How to pay ZERO taxes in retirement with 6-figure expenses

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acr123
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by acr123 »

Obviously, the best situation is for many years to have put money into an "IRA where you get a deduction" and years later to have been able to slowly convert most of "IRA" to Roth ( and pay minimal to no extra taxes or at least be in the 15% tax bracket). However, the trick is to be able to use legal tax deductions to accomplish this. I would think, the easiest way to accomplish this is if you owned your own business and owned a home (itemized deductions) since there are many more tax breaks available. As others have stated, it is easier if you have children at the right ages to also use college credits.
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by plnelson »

VictoriaF wrote: However, ZERO or MINIMUM taxes are secondary to having money to start with. And having money is generally secondary to having a satisfying life. And so some of these tax-saving approaches are not relevant to most people, and even when they are relevant, the trade-offs may not be worth it. For example, one may want to live in a high-taxing city as a matter of quality of life (New York City comes to mind). Another one may not want to own house to be able to move around (both in the U.S. and abroad). The third one does not have college-age children.

Victoria
Exactly. It's like "hypermilers" - people who use extreme driving techniques to extract 80 MPG from their 30 EPA-MPG car. Sure, it can be done if you're willing to go to enough extremes, but it's not really applicable to normal, non-nerdy people.

I remember some years ago I was reading one of those "10 techniques to reduce your taxes" articles in some money magazine - probably Money or Kiplinger's - and one of them suggested you take advantage of a special tax credit for people who'd been storing old cans of kerosene in their basement. Apparently some industry group had contributed to enough election campaigns to get this written into the tax code. But really: how many people does that apply to?

I have no kids; I don't want to retire to the boondocks, "bunching" property taxes is not an option where I live, and I hardly ever have investment losses to "harvest". (I also have no kerosene in my basement)
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by plnelson »

555 wrote:
livesoft wrote:
555 wrote:The taxable investments have already been subject to income tax. This needs to be taken into account.
It was.
Here's a question. Would you ever forgo tax-sheltered investing and invest in taxable instead? If so, under what circumstances? Maybe it's a topic for a separate thread.

Boston University's Laurence Kotlikoff has written extensively on this topic and published his research in peer-reviewed economic journals and he has concluded that many people would be better off only contributing to a 401(k) up to the employer-match and then putting the rest into a non-tax-favored portfolio.
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by VictoriaF »

plnelson wrote:
555 wrote:
livesoft wrote:
555 wrote:The taxable investments have already been subject to income tax. This needs to be taken into account.
It was.
Here's a question. Would you ever forgo tax-sheltered investing and invest in taxable instead? If so, under what circumstances? Maybe it's a topic for a separate thread.

Boston University's Laurence Kotlikoff has written extensively on this topic and published his research in peer-reviewed economic journals and he has concluded that many people would be better off only contributing to a 401(k) up to the employer-match and then putting the rest into a non-tax-favored portfolio.
Kotlickoff's conclusions may not hold if the favorable taxes of the investment income expire. On the other hand, once the 401(k) contributions are missed, it is impossible to make them up later.

Victoria
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by plnelson »

retiredjg wrote:
alanf56 wrote:I don't currently have any Roth's and next year will not have income in the IRS definition so I wonder if one is able to set one up and roll into it at the same time? If I can't I guess I better get on it right away and set one up since this year I DID have income!
You can set up Roth IRA any time by either contributing directly or converting traditional IRA into Roth. No need to rush.
Unless they've changed the law recently we're never found that we could contribute directly. Even in 2009 when I was unemployed our Adjusted Gross Income was too high to set up a Roth. They've raised the phase-out limit a little in 2012 but I don't think it will be enough.
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by Diogenes »

Peer reviewed does not mean accurate, as we have seen all too frequently lately. I have not read that article, but I would question the math of forgoing tax deferred compounding for 30 + years.

Seems to also fly in the face of most other analysis, and common sense.
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by VictoriaF »

plnelson wrote:
retiredjg wrote:
alanf56 wrote:I don't currently have any Roth's and next year will not have income in the IRS definition so I wonder if one is able to set one up and roll into it at the same time? If I can't I guess I better get on it right away and set one up since this year I DID have income!
You can set up Roth IRA any time by either contributing directly or converting traditional IRA into Roth. No need to rush.
Unless they've changed the law recently we're never found that we could contribute directly. Even in 2009 when I was unemployed our Adjusted Gross Income was too high to set up a Roth. They've raised the phase-out limit a little in 2012 but I don't think it will be enough.
You could always contribute to a traditional non-deductible IRA directly. That is you would contribute after-tax money, and your earnings would be taxable when you sell. What has changed recently is that the income limits on the conversion from a traditional IRA to a Roth IRA have been eliminated. And so while you cannot contribute to Roth IRA, you can contribute to a traditional IRA and then convert to Roth IRA soon afterwards. retiredjg mentions this in the statement I have highlighted.

