How to minimize taxes when living off of a brokerage account

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RoboFan
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How to minimize taxes when living off of a brokerage account

Post by RoboFan »

I’m just starting my retirement and plan to live off of my brokerage account, which is compromised of 100% equity holdings (index funds). I also have tax advantaged accounts (401k, 403b, Roth) which, when combined with the holdings in my brokerage account, give me my desired asset allocation (60% stock 40% bonds). I plan to delay taking any distributions from the tax advantaged accounts for as long as possible.

The question is how to keep the overall mix in balance while minimize taxes. Specifically, how to avoid wash sales. My current plan is to sell enough stock at the beginning of each year to cover living expenses and taxes for that year. This transaction would occur in the brokerage account. I would then wait 3-months and rebalance the overall mix - basically sell bonds held in the retirement accounts to buy whatever portion of the equities I just sold to re-establish the desired 60/40 asset allocation.

Does this make sense? Can I apply a tax loss harvesting strategy to minimize taxation at the time I sell equities in the brokerage account, and then buy back whatever stock I sold at a loss to 3 months later in the retirement account. Is there any data on rebalancing again at 6 and 9 months (currently I rebalance once a year).
exodusNH
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Re: How to minimize taxes when living off of a brokerage account

Post by exodusNH »

RoboFan wrote: Wed Oct 20, 2021 5:34 pm I’m just starting my retirement and plan to live off of my brokerage account, which is compromised of 100% equity holdings (index funds). I also have tax advantaged accounts (401k, 403b, Roth) which, when combined with the holdings in my brokerage account, give me my desired asset allocation (60% stock 40% bonds). I plan to delay taking any distributions from the tax advantaged accounts for as long as possible.

The question is how to keep the overall mix in balance while minimize taxes. Specifically, how to avoid wash sales. My current plan is to sell enough stock at the beginning of each year to cover living expenses and taxes for that year. This transaction would occur in the brokerage account. I would then wait 3-months and rebalance the overall mix - basically sell bonds held in the retirement accounts to buy whatever portion of the equities I just sold to re-establish the desired 60/40 asset allocation.

Does this make sense? Can I apply a tax loss harvesting strategy to minimize taxation at the time I sell equities in the brokerage account, and then buy back whatever stock I sold at a loss to 3 months later in the retirement account. Is there any data on rebalancing again at 6 and 9 months (currently I rebalance once a year).
Since your tax deferred accounts will eventually require distributions, why not draw from them now if you're eligible? Those will count as ordinary income. If you have no other income, you can draw quite a bit out at fairly low tax rates and then top it off with your taxable.

The current rates are set to expire in the next couple of years.
jebmke
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Re: How to minimize taxes when living off of a brokerage account

Post by jebmke »

You may want to take a look at a longer term. Depending on a lot of factors, achieving the lowest possible tax in the short run may not be optimal over several years. I incurred a tax on converting sheltered assets to Roth IRA in more than one year in early retirement. But the analysis is very specific to your situation and only you can decide if that would make sense.
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marcopolo
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Re: How to minimize taxes when living off of a brokerage account

Post by marcopolo »

RoboFan wrote: Wed Oct 20, 2021 5:34 pm I’m just starting my retirement and plan to live off of my brokerage account, which is compromised of 100% equity holdings (index funds). I also have tax advantaged accounts (401k, 403b, Roth) which, when combined with the holdings in my brokerage account, give me my desired asset allocation (60% stock 40% bonds). I plan to delay taking any distributions from the tax advantaged accounts for as long as possible.

The question is how to keep the overall mix in balance while minimize taxes. Specifically, how to avoid wash sales. My current plan is to sell enough stock at the beginning of each year to cover living expenses and taxes for that year. This transaction would occur in the brokerage account. I would then wait 3-months and rebalance the overall mix - basically sell bonds held in the retirement accounts to buy whatever portion of the equities I just sold to re-establish the desired 60/40 asset allocation.

