Managing our taxable account planned for near-term draw-down

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Topic Author
BH_RedRan
Posts: 36
Joined: Thu Apr 04, 2019 4:27 pm

Managing our taxable account planned for near-term draw-down

Post by BH_RedRan » Fri Jan 24, 2020 4:29 pm

My question is this: How do we best guard against stock downturns (and having to sell low) in my taxable account for the next few years? Do we diversify the taxable account soon or instead just dip into an IRA by selling bonds if our taxable account has taken a sizable short-term hit? See the details below.

Ages Me: 57.5 Wife: 60.5

Overall, ~60/40 stock/bond allocation, low-cost Vanguard funds, ~1/4 of assets are in a taxable account. We have about 9 months of cash on hand. We both plan to retire mid-2020. We will likely wait until we are 68-70 to take social security.

[Edits] Our state has no income or cap. gains tax. We have no long term debt. Pre-retirement tax bracket 24%, post-retirement, would like to remain 24%. Likely expenses $140K including health insurance and fun stuff.

For tax efficiency, we've loaded up our taxable account with 100% Vanguard stock funds (VTIAX, VIMAX, VFIAX). They have appreciated a great deal lately like everyones.

We plan to live off of the taxable account for about 5-6 years if all goes swimmingly, then switch to traditional IRA money (we have no Roth as yet), no pensions. At the moment, we think our average withdrawal rate will be about 4% give or take, much less after SS starts. But now I'm thinking that the taxable assets are really for very short term use and, taken by themselves, kind of risky. However, capturing a lot of gain at once may be expensive so diversifying the account seems tough. For whatever reason, I didn't come to this realization until about a week or so ago but have been worrying about it a bit since then.

Thank you for your thoughts and suggestions.
Last edited by BH_RedRan on Fri Jan 24, 2020 5:33 pm, edited 5 times in total.

bloom2708
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Location: Fargo, ND

Re: Managing our taxible account planned for near-term draw-down

Post by bloom2708 » Fri Jan 24, 2020 4:36 pm

Redirect dividends.
Sell shares with small gain or no gain or loss.
Take a certain amount of gain this year and next.

Limited or Int-Term Tax-Exempt, state specific tax-exempt (CA, PA, NY, NJ, OH at Vanguard).
Int-Term Treasury Index (or similar).
Maybe a mix in taxable.

Increase stocks in pre-tax to keep asset mix in tact. Roth should still be stock index funds.

No easy answers. You had a good run, paying some tax isn't the worst place to be to get to a safer place.
"People want confirmation, not advice" Unknown | "We are here to provoke thoughtfulness, not agree with you" Unknown | Four words: Whole food, plant based

Topic Author
BH_RedRan
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Joined: Thu Apr 04, 2019 4:27 pm

Re: Managing our taxable account planned for near-term draw-down

Post by BH_RedRan » Fri Jan 24, 2020 5:15 pm

Thanks, bloom2708. Our dividends are directed to the money market settlement account, which was a recent change. For a state with no cap gains or income tax, do your bond fund suggestions change?

bloom2708
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Location: Fargo, ND

Re: Managing our taxable account planned for near-term draw-down

Post by bloom2708 » Fri Jan 24, 2020 5:21 pm

BH_RedRan wrote:
Fri Jan 24, 2020 5:15 pm
Thanks, bloom2708. Our dividends are directed to the money market settlement account, which was a recent change. For a state with no cap gains or income tax, do your bond fund suggestions change?
With no state tax, Limited-Term or Int-Term Tax-Exempt are both Fed tax exempt. I am guessing you are at least in 22% and maybe 24% where tax-exempt makes sense. Some mix Limited and Long term or just stay with Intermediate-Term.

I split with Int-Term Treasury index (VSIGX) to not have all municipal bonds. You trade some return for less risk. You can ladder the risk. Fed/Prime Money Market, Treasuries (index or actual individual), Tax-Exempt municipals (or individual municipals).

Missing some information to help like Fed marginal tax bracket.
"People want confirmation, not advice" Unknown | "We are here to provoke thoughtfulness, not agree with you" Unknown | Four words: Whole food, plant based

Topic Author
BH_RedRan
Posts: 36
Joined: Thu Apr 04, 2019 4:27 pm

Re: Managing our taxable account planned for near-term draw-down

Post by BH_RedRan » Fri Jan 24, 2020 5:34 pm

Yes. Sorry about that. Thought I had that figure in there. A good guess at the 24% bracket.