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VictoriaF
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by VictoriaF »

Diogenes wrote:Peer reviewed does not mean accurate, as we have seen all too frequently lately. I have not read that article, but I would question the math of forgoing tax deferred compounding for 30 + years.

Seems to also fly in the face of most other analysis, and common sense.
I have not read Kotlikoff's papers on the subject, but he is a respected economist. His analysis may be specific to 401(k) plans with poor investment options, e.g., only highly speculative funds or very high fees.

Victoria
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plnelson
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by plnelson »

VictoriaF wrote: Boston University's Laurence Kotlikoff has written extensively on this topic and published his research in peer-reviewed economic journals and he has concluded that many people would be better off only contributing to a 401(k) up to the employer-match and then putting the rest into a non-tax-favored portfolio.
Kotlickoff's conclusions may not hold if the favorable taxes of the investment income expire. On the other hand, once the 401(k) contributions are missed, it is impossible to make them up later.

Victoria[/quote]

True but you could say that about any retirement planning topic. If tax laws changed, if Social Security laws changed, if the war with Iran causes massive fuel shortages and we're force to burn Social Security cards to heat our houses, if federal death panels set a federal age limit on collecting oxygen at 71, etc, then of course all bets are off.

But there is no plausible basis for assuming any increase in investment taxes. Absolutely no one in the political ascendancy in Washington is proposing that; there simply is no basis to assume it would happen.
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by plnelson »

VictoriaF wrote:
Diogenes wrote:Peer reviewed does not mean accurate, as we have seen all too frequently lately. I have not read that article, but I would question the math of forgoing tax deferred compounding for 30 + years.

Seems to also fly in the face of most other analysis, and common sense.
I have not read Kotlikoff's papers on the subject, but he is a respected economist. His analysis may be specific to 401(k) plans with poor investment options, e.g., only highly speculative funds or very high fees.

Victoria
Nope. He compared the SAME investments inside and outside a tax-deferred portfolio. He assumed some modest annual, compounded rate of growth and assumed a some longish time before it was withdrawn. (I think he might have used S&P500 index funds) In that scenario you have a lot of growth. If you buy-and-hold an investment for 20 years at 7% it will almost quadruple.

The main factors are:
1. The fact that 401(k) withdrawals are taxed as ordinary income; capital gains are taxed at a much lower rate
2. The very UNfavorable way that Social Security benefits are taxed as a function of other taxable income. Specifically, to achieve the same after-tax income you have to withdraw more money from the 401(k), because it's taxed at a higher rate than if you withdraw it from your non-401(k) portfolio, because that's only taxed at a capital-gains rate. Since SS is taxed based on your pre-tax income then you pay a higher-tax on Social Security. So the 401(k) withdrawals give you a double tax whammy - higher tax on the withdrawal plus higher tax on the SS.

Read his research and come to your own conclusions:

Jagadeesh Gokhale & Laurence J. Kotlikoff & Todd Neumann, 2001. "Does participating in a 401(k) raise your lifetime taxes?," Working Paper 0108, Federal Reserve Bank of Cleveland.

B. Douglas Bernheim & Lorenzo Forni & Jagadeesh Gokhale & Laurence J. Kotlikoff, "How Much Should Americans Be Saving for Retirement?," American Economic Review, American Economic Association, vol. 90(2), pages 288-292, May 2000.
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livesoft
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by livesoft »

This thread already demonstrated that for some folks 401(k) withdrawals are taxed at zero percent. Did Kotlikoff figure out that some folks are not taxed on their 401(k) withdrawals? It is true that the contributions to a taxable joint account made the 401(k) end up in 0% tax bracket.
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market timer
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by market timer »

plnelson wrote:I hardly ever have investment losses to "harvest".
You must have started investing after March 2009. Give it time.
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by VictoriaF »

plnelson wrote:
VictoriaF wrote:
plnelson wrote: Boston University's Laurence Kotlikoff has written extensively on this topic and published his research in peer-reviewed economic journals and he has concluded that many people would be better off only contributing to a 401(k) up to the employer-match and then putting the rest into a non-tax-favored portfolio.
Kotlickoff's conclusions may not hold if the favorable taxes of the investment income expire. On the other hand, once the 401(k) contributions are missed, it is impossible to make them up later.

Victoria
True but you could say that about any retirement planning topic. If tax laws changed, if Social Security laws changed, if the war with Iran causes massive fuel shortages and we're force to burn Social Security cards to heat our houses, if federal death panels set a federal age limit on collecting oxygen at 71, etc, then of course all bets are off.

