tax planning for Large future savings bonds lump sum

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stvyreb
Posts: 81
Joined: Sat Nov 05, 2016 8:57 pm

tax planning for Large future savings bonds lump sum

Post by stvyreb » Tue Apr 02, 2019 4:30 pm

Hello, some data points:

+I am in my early 50s,
+I’ve a large amount of EE and I bonds (which have interest rates of 2.56% & 5.76% respectively)
+the interest earned on the savings bonds is being deferred till sold.

+my AGI federal is approximately $30,000 (none of which is wages) ; taxable income $19,000
(which I believe means there is $19,700 of “room” in the fed 12% bracket)
+my current state Does have state taxes
+I don’t plan on taking SS till age 70 or as late as possible.
+I currently get very large ACA APTC (advanced premium tax credits, I believe on the order of $450/month)

Federal 12% $9,526 to $38,700
22% >$38,700

so specifically in year 2028 when I'm < 70 years old still the portion that would fall into the 22% bracket would be about $35,000 or ($7,700) in taxes

and the following 3 years , there is another $10,000 that would fall into the 22% bracket (assuming brackets stay the same)

And hence I’m thinking that despite their excellent interest rate, and my potential very large increase in ACA health premium (assuming it lasts) that the numbers (when “crunched”), might make it worthwhile to sell a few of the Savings Bonds, now and per year for the next decade.

my other choice would be Roth Conversions or Capital Gain Harvesting (though I've many years rolling over the $3000 of CG losses going on)

In short I don't know how to approach this, (perhaps I could do some TurboTax what-if mock up with my TT 2018 software) or if it's worth hiring someone, and if so whom .....

And
I'm perfectly happy to do nothing, (if that is as wise as pursuing filling up my 12% federal bracket) as it seems to me the yield on these savings bonds are nice, and currently my ACA premium is very low , etc

TIA

Gill
Posts: 5185
Joined: Sun Mar 04, 2007 8:38 pm
Location: Florida

Re: tax planning for Large future savings bonds lump sum

Post by Gill » Tue Apr 02, 2019 4:56 pm

I’m generally opposed to paying taxes sooner than necessary. Many of us have large potential slugs of income off in the future arising from I-Bonds and EE Bonds. I cringe at the income I will have 11 years from now and beyond from bonds bought early this century but I’ve decided not to worry about it at this point. Could be that it will be offset by large nursing home expenses at that point as was the case with my mother.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal

Spirit Rider
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Joined: Fri Mar 02, 2007 2:39 pm

Re: tax planning for Large future savings bonds lump sum

Post by Spirit Rider » Tue Apr 02, 2019 5:40 pm

I have the same problem, I have a large number of 3.4% (missed the 3/6% ones) I Bonds. They are coming due when I will be knee deep in RMD's.

I am currently getting maximum benefit from ACA subsidies and cost sharing, When I turn 65 I have been having an internal debate on whether I should prioritize Roth IRA conversions to reduce future RMDs or start a phased I Bond redemption plan. The alternative is to have significant spikes in income during my 70s from I Bond redemptions.

From a solely emotional perspective, I am loathe to sell my beloved I Bonds early. I know emotion should have no basis in investment decisions, but hey they are there.

P.S. Thanks Mel.

megabad
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Joined: Fri Jun 01, 2018 4:00 pm

Re: tax planning for Large future savings bonds lump sum

Post by megabad » Tue Apr 02, 2019 6:35 pm

Seems like the deciding factor will be the ACA cliff not the 22% bracket. Assuming you think you will be in >12% bracket forever post 2028, it may be wise to terminate some of your bond holdings up to the ACA cliff limit (assuming all are penalty free). A Roth conversion would have a similar affect but it would not have impact until after RMDs (so you would still face the hit in 2028) so that probably is a worse move depending on your post 70 tax situation. It would probably have been most valuable to harvest capital gains but you indicate you had carryover losses so you can't do that. Seems like kind of a waste to deduct capital losses in the 12% bracket (when you will soon be higher), but offsetting capital gains is not a good solution either.

