Tax Math on 3.6MM portfolio

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Topic Author
LongTermLenny
Posts: 8
Joined: Sat Mar 30, 2019 11:02 am

Tax Math on 3.6MM portfolio

Post by LongTermLenny » Sun Apr 14, 2019 2:42 pm

Hey Bogleheads,

Longtime reader here but first post. I appreciate any and all feedback as this community has provided tremendous guidance and eye-opening insights for me, and this is coming from someone in the financial industry (derivatives trader).

I'm in the process of helping my 68 yo retired Mother transfer her retirement assets from a financial advisor into a self managed account at Merrill Edge. Her objective is:

- Keep it as simple as possible
- Maximize tax efficiency
- Maintain roughly 50/50 asset allocation
- Withdraw roughly $85K per year from her collective accounts including a $25k RMD from IRA

She currently has $800k in her IRAs and and $2.8MM in taxable. I plan on the current asset allocation

IRA - $800K BND (Total Bond Fund 2.81% Yield)
Taxable - $800K BND + $2MM VTI (total market fund 1.89% Yield)

Rough Tax Calculations -
Taxable Income = $25k(RMD) - $12,200 (Stand Deduction) = $12,800
Tax Owed = $1,346

Cap Gains = $22,400(BND) + $37,800(VTI) = $60,200
Tax Owed = 0% x $26,575 (39,375-12,800) + 15% x $33,625 = $5,044

TOTAL INCOME- $85,200
TOTAL TAX - $6,390
EFFECTIVE RATE - 7.5%

QUESTIONS -

1. Is this tax math correct
2. Wouldn't it make sense to replace a small portion of her VTI holdings with BRK to keep her MAGI under $85,000 and thus keep her eligible for lowest Medicare premiums?
2. Anything I'm overlooking or any other suggestions to achieve desired objectives?


Thank you everyone for your time.

blackholescion
Posts: 37
Joined: Fri Mar 22, 2019 6:41 pm

Re: Tax Math on 3.6MM portfolio

Post by blackholescion » Sun Apr 14, 2019 3:00 pm

Medicare premiums are fixed per income bracket. That is someone with 60k income pays the same as someone with 70k. With that in mind, my recommendation is to take the first few years and deal with the pain of converting that entire IRA to a Roth IRA. You have 2, maybe 3 more tax years to convert before those RMDs hit. This means the RMD will be lower to start and you can keep converting if you do choose. This may temporarily this may mean hitting the top of the next tax bracket in order to be able to convert 10% or more per year while also not hitting a tax bracket above 22-24%. RMDs will only go up and it may not be advantageous to stay the course if all of a sudden you’re forced to withdraw 80k.

That way, in the long run, you’re not going to be forced into RMD and can efficiently decide on next steps and where you’re actually wanting to pull money from (taxable, which holdings are most tax advantageous that year, social security, etc.)
Last edited by blackholescion on Sun Apr 14, 2019 3:21 pm, edited 2 times in total.

cas
Posts: 558
Joined: Wed Apr 26, 2017 8:41 am

Re: Tax Math on 3.6MM portfolio

Post by cas » Sun Apr 14, 2019 3:18 pm

Is there going to be Social Security in the picture at some point? (age 70?)

Federal taxation of SS is odd (see wiki on Taxation of Social Security), but that would change all the tax calculations, plus her ability to stay under that first IRMAA threshold.

NancyABQ
Posts: 243
Joined: Thu Aug 18, 2016 3:37 pm

Re: Tax Math on 3.6MM portfolio

Post by NancyABQ » Sun Apr 14, 2019 3:23 pm

LongTermLenny wrote:
Sun Apr 14, 2019 2:42 pm
- Keep it as simple as possible
- Maximize tax efficiency
- Maintain roughly 50/50 asset allocation
- Withdraw roughly $85K per year from her collective accounts including a $25k RMD from IRA

She currently has $800k in her IRAs and and $2.8MM in taxable. I plan on the current asset allocation

IRA - $800K BND (Total Bond Fund 2.81% Yield)
Taxable - $800K BND + $2MM VTI (total market fund 1.89% Yield)