Does this make sense? Can I apply a tax loss harvesting strategy to minimize taxation at the time I sell equities in the brokerage account, and then buy back whatever stock I sold at a loss to 3 months later in the retirement account. Is there any data on rebalancing again at 6 and 9 months (currently I rebalance once a year).
You could do what you describe, but why wait 3 months to rebalance? Why not rebalance immediately?
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marcopolo
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Re: How to minimize taxes when living off of a brokerage account

Post by marcopolo »

exodusNH wrote: Wed Oct 20, 2021 5:48 pm
RoboFan wrote: Wed Oct 20, 2021 5:34 pm I’m just starting my retirement and plan to live off of my brokerage account, which is compromised of 100% equity holdings (index funds). I also have tax advantaged accounts (401k, 403b, Roth) which, when combined with the holdings in my brokerage account, give me my desired asset allocation (60% stock 40% bonds). I plan to delay taking any distributions from the tax advantaged accounts for as long as possible.

The question is how to keep the overall mix in balance while minimize taxes. Specifically, how to avoid wash sales. My current plan is to sell enough stock at the beginning of each year to cover living expenses and taxes for that year. This transaction would occur in the brokerage account. I would then wait 3-months and rebalance the overall mix - basically sell bonds held in the retirement accounts to buy whatever portion of the equities I just sold to re-establish the desired 60/40 asset allocation.

Does this make sense? Can I apply a tax loss harvesting strategy to minimize taxation at the time I sell equities in the brokerage account, and then buy back whatever stock I sold at a loss to 3 months later in the retirement account. Is there any data on rebalancing again at 6 and 9 months (currently I rebalance once a year).
Since your tax deferred accounts will eventually require distributions, why not draw from them now if you're eligible? Those will count as ordinary income. If you have no other income, you can draw quite a bit out at fairly low tax rates and then top it off with your taxable.

The current rates are set to expire in the next couple of years.
Couple points.

We don't know the OP's age, unless they are 59.5 or older, withdrawing from tax-advantaged accounts will cost a 10% penalty.

While there are no absolutes, generally it would be better to enjoy tax-deferred, or tax-free growth. If there is additional space in a low tax bracket, it would generally be better to Roth Conversion while living off taxable account rather than spending from tax-deferred.
Once in a while you get shown the light, in the strangest of places if you look at it right.
backpacker61
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Re: How to minimize taxes when living off of a brokerage account

Post by backpacker61 »

One thing I would consider doing is directing the dividends and capital gains distributions from your taxable brokerage to the sweep account.

Then only sell enough equities to top off the difference between what you need for spending and what you expect the taxable brokerage account assets will throw off in dividends and capital gains distributions during the year.
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exodusNH
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Re: How to minimize taxes when living off of a brokerage account

Post by exodusNH »

marcopolo wrote: Wed Oct 20, 2021 6:17 pm
exodusNH wrote: Wed Oct 20, 2021 5:48 pm
RoboFan wrote: Wed Oct 20, 2021 5:34 pm I’m just starting my retirement and plan to live off of my brokerage account, which is compromised of 100% equity holdings (index funds). I also have tax advantaged accounts (401k, 403b, Roth) which, when combined with the holdings in my brokerage account, give me my desired asset allocation (60% stock 40% bonds). I plan to delay taking any distributions from the tax advantaged accounts for as long as possible.

The question is how to keep the overall mix in balance while minimize taxes. Specifically, how to avoid wash sales. My current plan is to sell enough stock at the beginning of each year to cover living expenses and taxes for that year. This transaction would occur in the brokerage account. I would then wait 3-months and rebalance the overall mix - basically sell bonds held in the retirement accounts to buy whatever portion of the equities I just sold to re-establish the desired 60/40 asset allocation.

Does this make sense? Can I apply a tax loss harvesting strategy to minimize taxation at the time I sell equities in the brokerage account, and then buy back whatever stock I sold at a loss to 3 months later in the retirement account. Is there any data on rebalancing again at 6 and 9 months (currently I rebalance once a year).
Since your tax deferred accounts will eventually require distributions, why not draw from them now if you're eligible? Those will count as ordinary income. If you have no other income, you can draw quite a bit out at fairly low tax rates and then top it off with your taxable.

