How should I fund 2022?

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Topic Author
BigLaw Survivor
Posts: 223
Joined: Mon Oct 19, 2015 8:55 pm

How should I fund 2022?

Post by BigLaw Survivor »

Hi all, hope you are well.

I am thinking ahead on how to minimize my federal income tax exposure in 2022. Basically, I would like to withdraw $200,000 from my investment portfolio in January and deposit the money into my checking account and use it to fund my living expenses for the year. To do this, I would tap both my retirement accounts and my taxable brokerage accounts. I am married and we file jointly.

My question is this: how much should I be withdrawing from the retirement accounts (which once withdrawn are subject to ordinary income tax rates) and how much should I withdraw from my brokerage account (which will be taxed at capital gains rates)? Obviously both incone and capital gains taxes have graduated rates, but for the life of me I can’t figure out the point of intersection that makes the most sense for me.

For what it’s worth, I expect we will itemize rather than claim the standard deduction and claim about $40k in deductions.

Thoughts anymore? Thanks in advance.
HDM1004
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Re: How should I fund 2022?

Post by HDM1004 »

Understanding Tax Brackets: Interactive Income Tax Visualization and Calculator
(link to Engaging data website formatted by Moderator Misenplace)
Dantes
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Joined: Wed Feb 25, 2015 5:38 pm

Re: How should I fund 2022?

Post by Dantes »

It depends upon how much capital gain would be realized by the sale of assets in your taxable brokerage account.

Assuming you are not yet collecting SS or RMD's then, as a simple example, if you took all 200K from taxable brokerage, and the capital gains were 100K then your income after a 40K deduction would be 60K - but capital gains when filing jointly would not be taxable at that income level. So zero taxes - though I have never been in this position myself, so I may be missing something.

Obviously you don't want to waste space at the zero tax rate. So play around with a tax calculator such as https://www.dinkytown.net/java/1040-tax-calculator.html.
basspond
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Re: How should I fund 2022?

Post by basspond »

If you are trying to minimize taxes, withdraw enough from your brokerage account to keep capital gains under 20% and your retirement account at least (could be more) to 22% tax rate.
delamer
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Re: How should I fund 2022?

Post by delamer »

You can use your tax filing software to model different scenarios to minimize your taxes in any given year.

The TaxCaster app is another option if you don’t use tax software to file.

Remember though that the plan that minimizes taxes in 2022 might not minimize them over your remaining life span.

Or, more to the point, maximize your (and/or your heirs’) aftertax income.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
curmudgeon
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Re: How should I fund 2022?

Post by curmudgeon »

I like to use this tool as an easy, but reasonably detailed tax estimator: https://www.mortgagecalculator.org/calc ... ulator.php

It can be tempting to minimize taxes in a given year, but that may come at the expense of higher taxes in later years. Much would depend on the relative balances of taxable and tax-deferred accounts and the proportion of gains in the taxable. The 0% LTCG space is nice, but doesn't play well with other income.

If you are pre-RMD, but not using ACA, you have a fair bit of flexibility. You may want to swing one way or another on cap gains vs IRA withdrawal from year to year to take advantage of 0% cap gains space. Maybe treat it as a two-year plan rather than individual years. I would start by filling up your standard (or itemized) deduction space with ordinary income each year (IRA withdrawal, Roth conversions, interest/non-qual dividends etc). For the rest, consider pulling it all out of taxable one year (making use of the 0% LTCG space) and pulling it all out of tax-deferred the next year. Maybe use Roth conversions or withdrawals to tweak around the edges to optimize the tax brackets.
RyeBourbon
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Re: How should I fund 2022?

Post by RyeBourbon »

Without knowing more details, I would fill the 12% bracket from the tax deferred account ($83.5k plus your $40k deduction; $9620 in tax) and fund the remaining $76.5k from taxable, paying 15% on the gains (whatever that would be).

Of course, if you can work it so you fund the entire $200k from taxable and the cap gains are $123.5k, then you're entirely in 0% LTCG and owe nothing.
Retired June 2023. AA = 55/35/10
Topic Author
BigLaw Survivor
Posts: 223
Joined: Mon Oct 19, 2015 8:55 pm

Re: How should I fund 2022?

Post by BigLaw Survivor »

curmudgeon wrote: Tue Nov 30, 2021 1:23 pm I like to use this tool as an easy, but reasonably detailed tax estimator: https://www.mortgagecalculator.org/calc ... ulator.php

It can be tempting to minimize taxes in a given year, but that may come at the expense of higher taxes in later years. Much would depend on the relative balances of taxable and tax-deferred accounts and the proportion of gains in the taxable. The 0% LTCG space is nice, but doesn't play well with other income.

If you are pre-RMD, but not using ACA, you have a fair bit of flexibility. You may want to swing one way or another on cap gains vs IRA withdrawal from year to year to take advantage of 0% cap gains space. Maybe treat it as a two-year plan rather than individual years. I would start by filling up your standard (or itemized) deduction space with ordinary income each year (IRA withdrawal, Roth conversions, interest/non-qual dividends etc). For the rest, consider pulling it all out of taxable one year (making use of the 0% LTCG space) and pulling it all out of tax-deferred the next year. Maybe use Roth conversions or withdrawals to tweak around the edges to optimize the tax brackets.
Really helpful. Thanks.
Rajsx
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Location: Florida

Re: How should I fund 2022?

Post by Rajsx »

Following this helpful thread, thanks
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