But there is no plausible basis for assuming any increase in investment taxes. Absolutely no one in the political ascendancy in Washington is proposing that; there simply is no basis to assume it would happen.
The basis for my statement is that the currently reduced tax rates on qualified dividends and long term capital gains were scheduled to expire in 2008, were extended through 2010, and then through 2012. Barring further extensions, after 2012:
- dividends will be taxed at the taxpayer's ordinary income tax rate
- the long-term capital gains tax rate will be 20% (10% for taxpayers in the 15% tax bracket).
- the qualified five-year 18% capital gains rate (8% for taxpayers in the 15% tax bracket) will be reinstated.

These rates would be the result of the return to normal not requiring a legislative action.

Victoria
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555
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by 555 »

plnelson wrote:
VictoriaF wrote:I have not read Kotlikoff's papers on the subject, but he is a respected economist. His analysis may be specific to 401(k) plans with poor investment options, e.g., only highly speculative funds or very high fees.
Victoria
Nope. He compared the SAME investments inside and outside a tax-deferred portfolio. He assumed some modest annual, compounded rate of growth and assumed a some longish time before it was withdrawn. (I think he might have used S&P500 index funds) In that scenario you have a lot of growth. If you buy-and-hold an investment for 20 years at 7% it will almost quadruple.

The main factors are:
1. The fact that 401(k) withdrawals are taxed as ordinary income; capital gains are taxed at a much lower rate
2. The very UNfavorable way that Social Security benefits are taxed as a function of other taxable income. Specifically, to achieve the same after-tax income you have to withdraw more money from the 401(k), because it's taxed at a higher rate than if you withdraw it from your non-401(k) portfolio, because that's only taxed at a capital-gains rate. Since SS is taxed based on your pre-tax income then you pay a higher-tax on Social Security. So the 401(k) withdrawals give you a double tax whammy - higher tax on the withdrawal plus higher tax on the SS.
Okay I'm skeptical. In taxable you pay capital gains tax and dividend tax, whereas in the 401k you don't. In both case you pay income tax, either as it exits (trad, deductible) 401k (or any trad space), or as it enters taxable, (or 3rd possibility, as it enters Roth). In an "all other things being equal" scenario, taxable must be inferior. Just consider $X that you could put into 401k or taxable and trace through what happens to it when it is withdrawn/sold sometime later. Taxable clearly loses out due to the extra taxes. The Social Security Taxation issue is a red herring, it's just the usual thing of paying more tax due to more income.
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by norookie »

:D Treading water here! :P
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by rai »

just found this thread, all sounds good in theory but will the Roth conversion rule still be around in 12 years (and last for 22 years from now) for my ER conversion?


Also is there some metric where you can say taxable money is worth 'x' percent more than tax sheltered money for example would $1M in taxable be worth $1.2M in tax shelter (I guess it all depends on the tax bracket situation).
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by 555 »

rai wrote:`Also is there some metric where you can say taxable money is worth 'x' percent more than tax sheltered money for example would $1M in taxable be worth $1.2M in tax shelter (I guess it all depends on the tax bracket situation).'
Sure, but x is a random variable.
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by letsgobobby »

Doesn't the bottom line remain that if you max out your retirement accounts and also save in taxable, your options to limit your taxes after age 70.5 are pretty limited? You'll get SS. You'll get RMDs or more. You'll have capital gains. If you didn't retire before age 70.5 (to create low income years in which to covert traditional to Roth assets), the only way to really pay less in taxes is to have less money.

Assume SS benefits are already taxed at the maximal level.
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by Code Commit »

Wasn't this issue raised and answered by a few posters on page 2? Isn't this a variation of "what if we end up too rich?" ?

If you are saving say, $70000 per year by maxing out retirement accounts + some taxable ($35000 to 401k, 11000 to Roth, 6450 to HSA + let's say 18000 taxable) from age 30 to 70 at real rate of 4%, you end up with 7 million. At 3% withdrawal, you get $210,000 annual income. The OP was about how to pay for $100k expenses (and not maximizing net worth, with maximum payout). If you are maxing out all retirement accounts + contribute to taxable, what do you get (financially) by working from, say 55 or 60? At age 58/59, you might have $4million which will generate $120k. If you tap taxable first, this still gives you 10+ years to convert to Roth at lower rate and reduce future RMDs to some extent.

If you do go for maximizing, then sure you will have very high income and taxes. Of course, you could keep working past 70 to pay for these taxes (umm.. and in turn, pay even more taxes :twisted: )

EDIT: Please don't get me wrong. I would love to know if there is way to reduce taxes despite $210,000 (+SS) real, retirement income. But wouldn't that be a very nice problem to have?
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by livesoft »

The previous response to donate your income to charity still applies. That will help reduce taxes quite a bit. And I'm not talking about throwing a dollar bill in the Salvation Army bucket.
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by baw703916 »

Um, I'd rather not have 6-figure expenses in retirement, actually. :) It would make me nervous about running out of money (unless I had an eight figure portfolio).