The current rates are set to expire in the next couple of years.
Couple points.

We don't know the OP's age, unless they are 59.5 or older, withdrawing from tax-advantaged accounts will cost a 10% penalty.

While there are no absolutes, generally it would be better to enjoy tax-deferred, or tax-free growth. If there is additional space in a low tax bracket, it would generally be better to Roth Conversion while living off taxable account rather than spending from tax-deferred.
Hence the "if you're eligible".

Absolutely better to not tap the tax-free stuff. You could also convert to Roth instead.

But the taxes are due eventually. You owe the government ~20% of your tax deferred. Whether you let it grow and pay 20% on a bigger amount or pay it now and get the same growth from the smaller starting point, the numbers roughly come out the same. (Assuming tax rates stay the same.)

There are other considerations like Medicare subsidies and SS taxation. We don't have enough info to really help, which is why I asked my question.
shess
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Re: How to minimize taxes when living off of a brokerage account

Post by shess »

Most of the time, you're likely to be selling taxable shares with gains, so no problems come up.

If you do manage a TLH, rather than waiting to rebalance, just rebalance using a similar-but-not-identical fund in the tax-deferred account, then circle back a few months later to put it into what you REALLY wanted.

Keep in mind that if you want to be technical about it, your dividend reinvestment in tax-deferred also applies. You could arrange to make your sale between quarterly dividend payments OR you could just leave the tax-deferred account invested in the similar-but-not-identical fund all the time. Like I don't lose much sleep over my 401k being invested in an S&P500 trust rather than the total-market fund I use in taxable.
MrJedi
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Re: How to minimize taxes when living off of a brokerage account

Post by MrJedi »

If you post a full portfolio and also information like age, estimated annual expenses, etc., the forum can provide some good insight on how to strategize your taxes and account distributions.
sailaway
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Re: How to minimize taxes when living off of a brokerage account

Post by sailaway »

You could just rebalance immediately by using an unsubstantially similar fund, as folks use for tax loss harvesting. We don't have a strong preference between SP500 and total us market, so are even further apart than some.

As mentioned, it would be worth your while to double check how Roth conversions fit into your plan, thinking of tax smoothing and long term tax mitigation, rather than focusing on minimum taxes at a certain period. We will retire rather early and may well just convert up to our tax deduction or the lowest bracket.
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Re: How to minimize taxes when living off of a brokerage account

Post by samsoes »

RoboFan wrote: Wed Oct 20, 2021 5:34 pm Specifically, how to avoid wash sales.
There is no wash sale if you don't sell from the taxable brokerage account at a loss.
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ralph124cf
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Re: How to minimize taxes when living off of a brokerage account

Post by ralph124cf »

Question: If you convert from tIRA to Roth before age 59.5, is there any penalty due? I know that there will always be ordinary income tax due on that amount.

If I were early retired and living primarily from a taxable brokerage account, I would certainly like to do Roth conversions up to some arbitrary tax break point.

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grabiner
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Re: How to minimize taxes when living off of a brokerage account

Post by grabiner »

ralph124cf wrote: Wed Oct 20, 2021 7:16 pm Question: If you convert from tIRA to Roth before age 59.5, is there any penalty due? I know that there will always be ordinary income tax due on that amount.
No penalty. However, if you withdraw that particular conversion in less than five years and are still under 59.5, there will be a 10% penalty on the amount that was taxed upon conversion; this prevents you from using a conversion and then a quick withdrawal to avoid the 10% withdrawal penalty. (Conversions are treated as withdrawn first-in-first-out, so if you did one conversion in 2021 and another in 2022, you withdraw the entire 2021 conversion first, then the 2022 conversion.)
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WhiteMaxima
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Re: How to minimize taxes when living off of a brokerage account

Post by WhiteMaxima »

Do Roth conversion, you hear me?
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Watty
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Re: How to minimize taxes when living off of a brokerage account

Post by Watty »

How to minimize taxes when living off of a brokerage account
One critical thing is to focus on the tax burden over the long term and not just this years taxes. This could include looking at your heirs taxes too.

