Should I harvest long-term capital gains this year

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Topic Author
aiyuanuc
Posts: 22
Joined: Fri May 03, 2019 8:16 am

Should I harvest long-term capital gains this year

Post by aiyuanuc » Tue Nov 26, 2019 1:35 pm

Hi Bogleheads,

As we near the end of the year, I am trying to figure out if there is any way for me to harvest some capital gains without paying taxes.

MFJ, gross income 135K including salary and dividend.

By my calculation, 135K - 24K (std ded) - 2.4K (ins. premium) - 5.4k (HSA) - 19K (401k) = 84K. For tax diversification purposes, we have already used up 12K Roth IRA space.

It seems to me that for any LTCG that I may realize this year, I will have to pay 15% taxes. Am I missing anything here?

Thank you all for your inputs.

Silk McCue
Posts: 3403
Joined: Thu Feb 25, 2016 7:11 pm

Re: Should I harvest long-term capital gains this year

Post by Silk McCue » Tue Nov 26, 2019 1:55 pm

That's the way I see it.

I used this tool someone shared recently to validate that. If I drop out the $40k capital gains the tax burden goes down by exactly $6k.

https://www.mortgagecalculator.org/calc ... ulator.php

Cheers

Topic Author
aiyuanuc
Posts: 22
Joined: Fri May 03, 2019 8:16 am

Re: Should I harvest long-term capital gains this year

Post by aiyuanuc » Tue Nov 26, 2019 2:27 pm

Thanks, Silk McCue.

Another question for you and for all other Bogleheads, is it a bad idea for me to use Roth IRA instead of traditional given my situation?
Silk McCue wrote:
Tue Nov 26, 2019 1:55 pm
That's the way I see it.

I used this tool someone shared recently to validate that. If I drop out the $40k capital gains the tax burden goes down by exactly $6k.

https://www.mortgagecalculator.org/calc ... ulator.php

Cheers

Silk McCue
Posts: 3403
Joined: Thu Feb 25, 2016 7:11 pm

Re: Should I harvest long-term capital gains this year

Post by Silk McCue » Tue Nov 26, 2019 2:44 pm

aiyuanuc wrote:
Tue Nov 26, 2019 2:27 pm
Thanks, Silk McCue.

Another question for you and for all other Bogleheads, is it a bad idea for me to use Roth IRA instead of traditional given my situation?
It certainly isn't a bad idea. I personally like diversification of the Roth even though you could save some in taxes by using Traditional. Entering retirement with healthy amounts in tax deferred, Taxable, Roth and HSA will provide greater opportunity for tax managed spending.

Cheers

lakpr
Posts: 3051
Joined: Fri Mar 18, 2011 9:59 am

Re: Should I harvest long-term capital gains this year

Post by lakpr » Tue Nov 26, 2019 3:24 pm

Actually, Roth IRA is the perfect answer for you instead of traditional IRA, since you are in the 12% bracket now. This 12% bracket will disappear come 2026, as the law stands now. And remember that we never saw this bracket before.

Do you have any traditional IRAs that you can convert to Roth and use up the remaining $19k room in the 12% bracket? Perhaps you can ask your 401k administrator if you can do an in-plan Roth conversion of the traditional 401k contributions already made, into Roth?

In the 12% bracket, I advocate for Roth conversions more than tax gains harvesting. That's because Roth conversion is a gift that keeps on giving, through your life time and at least one more generation after yours. Whereas tax gains harvesting is a one time benefit.

Topic Author
aiyuanuc
Posts: 22
Joined: Fri May 03, 2019 8:16 am

Re: Should I harvest long-term capital gains this year

Post by aiyuanuc » Fri Nov 29, 2019 11:04 am

Did you mean 22% Fed?
lakpr wrote:
Tue Nov 26, 2019 3:24 pm
Actually, Roth IRA is the perfect answer for you instead of traditional IRA, since you are in the 12% bracket now. This 12% bracket will disappear come 2026, as the law stands now. And remember that we never saw this bracket before.

Do you have any traditional IRAs that you can convert to Roth and use up the remaining $19k room in the 12% bracket? Perhaps you can ask your 401k administrator if you can do an in-plan Roth conversion of the traditional 401k contributions already made, into Roth?

In the 12% bracket, I advocate for Roth conversions more than tax gains harvesting. That's because Roth conversion is a gift that keeps on giving, through your life time and at least one more generation after yours. Whereas tax gains harvesting is a one time benefit.

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AndrewXnn
Posts: 176
Joined: Thu Jan 02, 2014 7:55 pm
Location: Upstate New York

Re: Should I harvest long-term capital gains this year

Post by AndrewXnn » Fri Nov 29, 2019 11:20 am

It is probably not be a good idea to harvest long-term gains just because.