Rough Tax Calculations -
Taxable Income = $25k(RMD) - $12,200 (Stand Deduction) = $12,800
Tax Owed = $1,346

Cap Gains = $22,400(BND) + $37,800(VTI) = $60,200
Tax Owed = 0% x $26,575 (39,375-12,800) + 15% x $33,625 = $5,044

TOTAL INCOME- $85,200
TOTAL TAX - $6,390
EFFECTIVE RATE - 7.5%

QUESTIONS -

1. Is this tax math correct
2. Wouldn't it make sense to replace a small portion of her VTI holdings with BRK to keep her MAGI under $85,000 and thus keep her eligible for lowest Medicare premiums?
2. Anything I'm overlooking or any other suggestions to achieve desired objectives?


Thank you everyone for your time.
I don't think your math is correct. You have a category "Cap Gains" that I think you meant as "Qualified Dividends", based on how you used it in the tax calculation. Capital Gains would come from selling the holdings that had gains, which I don't think is what you are talking about doing here.

But BND wouldn't have qualified dividends, it would have Interest (or non-quailified dividends, anyway) that is taxed as normal income. So the $22400 you are counting from BND would be taxed as ordinary income, not at 15% cap gains rate. This changes the whole calculation by quite a bit.

Topic Author
LongTermLenny
Posts: 8
Joined: Sat Mar 30, 2019 11:02 am

Re: Tax Math on 3.6MM portfolio

Post by LongTermLenny » Sun Apr 14, 2019 3:30 pm

blackholescion wrote:
Sun Apr 14, 2019 3:00 pm
Medicare premiums are fixed per income bracket. That is someone with 60k income pays the same as someone with 70k. With that in mind, my recommendation is to take the first few years and deal with the pain of converting that entire IRA to a Roth IRA. You have 2, maybe 3 more tax years to convert before those RMDs hit. This means the RMD will be lower to start and you can keep converting if you do choose. This may temporarily this may mean hitting the top of the next tax bracket in order to be able to convert 10% or more per year while also not hitting a tax bracket above 22-24%. RMDs will only go up and it may not be advantageous to stay the course if all of a sudden you’re forced to withdraw 80k.

That way, in the long run, you’re not going to be forced into RMD and can efficiently decide on next steps and where you’re actually wanting to pull money from (taxable, which holdings are most tax advantageous that year, social security, etc.)
Thanks for your response. Her current $25k RMD is from an inherited IRA so her RMDs have already begun. That being said, according to the RMD Table it looks like the over the next 10 years of distributions, they begin with roughly a 4% distribution and end with a 5% distribution so I don't see when she would ever be forced to withdraw anything close to 80k like you said. Am I thinking about this wrong? So I'm failing to see the value in Roth Conversions for her where she would be converting up through 12% tax bracket, and paying that tax now vs. the same 12% through her RMDs in the years to come.

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RickBoglehead
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Re: Tax Math on 3.6MM portfolio

Post by RickBoglehead » Sun Apr 14, 2019 3:33 pm

Standard deduction is also wrong. $13,600 for over 65 for 2018.
Avid user of forums on variety of interests-financial, home brewing, F-150, PHEV, home repair, etc. Enjoy learning & passing on knowledge. It's PRINCIPAL, not PRINCIPLE. I ADVISE you to seek ADVICE.

cas
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Joined: Wed Apr 26, 2017 8:41 am

Re: Tax Math on 3.6MM portfolio

Post by cas » Sun Apr 14, 2019 3:46 pm

Another question: You say that you are in the process of moving the portfolio from a financial advisor to self-directed. Then you mention a multi-million amount invested in BND and VTI.

Is that amount already invested in BND and VTI with the financial advisor (doesn't seem likely), so you will be moving it in-kind?

Or is the BND and VTI an aspirational portfolio of what you would like the portfolio to look like once it is self-directed, but the financial advisor currently has it invested in a variety of other investments?