Don't forget that the federal tax rates are scheduled to revert to the old higher rates in 2026 and if you are married then when one of you dies the survivor will be in the higher single tax brackets.

You also need to remember that minimizing your taxes is not the real goal. The real goal is to maximize what you, and your heirs, have to spend after taxes.
adestefan
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Re: How to minimize taxes when living off of a brokerage account

Post by adestefan »

If you’re living off investments then you can manage your income to reduce your capital gains tax rate.

Remember you’re paying only a small amount of tax on the gains and not on your initial investments. It’s a really good deal and not bad to pay the taxes!
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Re: How to minimize taxes when living off of a brokerage account

Post by crefwatch »

Are you certain you want 60/40 for the rest of your life? Is your tax-deferred portfolio a substantially different AA than the subject brokerage account?
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Re: How to minimize taxes when living off of a brokerage account

Post by Shallowpockets »

Why take out ALL of your years expenses at the beginning of the year before you need them? That is cutting down on what you do have invested. Why not leave it in and remove it as you need it?
Unless you have a real good grasp on your expenses, which is not the norm, you could not know of your expenses sufficiently to account for them all in the beginning of the year. Also, many of us have lumpy expenses.
As far as taxes, if you sell to cover your annual expenses at the start of the year, you could be wrong and remove too much. Then you have paid taxes on the surplus when it could have been working for you.
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Re: How to minimize taxes when living off of a brokerage account

Post by ScubaHogg »

Portfolio size matters here, but an aggressive person might consider living off margin loans vs actually incurring capital gains taxes. Tread carefully
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Re: How to minimize taxes when living off of a brokerage account

Post by calmaniac »

If you have long-held individual stocks or funds that have sizable capital gains, by selling specific lots that have less appreciation you will have lower capital gains and thus pay less tax. Obviously, this strategy only goes so far....as eventually you will run through these less appreciated lots.
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Re: How to minimize taxes when living off of a brokerage account

Post by celia »

RoboFan wrote: Wed Oct 20, 2021 5:34 pm I’m just starting my retirement and plan to live off of my brokerage account, which is compromised of 100% equity holdings (index funds). I also have tax advantaged accounts (401k, 403b, Roth) which, when combined with the holdings in my brokerage account, give me my desired asset allocation (60% stock 40% bonds). I plan to delay taking any distributions from the tax advantaged accounts for as long as possible.
I’ll wager that ALL of your accounts are brokerage accounts (stock and bond funds) unless you have a savings account at a bank or credit union. Which TAX CATEGORY (Taxable, Tax-deferred, or Roth) to withdraw from is more important since they each have different tax characteristics. But without knowing how much you have in each (and how much you need to withdraw in total each year for living expenses), there’s not much advice we can give. We also can’t estimate the taxes for you without some sense of the dollar amounts in each and the assets in each category.
The question is how to keep the overall mix in balance while minimize taxes.
Why are you asking this? Isn’t is better to “level” out your taxes over all future years instead of having a few years of low taxes followed by many more years of higher taxes?

This is what many of us are trying to say. You should be thinking long-term, say from your current age until you are 74 (after RMDs start at 72). Have you even estimated what the value of your tax-deferred accounts will be at 72 (NOT today’s value)? Then calculate the RMDs that will have to be withdrawn along with the taxes each year. Note that every dollar withdrawn from a tax-deferred account will be taxed as ordinary income compared to only the gain on sales in Taxable will be taxed, and at a more favorable tax rate.

AND, most likely you want to use some of your Taxable assets to pay the taxes. That’s a good reason to have dividends in Taxable be put into your settlement fund. If you keep re-investing them in the same fund, you end up with lots of little “purchases”, some of which may have to be sold to pay the taxes.

AND, anything not needed in Taxable that you don’t need for living expenses, can get a step-up in value when you die. Tax-Free for your Heirs!!! (That doesn’t happen for tax-deferred. Every dollar in there will still be taxed, unless given to charity.)
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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