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Peter Foley
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Re: Managing our taxable account planned for near-term draw-down

Post by Peter Foley » Fri Jan 24, 2020 5:42 pm

I am very doubtful than many here would recommend the following:

One could purchase long term puts (options) on market indexes. These would basically serve as an insurance policy against a severe downturn in the indexes themselves. I have not researched this approach with respect to current options and costs to ascertain if this would be a viable "insurance" strategy.

KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: Managing our taxable account planned for near-term draw-down

Post by KlangFool » Fri Jan 24, 2020 5:52 pm

BH_RedRan wrote:
Fri Jan 24, 2020 4:29 pm
My question is this: How do we best guard against stock downturns (and having to sell low) in my taxable account for the next few years? Do we diversify the taxable account soon or instead just dip into an IRA by selling bonds if our taxable account has taken a sizable short-term hit? See the details below.

Ages Me: 57.5 Wife: 60.5

Overall, ~60/40 stock/bond allocation, low-cost Vanguard funds, ~1/4 of assets are in a taxable account. We have about 9 months of cash on hand. We both plan to retire mid-2020. We will likely wait until we are 68-70 to take social security.

[Edits] Our state has no income or cap. gains tax. We have no long term debt. Pre-retirement tax bracket 24%, post-retirement, would like to remain 24%. Likely expenses $140K including health insurance and fun stuff.

For tax efficiency, we've loaded up our taxable account with 100% Vanguard stock funds (VTIAX, VIMAX, VFIAX). They have appreciated a great deal lately like everyones.

We plan to live off of the taxable account for about 5-6 years if all goes swimmingly, then switch to traditional IRA money (we have no Roth as yet), no pensions. At the moment, we think our average withdrawal rate will be about 4% give or take, much less after SS starts. But now I'm thinking that the taxable assets are really for very short term use and, taken by themselves, kind of risky. However, capturing a lot of gain at once may be expensive so diversifying the account seems tough. For whatever reason, I didn't come to this realization until about a week or so ago but have been worrying about it a bit since then.

Thank you for your thoughts and suggestions.
BH_RedRan,

<<How do we best guard against stock downturns (and having to sell low) in my taxable account for the next few years? >>

Why do you think you have a problem?

If this happened,

A) you can sell the stock at a loss in your taxable account

B) Exchange the bond with the stock in your IRA.

This is a great thing! With enough losses, you can use the losses to do Roth conversion of your IRAs and pay zero taxes.

<<We plan to live off of the taxable account for about 5-6 years if all goes swimmingly, then switch to traditional IRA money (we have no Roth as yet),>>

Why? If you can Roth convert some of your IRAs at zero taxes over the next 5 to 6 years, why won't you do it?

You have no problem.

KlangFool

Topic Author
BH_RedRan
Posts: 36
Joined: Thu Apr 04, 2019 4:27 pm

Re: Managing our taxable account planned for near-term draw-down

Post by BH_RedRan » Fri Jan 24, 2020 5:55 pm

KlangFool. Wow, that answer is why I ask here. That strategy never occurred to me. The "live off of taxable first" idea is based on what seems to be the common dogma. I had Roth conversion questions too but thought I'd start a different thread so as not confound this thread. But, since they are inter-related I'm glad you brought it up.

RubyTuesday
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Joined: Fri Oct 19, 2012 11:24 am

Re: Managing our taxable account planned for near-term draw-down

Post by RubyTuesday » Fri Jan 24, 2020 6:23 pm

Also while living off taxable, start Roth conversions now up to top of tax bracket.
“Doing nothing is better than being busy doing nothing.” – Lao Tzu

Topic Author
BH_RedRan
Posts: 36
Joined: Thu Apr 04, 2019 4:27 pm

Re: Managing our taxable account planned for near-term draw-down

Post by BH_RedRan » Fri Jan 24, 2020 6:43 pm

I just looked up "wash sale rule". It looks like the sale to capture a loss and the re-purchase of a "substantially similar" fund/stock has to be 31 days apart, else the deduction is disallowed. Is that about right?