If it is the second, you're going to have to deal with (taxable) realized capital gains in order to get the portfolio out of the financial advisor portfolio and into the BND/VTI portfolio. (What is the general level of unrealized long-term/short-term capital gains in the financial-advisor version of portfolio now?) Reconfiguring a big taxable portfolio like your mother has in a tax-reasonable way would, at the very least, likely make your annual tax calculations very different than you show above.

Topic Author
LongTermLenny
Posts: 8
Joined: Sat Mar 30, 2019 11:02 am

Re: Tax Math on 3.6MM portfolio

Post by LongTermLenny » Sun Apr 14, 2019 4:02 pm

cas wrote:
Sun Apr 14, 2019 3:46 pm
Another question: You say that you are in the process of moving the portfolio from a financial advisor to self-directed. Then you mention a multi-million amount invested in BND and VTI.

Is that amount already invested in BND and VTI with the financial advisor (doesn't seem likely), so you will be moving it in-kind?

Or is the BND and VTI an aspirational portfolio of what you would like the portfolio to look like once it is self-directed, but the financial advisor currently has it invested in a variety of other investments?

If it is the second, you're going to have to deal with (taxable) realized capital gains in order to get the portfolio out of the financial advisor portfolio and into the BND/VTI portfolio. (What is the general level of unrealized long-term/short-term capital gains in the financial-advisor version of portfolio now?) Reconfiguring a big taxable portfolio like your mother has in a tax-reasonable way would, at the very least, likely make your annual tax calculations very different than you show above.
It is the second. It is an aspirational portfolio that I am showing to my mother to help her visualize what her portfolio and tax situation would look like in this scenario. However, fortunately or unfortunately, my mother has very little unrealized Capital Gains in her taxable account so I should be able to convert most of the portfolio into this two fund portfolio with minimal tax implications.

Topic Author
LongTermLenny
Posts: 8
Joined: Sat Mar 30, 2019 11:02 am

Re: Tax Math on 3.6MM portfolio

Post by LongTermLenny » Sun Apr 14, 2019 4:11 pm

NancyABQ wrote:
Sun Apr 14, 2019 3:23 pm
LongTermLenny wrote:
Sun Apr 14, 2019 2:42 pm
- Keep it as simple as possible
- Maximize tax efficiency
- Maintain roughly 50/50 asset allocation
- Withdraw roughly $85K per year from her collective accounts including a $25k RMD from IRA

She currently has $800k in her IRAs and and $2.8MM in taxable. I plan on the current asset allocation

IRA - $800K BND (Total Bond Fund 2.81% Yield)
Taxable - $800K BND + $2MM VTI (total market fund 1.89% Yield)

Rough Tax Calculations -
Taxable Income = $25k(RMD) - $12,200 (Stand Deduction) = $12,800
Tax Owed = $1,346

Cap Gains = $22,400(BND) + $37,800(VTI) = $60,200
Tax Owed = 0% x $26,575 (39,375-12,800) + 15% x $33,625 = $5,044

TOTAL INCOME- $85,200
TOTAL TAX - $6,390
EFFECTIVE RATE - 7.5%

QUESTIONS -

1. Is this tax math correct
2. Wouldn't it make sense to replace a small portion of her VTI holdings with BRK to keep her MAGI under $85,000 and thus keep her eligible for lowest Medicare premiums?
2. Anything I'm overlooking or any other suggestions to achieve desired objectives?


Thank you everyone for your time.
I don't think your math is correct. You have a category "Cap Gains" that I think you meant as "Qualified Dividends", based on how you used it in the tax calculation. Capital Gains would come from selling the holdings that had gains, which I don't think is what you are talking about doing here.

