), treasury bonds, mortgage-backed securities, ETF’s, etc., what ever growth, qualified or non-qual dividends, capital gains, interest from bonds, bottom line, all will be taxed at my ordinary income rate upon withdrawal. Do I have this correct! Thanks!
Before you make any changes decide how much you need or want to live on and what you want to do with your assets once you pass. If you have plenty of taxable assets outside of your IRAs I see no harm in leaving the IRAs agressively invested. Once rmds kick in you will be able to donate up $100k per year via QUalified Charitable Contributions tax free. Any left when you pass could be left to charitable beneficiaries. In the interim, if you have excess funds consider a Donor Advised Fund so that you could at least deduct some of the donations on your taxes.

Topic Author
YikesHighFees
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Re: The IRA Lightbulb just went on

Post by YikesHighFees » Wed Mar 27, 2019 7:52 pm

More clarification on my portfolio. Some 12 years ago an advisor put me in institutional class F funds, a mix of equity and fixed income funds with a 60/40 split. I wish I knew then what I know now. The funds all have high expense ratios and I was paying AUM fees to the advisor who did little for me other than the initial placement. To boot, the same exact funds were purchased in my taxable account as well as a traditional IRA and a a Roth IRA. I recently sold off 3 bond funds in the taxable but am still in large cap, small cap domestic and international funds. I have since gotten away from the advisor. I am planning to wait til end of year and hope that this is a year with less distributions and start selling off a little at a time of the funds with large distributions and perhaps move into ETFs or index funds or a muni bond ladder. Thanks so much again for all the helpful tips!

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Electron
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Re: The IRA Lightbulb just went on

Post by Electron » Thu Mar 28, 2019 1:51 pm

sport wrote:
Wed Mar 27, 2019 7:11 pm
Then came 2008. I sold the fund at a loss and reinvested in an equivalent index fund. The value came back, I still have some of the tax loss carryover to use, and the distributions are much lower. Win, win, win. :moneybag
Excellent move. The actively managed fund recommendations in various publications were not unreasonable and many would have been fine in tax sheltered accounts.

Last year I was hit with essentially a worst case scenario where Harbor International (HAINX) distributed 39% of NAV. The fund lost a star manager which was followed by disappointing performance and eventually large shareholder redemptions. Realized capital gains had to be paid out to a shrinking shareholder base.

A new portfolio manager was also appointed resulting in significant portfolio turnover and additional capital gains. The only good news is that the new manager has an excellent record managing a separate account going back to 1987. That account gained an impressive 10.0% annualized versus 5.3% for the MSCI EAFE index. I still have unrealized gains in my shares and decided to stay with the fund.
Electron

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YikesHighFees
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Re: The IRA Lightbulb just went on

Post by YikesHighFees » Fri Mar 29, 2019 7:52 am

As other options to move away from actively-managed funds, can anyone share experience with index funds vs ETF’s. I know the basic differences, but am interested in a comparison from anyone who has had both in their portfolio. Also, I was advised that I cannot purchase a muni bond with my trad IRA with cash I have sitting in that account. Is there an IRS restriction or is it more that it is not advisable to put a tax-efficient asset in a tax-advantaged account? Thanks for any input...

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Electron
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Re: The IRA Lightbulb just went on

Post by Electron » Fri Mar 29, 2019 2:12 pm

The Wiki has quite a bit of information on ETFs versus Mutual Funds. I personally prefer the Mutual Fund which is always bought and sold at NAV. In addition, I don't have to concern myself with the financial strength of the brokerage firm holding the security.

https://www.bogleheads.org/wiki/ETFs_vs_mutual_funds

An Internet search on IRA Municipal Bonds turns up quite a bit of information. One can hold a Municipal Bond in an IRA but the expected return would typically be less in comparison with a taxable bond of similar maturity and credit quality. The article below mentions that Taxable Municipal Bonds can make sense within an IRA.

https://www.marketwatch.com/story/does- ... 2016-12-02

Here is another informative article. Click on the indicated link to view as one page.

https://www.kiplinger.com/slideshow/inv ... index.html
Last edited by Electron on Fri Mar 29, 2019 4:24 pm, edited 1 time in total.
Electron

EnjoyIt
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Re: The IRA Lightbulb just went on

Post by EnjoyIt » Fri Mar 29, 2019 2:19 pm

YikesHighFees wrote:
Fri Mar 29, 2019 7:52 am
As other options to move away from actively-managed funds, can anyone share experience with index funds vs ETF’s. I know the basic differences, but am interested in a comparison from anyone who has had both in their portfolio. Also, I was advised that I cannot purchase a muni bond with my trad IRA with cash I have sitting in that account. Is there an IRS restriction or is it more that it is not advisable to put a tax-efficient asset in a tax-advantaged account? Thanks for any input...
Listen, until you post your entire portfolio it is impossible to offer good advice. I know, it’s tough to lay yourself out there like that. But seriously, it is anonymous and no one here cares about you other than to help you get your finances in order. Make life easier for everyone here including yourself and share everything.

My advice would be to edit the first post.

EnjoyIt
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Re: The IRA Lightbulb just went on

Post by EnjoyIt » Fri Mar 29, 2019 2:21 pm

YikesHighFees wrote:
Fri Mar 29, 2019 7:52 am
As other options to move away from actively-managed funds, can anyone share experience with index funds vs ETF’s. I know the basic differences, but am interested in a comparison from anyone who has had both in their portfolio. Also, I was advised that I cannot purchase a muni bond with my trad IRA with cash I have sitting in that account. Is there an IRS restriction or is it more that it is not advisable to put a tax-efficient asset in a tax-advantaged account? Thanks for any input...
Muni bond funds are great in a taxable account and useless in your IRA since it is already a tax advantages account.

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