Topic Author
stvyreb
Posts: 81
Joined: Sat Nov 05, 2016 8:57 pm

Re: tax planning for Large future savings bonds lump sum

Post by stvyreb » Wed Apr 03, 2019 3:35 pm

megabad wrote:
Tue Apr 02, 2019 6:35 pm
Seems like the deciding factor will be the ACA cliff not the 22% bracket. Assuming you think you will be in >12% bracket forever post 2028, it may be wise to terminate some of your bond holdings up to the ACA cliff limit (assuming all are penalty free). A Roth conversion would have a similar affect but it would not have impact until after RMDs (so you would still face the hit in 2028) so that probably is a worse move depending on your post 70 tax situation. It would probably have been most valuable to harvest capital gains but you indicate you had carryover losses so you can't do that. Seems like kind of a waste to deduct capital losses in the 12% bracket (when you will soon be higher), but offsetting capital gains is not a good solution either.
yes, this sort of gets to the crux of the situation, there are many moving parts and unknowns , for sure in 2028-2031 , esp 2028 there would be a big hit, of course, my taxable accounts may get spent down in the next 10 years somewhat, and hence my income from those accounts ......

re: capital gain harvesting, I don't think I was really very aware of the concept till reading a michael kitce's article on it, and my understanding was it's somewhat a no-brainer above a certain amount to capital loss harvest in most situations ........ at least for me it's seems more straightforward, though, the Kitce's article was specifically suggesting the Gain Harvest to benefit from the 0% LTG taxable status in the 12% bracket ......


bottom line, is, is this worth hiring someone to model the situation and potentially using the $19,000 of "room" over the next 8-9 years , or is there too many unknowns, to make a best guess (and whatever typical costs are for "fee-only" ? tax planners/retirement income planners, ?CPA ?CFP, etc)



and/or if I was going to take my own stab at it, how to do it ..... and where to start

sawdust60
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Re: tax planning for Large future savings bonds lump sum

Post by sawdust60 » Thu Apr 04, 2019 6:42 pm

Be careful before letting 12% tax rate space go unused.

You mentioned Roth conversions, inherited IRA, and taking SS at 70. My guess is your marginal rate is not less than 22%, once you start taking SS. Marginal tax rates are different with SS income; you cannot rely on tax brackets. Check out the wiki: Taxation of Social Security Note how marginal rates are 18% and 22.2% in the 12% tax bracket. And marginal rates can be 40.7% for part of the 22% tax bracket.

And until 85% of SS income becomes taxable, the 0% tax rate income from qualified dividends and LTCG will also cause additional SS to become taxable.

I think this table does a fairly good job of illustrating how some high marginal rates can occur (although not updated for 12% and 22% tax rates). https://www.bogleheads.org/wiki/File:ParallelTaxes.jpg and discussed here Social Security tax impact calculator

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Peter Foley
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Re: tax planning for Large future savings bonds lump sum

Post by Peter Foley » Thu Apr 04, 2019 7:36 pm

I'm not in favor of paying taxes early either. However, in your case, cashing in an EE bond and investing the proceeds in CDs or municipal bonds or municipal bond funds might make sense prior to taking SS benefits.

I wouldn't do anything now, but at some point in time prevailing interest rates might make cashing in the EE bonds an acceptable move to maintain level tax rates over a period of years.

I have a few of the older I-bonds too. Hard to give those up regardless of interest rates. I don't have a solution for those either. An emergency fund in case I have high deductibles in a given year?

Tyler18
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Joined: Sat Dec 01, 2018 4:03 pm

Re: tax planning for Large future savings bonds lump sum

Post by Tyler18 » Sat Apr 06, 2019 4:42 pm

Some thoughts and questions about ibonds maturing during RMD times.