But BND wouldn't have qualified dividends, it would have Interest (or non-quailified dividends, anyway) that is taxed as normal income. So the $22400 you are counting from BND would be taxed as ordinary income, not at 15% cap gains rate. This changes the whole calculation by quite a bit.
Thanks for your response, you are correct. I thought BND dividends were qualified but they are not. Here is my revised math and I will use 2019 rates:

Rough Tax Calculations -
Taxable Income = $25k(RMD) + $22,400(BND) - $13,850 (Stand Deduction) = $33550
Tax Owed = $3,832

Qualified Dividends = $37,800(VTI)
Tax Owed = 0% x $5,825 (39,375-33,500) + 15% x $31,975 = $4,796

TOTAL INCOME- $85,200
TOTAL TAX - $8,629
EFFECTIVE RATE - 10.13%

blackholescion
Posts: 37
Joined: Fri Mar 22, 2019 6:41 pm

Re: Tax Math on 3.6MM portfolio

Post by blackholescion » Sun Apr 14, 2019 4:11 pm

LongTermLenny wrote:
Sun Apr 14, 2019 3:30 pm
blackholescion wrote:
Sun Apr 14, 2019 3:00 pm
Medicare premiums are fixed per income bracket. That is someone with 60k income pays the same as someone with 70k. With that in mind, my recommendation is to take the first few years and deal with the pain of converting that entire IRA to a Roth IRA. You have 2, maybe 3 more tax years to convert before those RMDs hit. This means the RMD will be lower to start and you can keep converting if you do choose. This may temporarily this may mean hitting the top of the next tax bracket in order to be able to convert 10% or more per year while also not hitting a tax bracket above 22-24%. RMDs will only go up and it may not be advantageous to stay the course if all of a sudden you’re forced to withdraw 80k.

That way, in the long run, you’re not going to be forced into RMD and can efficiently decide on next steps and where you’re actually wanting to pull money from (taxable, which holdings are most tax advantageous that year, social security, etc.)
Thanks for your response. Her current $25k RMD is from an inherited IRA so her RMDs have already begun. That being said, according to the RMD Table it looks like the over the next 10 years of distributions, they begin with roughly a 4% distribution and end with a 5% distribution so I don't see when she would ever be forced to withdraw anything close to 80k like you said. Am I thinking about this wrong? So I'm failing to see the value in Roth Conversions for her where she would be converting up through 12% tax bracket, and paying that tax now vs. the same 12% through her RMDs in the years to come.
It’s mostly past 10 years. In her 80s she will start to creep past 60k. If you can keep all of the taxable income down, then it doesn’t really matter. If you’re hitting issues, as other posters have mentioned with the capital gains versus dividends, the RMD may bite you in the future precisely when you need the most flexibility when it comes to long term care costs.

Ultimately we aren’t talking a lot of money here. But there are times when it’s advantageous to not sell bonds needlessly out of your IRA. Maybe the better plan would be going 50/50 within the IRA itself so you can choose which asset call you sell. As you have it, the IRA will always sell bonds even in times like today when markets are at all time highs and it may be better to sell the stock positions.

Topic Author
LongTermLenny
Posts: 8
Joined: Sat Mar 30, 2019 11:02 am

Re: Tax Math on 3.6MM portfolio

Post by LongTermLenny » Sun Apr 14, 2019 4:15 pm

blackholescion wrote:
Sun Apr 14, 2019 4:11 pm
LongTermLenny wrote:
Sun Apr 14, 2019 3:30 pm
blackholescion wrote:
Sun Apr 14, 2019 3:00 pm
Medicare premiums are fixed per income bracket. That is someone with 60k income pays the same as someone with 70k. With that in mind, my recommendation is to take the first few years and deal with the pain of converting that entire IRA to a Roth IRA. You have 2, maybe 3 more tax years to convert before those RMDs hit. This means the RMD will be lower to start and you can keep converting if you do choose. This may temporarily this may mean hitting the top of the next tax bracket in order to be able to convert 10% or more per year while also not hitting a tax bracket above 22-24%. RMDs will only go up and it may not be advantageous to stay the course if all of a sudden you’re forced to withdraw 80k.