If there is a chance that you might want to pass on the assets to later generations, then
keep in mind, that they will not have to pay any taxes on long term gains.
So, if the underlying security is a reasonably valued asset with the potential for
further long term gains, then probably the best thing would be to just let it ride.

lakpr
Posts: 3051
Joined: Fri Mar 18, 2011 9:59 am

Re: Should I harvest long-term capital gains this year

Post by lakpr » Fri Nov 29, 2019 11:26 am

aiyuanuc wrote:
Fri Nov 29, 2019 11:04 am
Did you mean 22% Fed?
lakpr wrote:
Tue Nov 26, 2019 3:24 pm
Actually, Roth IRA is the perfect answer for you instead of traditional IRA, since you are in the 12% bracket now. This 12% bracket will disappear come 2026, as the law stands now. And remember that we never saw this bracket before.

Do you have any traditional IRAs that you can convert to Roth and use up the remaining $19k room in the 12% bracket? Perhaps you can ask your 401k administrator if you can do an in-plan Roth conversion of the traditional 401k contributions already made, into Roth?

In the 12% bracket, I advocate for Roth conversions more than tax gains harvesting. That's because Roth conversion is a gift that keeps on giving, through your life time and at least one more generation after yours. Whereas tax gains harvesting is a one time benefit.
I am sorry, I must not have really looked through your post when I typed my previous reply. I must have just looked at the 84k income, not realizing that it is taxable income.

With that income, and in 22% bracket, I would not do any capital gains harvesting and pay 15% tax on it.

There's one item you might want to consider doing. Recharacterize *your* Roth IRA contribution to traditional IRA. Then roll that traditional IRA into your 401k plan. That would let you drop from 84k taxable income to 78k taxable income, and into 12% tax bracket. Will save you an extra $600 ($1320 in total) in taxes.

Folks with $123k income or less for MFJ are allowed to contribute to both 401k and to Traditional IRA and get tax deductions on it. With 135k gross income less $19k 401k contribution, you are below this threshold. Through this workaround, you get to essentially put $25k per year into tax deferred.

Even if you do this, since you are almost top of the 78750 limit for the year, you will be able to harvest at most $750 in capital gains for the year (with $0 in taxes).

Stick to Roth IRA for your spouse.

There's one other thing you COULD do. Do you have kids? Open a UTMA brokerage account in your kid's name, and transfer the stocks/mutual fund shares in kind from your account to the kid's UTMA account. Then sell them. Up to $2200 unearned income in kids names is tax free.

Topic Author
aiyuanuc
Posts: 22
Joined: Fri May 03, 2019 8:16 am

Re: Should I harvest long-term capital gains this year

Post by aiyuanuc » Sun Dec 01, 2019 4:36 pm

Thanks lakpr! Appreciate your detailed explanation very much!
lakpr wrote:
Fri Nov 29, 2019 11:26 am
aiyuanuc wrote:
Fri Nov 29, 2019 11:04 am
Did you mean 22% Fed?
lakpr wrote:
Tue Nov 26, 2019 3:24 pm
Actually, Roth IRA is the perfect answer for you instead of traditional IRA, since you are in the 12% bracket now. This 12% bracket will disappear come 2026, as the law stands now. And remember that we never saw this bracket before.

Do you have any traditional IRAs that you can convert to Roth and use up the remaining $19k room in the 12% bracket? Perhaps you can ask your 401k administrator if you can do an in-plan Roth conversion of the traditional 401k contributions already made, into Roth?

In the 12% bracket, I advocate for Roth conversions more than tax gains harvesting. That's because Roth conversion is a gift that keeps on giving, through your life time and at least one more generation after yours. Whereas tax gains harvesting is a one time benefit.
I am sorry, I must not have really looked through your post when I typed my previous reply. I must have just looked at the 84k income, not realizing that it is taxable income.

With that income, and in 22% bracket, I would not do any capital gains harvesting and pay 15% tax on it.

There's one item you might want to consider doing. Recharacterize *your* Roth IRA contribution to traditional IRA. Then roll that traditional IRA into your 401k plan. That would let you drop from 84k taxable income to 78k taxable income, and into 12% tax bracket. Will save you an extra $600 ($1320 in total) in taxes.

Folks with $123k income or less for MFJ are allowed to contribute to both 401k and to Traditional IRA and get tax deductions on it. With 135k gross income less $19k 401k contribution, you are below this threshold. Through this workaround, you get to essentially put $25k per year into tax deferred.

Even if you do this, since you are almost top of the 78750 limit for the year, you will be able to harvest at most $750 in capital gains for the year (with $0 in taxes).

Stick to Roth IRA for your spouse.

There's one other thing you COULD do. Do you have kids? Open a UTMA brokerage account in your kid's name, and transfer the stocks/mutual fund shares in kind from your account to the kid's UTMA account. Then sell them. Up to $2200 unearned income in kids names is tax free.

lakpr
Posts: 3051
Joined: Fri Mar 18, 2011 9:59 am

Re: Should I harvest long-term capital gains this year

Post by lakpr » Sun Dec 01, 2019 9:59 pm

I think I forgot to mention that you might want to also roll the recharacterized Traditional IRA to your 401k plan to take advantage of the superior creditor protections. Do this every year. You will thus remain in 12% bracket, and all your tax deferred assets are consolidated into a single account, your 401k. Your wife's assets will be also in a single account, her Roth IRA.

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