Retiring at age 51. Will live off taxable investments in early part of retirement.
Have some relatively tax-inefficient vehicles right now (REITS, CDs) in taxable account.
So, the plan is to live off any taxable dividends (small amount) and selling those tax-inefficient investments.
Those investments have relatively small capital gains associated with them.
The end result is that my taxable income (and MAGI) is likely to be quite small for a number of years, even though my actual withdrawal will be quite a bit bigger. I suspect this is common to many early retirees.
This would likely make me eligible for a healthy ACA premium tax credit. I am very conflicted about the ethics of taking the ACA tax credits. But, I think I would have do some financial contortions to avoid it.
The questions that I am struggling with (and seeking advice from this forum) are a financial one and an ethical one.
Would it be beneficial to do Roth Conversions (75% of our tax sheltered investments are pre-tax) or Tax gain harvesting at 0% rate?
If so, which is preferable?
Doing either to the top of the 15% bracket would still give us some tax credits (family of 4), does it make any sense to go even higher?
Something just feels wrong about taking the ACA tax credits when we have sufficient funds to pay the full premiums. I believe i have seem some people here refer to it as "gaming" the system. I can see their point. Playing the devil's advocate when i have this conversation with my self, several points come up:
- 1) We have been using tax advantaged accounts all my life. We could have afforded to pay the full tax on our income, so how is this any different, it is just another tax law that needs to be considered when optimizing various income/saving strategies
2) To avoid getting the ACA tax credit, we would have to be doing either Roth conversions or Tax Gain harvesting, so we are trading one type of "gaming" of the system, with another. Is one morally superior to the other?
3) I think some of what causes my discomfort is that in the IRA/401K case, we are paying less than we would otherwise owe (saving on taxes), where as in the case of the ACA credits, it feels like the government is giving us something, rather than us just paying less.
But, financially i guess they are the same thing. If i give you a dollar and you give me 20 cents back, is that somehow different than if i just gave you 80 cents instead of a dollar to begin with?