That way, in the long run, you’re not going to be forced into RMD and can efficiently decide on next steps and where you’re actually wanting to pull money from (taxable, which holdings are most tax advantageous that year, social security, etc.)
Thanks for your response. Her current $25k RMD is from an inherited IRA so her RMDs have already begun. That being said, according to the RMD Table it looks like the over the next 10 years of distributions, they begin with roughly a 4% distribution and end with a 5% distribution so I don't see when she would ever be forced to withdraw anything close to 80k like you said. Am I thinking about this wrong? So I'm failing to see the value in Roth Conversions for her where she would be converting up through 12% tax bracket, and paying that tax now vs. the same 12% through her RMDs in the years to come.
It’s mostly past 10 years. In her 80s she will start to creep past 60k. If you can keep all of the taxable income down, then it doesn’t really matter. If you’re hitting issues, as other posters have mentioned with the capital gains versus dividends, the RMD may bite you in the future precisely when you need the most flexibility when it comes to long term care costs.

Ultimately we aren’t talking a lot of money here. But there are times when it’s advantageous to not sell bonds needlessly out of your IRA. Maybe the better plan would be going 50/50 within the IRA itself so you can choose which asset call you sell. As you have it, the IRA will always sell bonds even in times like today when markets are at all time highs and it may be better to sell the stock positions.
That is good advice, thank you.

sawdust60
Posts: 193
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Re: Tax Math on 3.6MM portfolio

Post by sawdust60 » Sun Apr 14, 2019 4:17 pm

I didn't see where social security was included in your calculation. Marginal tax rates are different with SS income. Up to 85% of SS income becomes taxable, based on non-SS income. (With significant non-SS income, you might simply include 85% of SS in AGI and taxable income calculations.) link to wiki: Taxation of SS

Also note that qualified dividends, LTCG and tax exempt interest income are included in Medicare MAGI -- used with 2-year lag for determining the IRMAA premium. And it starts well before the top of the 22% tax bracket; IRMAA is MAGI-based, not to be confused with taxable income.

Topic Author
LongTermLenny
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Joined: Sat Mar 30, 2019 11:02 am

Re: Tax Math on 3.6MM portfolio

Post by LongTermLenny » Sun Apr 14, 2019 4:28 pm

sawdust60 wrote:
Sun Apr 14, 2019 4:17 pm
I didn't see where social security was included in your calculation. Marginal tax rates are different with SS income. Up to 85% of SS income becomes taxable, based on non-SS income. (With significant non-SS income, you might simply include 85% of SS in AGI and taxable income calculations.) link to wiki: Taxation of SS

Also note that qualified dividends, LTCG and tax exempt interest income are included in Medicare MAGI -- used with 2-year lag for determining the IRMAA premium. And it starts well before the top of the 22% tax bracket; IRMAA is MAGI-based, not to be confused with taxable income.
I left out Social Security because the objective of this exercise was to compare this portfolio to her to her current portfolio where she is paying high advisor fees and paying a lot in taxes through owning high yielding dividend stocks. She hasn't started collecting social security yet so to keep it an apples to apples comparison I left it out. Thanks!

delamer
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Re: Tax Math on 3.6MM portfolio

Post by delamer » Sun Apr 14, 2019 6:30 pm

You might try the TaxCaster app to estimate her taxes.

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AndrewXnn
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Location: Upstate New York

Re: Tax Math on 3.6MM portfolio

Post by AndrewXnn » Sun Apr 14, 2019 7:10 pm

Probably worth mentioning that while it is painful to pay taxes,
minimizing taxes does not necessarily result in the best overall returns.

Topic Author
LongTermLenny
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Re: Tax Math on 3.6MM portfolio

Post by LongTermLenny » Sun Apr 14, 2019 7:23 pm

What's interesting is that if you swap out BND for MUB in taxable you get the following:

IRA - $800K BND (Total Bond Fund 2.81% Yield)
Taxable - $800K MUB (Muni Bond Fund 2.5% Yield) + $2MM VTI (total market fund 1.89% Yield)

Rough Tax Calculations -
Taxable Income = $25k(RMD) - $13,850 (Stand Deduction) = $11,150
Tax Owed = $1,144

Qualified Dividends = $37,800(VTI)
Tax Owed = 0% x $28,225 (39,375-11,150) + 15% x $9,575 = $1,436