My crystal ball that is sometimes right tells me that I probably won't see a capital loss, just some loss of unrealized gain. So, doing Roth conversions "for free" isn't really in the cards, right? Still not a problem I guess. I have been contemplating the Roth conversions after retirement up to a certain amount per year anyway.

Fishing50
Posts: 384
Joined: Tue Sep 27, 2016 1:18 am

Re: Managing our taxable account planned for near-term draw-down

Post by Fishing50 » Sat Jan 25, 2020 12:13 pm

BH_RedRan wrote:
Fri Jan 24, 2020 4:29 pm
We have about 9 months of cash on hand. We both plan to retire mid-2020. We will likely wait until we are 68-70 to take social security.

[Edits] Our state has no income or cap. gains tax. We have no long term debt. Pre-retirement tax bracket 24%, post-retirement, would like to remain 24%. Likely expenses $140K including health insurance and fun stuff.

For tax efficiency, we've loaded up our taxable account with 100% Vanguard stock funds (VTIAX, VIMAX, VFIAX). They have appreciated a great deal lately like everyones.

We plan to live off of the taxable account for about 5-6 years if all goes swimmingly, then switch to traditional IRA money (we have no Roth as yet), no pensions. At the moment, we think our average withdrawal rate will be about 4% give or take, much less after SS starts. But now I'm thinking that the taxable assets are really for very short term use and, taken by themselves, kind of risky. However, capturing a lot of gain at once may be expensive so diversifying the account seems tough. For whatever reason, I didn't come to this realization until about a week or so ago but have been worrying about it a bit since then.
With no pension I think you have it backwards, you should delay spending taxable to preserve tax efficiency of dividends and capital gains and begin traditional IRA withdrawals before social security (SS) increases income. You should map out required taxable income now until SS, then after SS and RMDs. Salary, SS, and RMDs are near constant values that are easily predictable. Withdrawals and capital gains are variables that can be managed to allocate the entire portfolio between taxable and tax deferred. Turbo Tax downloaded to your computer can help do 'what if' scenarios.

With salary, you'll have less flexibility 2020. Salary + dividends + withdrawals = taxable income

In 2021 to age 70 you can choose how much tax to pay. dividends + withdrawals = taxable income
In retirement you can have $102,950 in taxable income in the 12% tax bracket.
You can choose tax free capital gains up to the 12% threshold in this time period, saving 15% capital gains that might be the wrong answer because withdrawals might be at the 22% tax rate after SS begins.

At age 70 SS and RMD are predicable setting a minimum tax rate.
SS + RMDs + dividends + withdrawals = taxable income
After 12 years of withdrawals if SS + RMDs = $190K (top of 22% tax bracket), you should probably begin withdrawals to $190K beginning in 2020 which probably makes Roth conversions a decent option.

I'll avoid detailed analysis of future tax rates, but I'll say the current expanded 22% and 24% tax brackets are set to expire in 2026.

YMMV. I'm just a guy on the internet with 100% taxable in equities, no emergency fund, and a future pension that ensures we'll pay 22% or higher taxes on our tax deferred accounts.
It's perfectly legal, go ask the IRS, they'll say the same thing. I actually feel stupid telling you this, I'm sure you would've investigated the matter yourself. Andy Dufresne

Boatguy
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Joined: Fri Apr 19, 2019 7:54 pm

Re: Managing our taxable account planned for near-term draw-down

Post by Boatguy » Sat Jan 25, 2020 12:54 pm

I don’t think this has been mentioned yet, but I would put more thought into when each of you decide to take SS. I’d suggest using opensocialsecurity.com as you might find that it makes more sense for the lower income earner to take SS earlier and the other spouse wait until 70. I and many others have found the site very useful.

KlangFool
Posts: 15583
Joined: Sat Oct 11, 2008 12:35 pm

Re: Managing our taxable account planned for near-term draw-down

Post by KlangFool » Sat Jan 25, 2020 12:56 pm

BH_RedRan wrote:
Fri Jan 24, 2020 6:43 pm
I just looked up "wash sale rule". It looks like the sale to capture a loss and the re-purchase of a "substantially similar" fund/stock has to be 31 days apart, else the deduction is disallowed. Is that about right?