Can you pay some of the taxes every year beginning now or must that have started in year one of the bond.
And if so must it be done for all ibonds you own or can you pick and choose which one to pay tax now?

Can you transfer the whole bond to another person or a joint holder who may not have much income at maturity date.
If so do you have to pay the tax now or does the other person pay at maturity?
I think it may matter whether they are paper or electronic.

If they mature in 2031 can you cash it in 2032 to defer the interest even after they stop paying?

I understand interest may be exempt for education but are there any others?
A previous post mentioned nursing home care.

Topic Author
stvyreb
Posts: 81
Joined: Sat Nov 05, 2016 8:57 pm

Re: tax planning for Large future savings bonds lump sum

Post by stvyreb » Mon Apr 15, 2019 3:37 pm

Tyler18 wrote:
Sat Apr 06, 2019 4:42 pm
Some thoughts and questions about ibonds maturing during RMD times.
A)
Can you pay some of the taxes every year beginning now or must that have started in year one of the bond.

B)
And if so must it be done for all ibonds you own or can you pick and choose which one to pay tax now?

a)
Can you transfer the whole bond to another person or a joint holder who may not have much income at maturity date.
If so do you have to pay the tax now or does the other person pay at maturity?
I think it may matter whether they are paper or electronic.

C)
If they mature in 2031 can you cash it in 2032 to defer the interest even after they stop paying?

I understand interest may be exempt for education but are there any others?
A previous post mentioned nursing home care.
for part C)
"When electronic EE Bonds in a TreasuryDirect account stop earning interest, they are automatically redeemed and the interest earned is reported to the IRS.": though the bond gets parked by Treasury Direct in a zero-interest certificate of indebtedness

https://www.treasurydirect.gov/indiv/re ... nsider.htm

trueblueky
Posts: 1428
Joined: Tue May 27, 2014 3:50 pm

Re: tax planning for Large future savings bonds lump sum

Post by trueblueky » Mon Apr 15, 2019 4:00 pm

stvyreb wrote:
Tue Apr 02, 2019 4:30 pm
Hello, some data points:

+I am in my early 50s,
+I’ve a large amount of EE and I bonds (which have interest rates of 2.56% & 5.76% respectively)
+the interest earned on the savings bonds is being deferred till sold.

+my AGI federal is approximately $30,000 (none of which is wages) ; taxable income $19,000
(which I believe means there is $19,700 of “room” in the fed 12% bracket)
+my current state Does have state taxes
+I don’t plan on taking SS till age 70 or as late as possible.
+I currently get very large ACA APTC (advanced premium tax credits, I believe on the order of $450/month)

Federal 12% $9,526 to $38,700
22% >$38,700

so specifically in year 2028 when I'm < 70 years old still the portion that would fall into the 22% bracket would be about $35,000 or ($7,700) in taxes

and the following 3 years , there is another $10,000 that would fall into the 22% bracket (assuming brackets stay the same)

And hence I’m thinking that despite their excellent interest rate, and my potential very large increase in ACA health premium (assuming it lasts) that the numbers (when “crunched”), might make it worthwhile to sell a few of the Savings Bonds, now and per year for the next decade.

my other choice would be Roth Conversions or Capital Gain Harvesting (though I've many years rolling over the $3000 of CG losses going on)

In short I don't know how to approach this, (perhaps I could do some TurboTax what-if mock up with my TT 2018 software) or if it's worth hiring someone, and if so whom .....

And
I'm perfectly happy to do nothing, (if that is as wise as pursuing filling up my 12% federal bracket) as it seems to me the yield on these savings bonds are nice, and currently my ACA premium is very low , etc

TIA
I would use the tax program to run some scenarios. What happens if you add $1000 interest? $5000? Your tax goes up and your ACA premium goes up, but by how much? Where is the cliff on APTC for you? (avoid, avoid going over 399% of the poverty level)

What is your plan between age 65 (when Medicare starts and ACA ends for you) and age 70 when you start SS? Those are key years.

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