TOTAL INCOME- $82,800
TOTAL TAX - $2,580
EFFECTIVE RATE - 3.12%

Comparing that to the same portfolio with BND in taxable which was:
TOTAL INCOME- $85,200
TOTAL TAX - $8,629
EFFECTIVE RATE - 10.13%

It appears MUB enables her to take more advantage of the 0% cap gains tax on income up to $39,375 which makes this a far superior portfolio.

typical.investor
Posts: 757
Joined: Mon Jun 11, 2018 3:17 am

Re: Tax Math on 3.6MM portfolio

Post by typical.investor » Sun Apr 14, 2019 7:29 pm

LongTermLenny wrote:
Sun Apr 14, 2019 4:11 pm

Thanks for your response, you are correct. I thought BND dividends were qualified but they are not. Here is my revised math and I will use 2019 rates:

Rough Tax Calculations -
Taxable Income = $25k(RMD) + $22,400(BND) - $13,850 (Stand Deduction) = $33550
Tax Owed = $3,832

Qualified Dividends = $37,800(VTI)
Tax Owed = 0% x $5,825 (39,375-33,500) + 15% x $31,975 = $4,796

TOTAL INCOME- $85,200
TOTAL TAX - $8,629
EFFECTIVE RATE - 10.13%
Apologies if this is mistaken (asking for my own info too), but have you considered munis to take better advantage of the 0% long term cap gain/qualified dividend bracket?

$800k in VTEB (2.28%) yields $18,240.

Rough Tax Calculations -
Taxable Income = $25k(RMD) - $13,850 (Stand Deduction) = $11,150
Tax Exempt income = $18,240(VTEB)
Tax Owed = $1,148

Qualified Dividends = $37,800(VTI)
Tax Owed = 0% x $28225 (39,375-11150) + 15% x $9.575 = $1436

TOTAL INCOME- $81,040
TOTAL TAX - $2,583.75
NET $78,456

That compares to a net of $76,568 using BND.

Not sure how social security would play out, but don't think having about $4,000 less in income would hurt.

Do people not consider this because munis are less liquid and/or more volatile so not worth the $1,900?

Topic Author
LongTermLenny
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Joined: Sat Mar 30, 2019 11:02 am

Re: Tax Math on 3.6MM portfolio

Post by LongTermLenny » Sun Apr 14, 2019 7:40 pm

typical.investor wrote:
Sun Apr 14, 2019 7:29 pm
LongTermLenny wrote:
Sun Apr 14, 2019 4:11 pm

Thanks for your response, you are correct. I thought BND dividends were qualified but they are not. Here is my revised math and I will use 2019 rates:

Rough Tax Calculations -
Taxable Income = $25k(RMD) + $22,400(BND) - $13,850 (Stand Deduction) = $33550
Tax Owed = $3,832

Qualified Dividends = $37,800(VTI)
Tax Owed = 0% x $5,825 (39,375-33,500) + 15% x $31,975 = $4,796

TOTAL INCOME- $85,200
TOTAL TAX - $8,629
EFFECTIVE RATE - 10.13%
Apologies if this is mistaken (asking for my own info too), but have you considered munis to take better advantage of the 0% long term cap gain/qualified dividend bracket?

$800k in VTEB (2.28%) yields $18,240.

Rough Tax Calculations -
Taxable Income = $25k(RMD) - $13,850 (Stand Deduction) = $11,150
Tax Exempt income = $18,240(VTEB)
Tax Owed = $1,148

Qualified Dividends = $37,800(VTI)
Tax Owed = 0% x $28225 (39,375-11150) + 15% x $9.575 = $1436

TOTAL INCOME- $81,040
TOTAL TAX - $2,583.75
NET $78,456

That compares to a net of $76,568 using BND.

Not sure how social security would play out, but don't think having about $4,000 less in income would hurt.