My crystal ball that is sometimes right tells me that I probably won't see a capital loss, just some loss of unrealized gain. So, doing Roth conversions "for free" isn't really in the cards, right? Still not a problem I guess. I have been contemplating the Roth conversions after retirement up to a certain amount per year anyway.
BH_RedRan,

Then, don't buy a substantially similar fund. It is not that hard. You can exchange the total stock market index fund to an S&P 500 index fund. As long as they are not using the same index, you are fine.

<<My crystal ball that is sometimes right tells me that I probably won't see a capital loss, just some loss of unrealized gain. So, doing Roth conversions "for free" isn't really in the cards, right? Still not a problem I guess. >>

Even without a loss, your gain will be lowered by the stock market crash. That leaves you room for Roth conversion.

KlangFool

Topic Author
BH_RedRan
Posts: 36
Joined: Thu Apr 04, 2019 4:27 pm

Re: Managing our taxable account planned for near-term draw-down

Post by BH_RedRan » Sat Jan 25, 2020 3:42 pm

Thank you all for the advice. Will be studying this more over the next few months. It is good to have these planning options in my back pocket.

aristotelian
Posts: 7005
Joined: Wed Jan 11, 2017 8:05 pm

Re: Managing our taxable account planned for near-term draw-down

Post by aristotelian » Sat Jan 25, 2020 4:47 pm

Fishing50 wrote:
Sat Jan 25, 2020 12:13 pm
BH_RedRan wrote:
Fri Jan 24, 2020 4:29 pm
We have about 9 months of cash on hand. We both plan to retire mid-2020. We will likely wait until we are 68-70 to take social security.

[Edits] Our state has no income or cap. gains tax. We have no long term debt. Pre-retirement tax bracket 24%, post-retirement, would like to remain 24%. Likely expenses $140K including health insurance and fun stuff.

For tax efficiency, we've loaded up our taxable account with 100% Vanguard stock funds (VTIAX, VIMAX, VFIAX). They have appreciated a great deal lately like everyones.

We plan to live off of the taxable account for about 5-6 years if all goes swimmingly, then switch to traditional IRA money (we have no Roth as yet), no pensions. At the moment, we think our average withdrawal rate will be about 4% give or take, much less after SS starts. But now I'm thinking that the taxable assets are really for very short term use and, taken by themselves, kind of risky. However, capturing a lot of gain at once may be expensive so diversifying the account seems tough. For whatever reason, I didn't come to this realization until about a week or so ago but have been worrying about it a bit since then.
With no pension I think you have it backwards, you should delay spending taxable to preserve tax efficiency of dividends and capital gains and begin traditional IRA withdrawals before social security (SS) increases income. You should map out required taxable income now until SS, then after SS and RMDs. Salary, SS, and RMDs are near constant values that are easily predictable. Withdrawals and capital gains are variables that can be managed to allocate the entire portfolio between taxable and tax deferred. Turbo Tax downloaded to your computer can help do 'what if' scenarios.

With salary, you'll have less flexibility 2020. Salary + dividends + withdrawals = taxable income

In 2021 to age 70 you can choose how much tax to pay. dividends + withdrawals = taxable income
In retirement you can have $102,950 in taxable income in the 12% tax bracket.
You can choose tax free capital gains up to the 12% threshold in this time period, saving 15% capital gains that might be the wrong answer because withdrawals might be at the 22% tax rate after SS begins.

At age 70 SS and RMD are predicable setting a minimum tax rate.
SS + RMDs + dividends + withdrawals = taxable income
After 12 years of withdrawals if SS + RMDs = $190K (top of 22% tax bracket), you should probably begin withdrawals to $190K beginning in 2020 which probably makes Roth conversions a decent option.

I'll avoid detailed analysis of future tax rates, but I'll say the current expanded 22% and 24% tax brackets are set to expire in 2026.

YMMV. I'm just a guy on the internet with 100% taxable in equities, no emergency fund, and a future pension that ensures we'll pay 22% or higher taxes on our tax deferred accounts.
I agree he should pull from the IRA while he can, but why not do so as Roth conversions while spending from taxable? He would get the same tax hit on the IRA but would be left in a more advantageous position with more in Roth and less in taxable.

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