Do people not consider this because munis are less liquid and/or more volatile so not worth the $1,900?
Thanks, had the exact same idea (but using MUB). See above post

cas
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Joined: Wed Apr 26, 2017 8:41 am

Re: Tax Math on 3.6MM portfolio

Post by cas » Mon Apr 15, 2019 6:54 am

LongTermLenny wrote:
Sun Apr 14, 2019 7:23 pm
What's interesting is that if you swap out BND for MUB in taxable you get the following:
You didn't say, but I suspect that you are thinking something along the lines of "Mom's ordinary income should be taxed at 12% or below. I've heard that muni bonds aren't worthwhile unless you are in a 25% or above tax bracket. So why are the muni bonds producing higher after-tax income in this portfolio?"

I didn't check your calculations carefully (or dig into the comparative risk profiles of the 2 bond funds), but I think what you are seeing is the effect of the 27% "shadow" marginal tax bracket that appears when a taxpayer is in the 12%-and-below nominal tax bracket for their ordinary income but also has a big chunk of qualified dividend or long term capital gain income floating on top of the ordinary income.

This difference between nominal and marginal tax brackets takes a bit of getting used to if you haven't delt with it before, but it is very necessary to understand for retirees with large taxable portfolios, but modest amounts of ordinary (e.g. pension, RMD, SS) income.

For more information, see:

Overview: Boglehead's wiki, "Common Examples of High Marginal Tax Rates", 2nd paragraph on QDiv/LTCG, https://www.bogleheads.org/wiki/Margina ... inal_rates

More details: An article, with graphics, that many people seem to find useful is the Kitces article listed below. Especially read through the examples - example 3 (which builds on the previous examples) talks a bit about the "shadow" marginal tax bracket. (Except this article is a few years old, so it is using the old 15% tax bracket rather than the new 12% tax bracket and comes up with a 30% "shadow" marginal tax bracket. You also have to adjust, in your mind, for some thresholds that have increased in the intervening years, plus disappearance of some things like personal exemptions in the new tax law. But the concepts and graphics are still fundamentally sound.)

Michael Kitces, "Mechanics of the 0% Long Term Capital Gains Tax Rate", November 2014, https://www.kitces.com/blog/understandi ... -in-basis/


However ... having said all that ... I understand the exercise you are trying to do with comparing apples-to-apples, leading to you to leave out the upcoming (?) social security from the exercise. But this is another case where all the calculations and marginal tax rates will likely be drastically different when a chunk of ordinary income from social security gets added into the picture. Plus, keep in mind that tax-exempt income from a (national) muni-bond fund:
- still counts towards determining how much of SS is taxable
- still adds towards IRMAA-style MAGI
- will still be (mostly) taxed as ordinary income at the state level (if your state has an income tax).

SovereignInvestor
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Re: Tax Math on 3.6MM portfolio

Post by SovereignInvestor » Mon Apr 15, 2019 7:34 am

It may be better to use taxable funds to pay taxes to convert IRA to roth or a portion of it.

Want to maximize bonds in IRA and minimize in taxable and ROTH IRA is worth more than traditional of same value.

Katietsu
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Joined: Sun Sep 22, 2013 1:48 am

Re: Tax Math on 3.6MM portfolio

Post by Katietsu » Mon Apr 15, 2019 7:59 am

The original post left out that the IRA was inherited. So no conversions even if you are a Roth fan.

OP, I would consider paying for a one time review like the services offered by Rick Ferri or Allan Roth. Your mother would have the comfort of having a well respected professional selecting the low cost investment portfolio for a tiny fraction of her current cost. These guys do not want to manage the portfolio, so no conflict with your desire that it be simple and self managed. Your relationship would be more likely to avoid any strain that might happen if the portfolio value performs poorly after you take it over. And you have the involvement of someone with experience at portfolios for someone at a different stage of life than you have navigated.

inbox788
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Re: Tax Math on 3.6MM portfolio

Post by inbox788 » Mon Apr 15, 2019 3:47 pm

Katietsu wrote:
Mon Apr 15, 2019 7:59 am
The original post left out that the IRA was inherited. So no conversions even if you are a Roth fan.
There's often benefit converting IRA to Roth, but if the goal is to reduce peak RMD effects, taking addition IRA withdraws early and saving them in taxable could still be helpful and shouldn't be ruled out without taking a look.

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