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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by thatwhichisgood »

OP, your post gave me pause to think of my dad and the delight he had the year he actually had to pay "six figures" in taxes. "A good problem to have"

I like a society with a decent, smart and fairer tax policy and tax foundation. Taxes drive so many behaviors in our society. It would be great in my lifetime if we could move that direction.

The other thing I remember from my dad, a German immigrant at the age of about 5 in 1930... when I criticized our government. "If you government isn't killing you, you have a good government". That was back in the 70's I think.

Life is complex just like taxes... I hope not every finds a way to pay zero taxes. :beer
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by 555 »

Here's a method. Earn a high wage and pay taxes. Then save by stuffing your (after tax) money in a mattress. Then when you retire you can withdraw money from your mattress without paying any further taxes on it. That's basically the gist of the OP's method.
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by Texas hold em71 »

555 wrote:Here's a method. Earn a high wage and pay taxes. Then save by stuffing your (after tax) money in a mattress. Then when you retire you can withdraw money from your mattress without paying any further taxes on it. That's basically the gist of the OP's method.
I don't think so. OP investments compound over time and keep up with inflation and then some.

Yes, he incurs taxable sales and conversions but he has enough exemptions and deductions to offset the taxes. I think the plan was pretty sound based on tax law at the time it was written. It has changed twice since then and will change again, but it made sense then and may still for some people. Of course, most people will not have hundreds of thousands of TLH losses to carry forward but that does not mean they could not have.
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by 555 »

Texas hold em71 wrote:
555 wrote:Here's a method. Earn a high wage and pay taxes. Then save by stuffing your (after tax) money in a mattress. Then when you retire you can withdraw money from your mattress without paying any further taxes on it. That's basically the gist of the OP's method.
I don't think so. OP investments compound over time and keep up with inflation and then some.

Yes, he incurs taxable sales and conversions but he has enough exemptions and deductions to offset the taxes. I think the plan was pretty sound based on tax law at the time it was written. It has changed twice since then and will change again, but it made sense then and may still for some people. Of course, most people will not have hundreds of thousands of TLH losses to carry forward but that does not mean they could not have.
The TLH is the point. Losing $X then gaining $X is like stuffing your money in a mattress.

Obviously there are lots of other ways to not pay federal taxes, as about 47% of people have figured out.
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by VictoriaF »

letsgobobby wrote:Doesn't the bottom line remain that if you max out your retirement accounts and also save in taxable, your options to limit your taxes after age 70.5 are pretty limited? You'll get SS. You'll get RMDs or more. You'll have capital gains. If you didn't retire before age 70.5 (to create low income years in which to covert traditional to Roth assets), the only way to really pay less in taxes is to have less money.

Assume SS benefits are already taxed at the maximal level.
Thus, it makes (even more) sense to retire early.

There are different ways to manage taxes in retirement but the more I think about it the more it seems that the most straightforward savings come from moving to a state without income tax.

Victoria
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Texas hold em71
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by Texas hold em71 »

555 wrote:
Texas hold em71 wrote:
555 wrote:Here's a method. Earn a high wage and pay taxes. Then save by stuffing your (after tax) money in a mattress. Then when you retire you can withdraw money from your mattress without paying any further taxes on it. That's basically the gist of the OP's method.
I don't think so. OP investments compound over time and keep up with inflation and then some.

Yes, he incurs taxable sales and conversions but he has enough exemptions and deductions to offset the taxes. I think the plan was pretty sound based on tax law at the time it was written. It has changed twice since then and will change again, but it made sense then and may still for some people. Of course, most people will not have hundreds of thousands of TLH losses to carry forward but that does not mean they could not have.
The TLH is the point. Losing $X then gaining $X is like stuffing your money in a mattress.

Obviously there are lots of other ways to not pay federal taxes, as about 47% of people have figured out.
Have you really lost money when you TLH? Or are you just adjusting your tax basis? I think the latter.

You create tax deductions in today's dollars that are applied to taxes in future rates, so yes 100,000 of losses in 2008 dollars are worth less than 2014 dollars, so you lose something to inflation on the TLH part of this.

Let's be fair to the 47 percent who pay no taxes- most of them do not have six figure expenses.
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by livesoft »

This real-world example with a copy of Form 1040 was linked today in another thread:
http://www.gocurrycracker.com/the-go-cu ... 013-taxes/
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by 555 »

livesoft wrote:This real-world example with a copy of Form 1040 was linked today in another thread:
http://www.gocurrycracker.com/the-go-cu ... 013-taxes/
That looks like prudent tax planning. It's still the case that they must have a sizeable taxable account funded by after tax dollars, so they presumably have paid a chunk of taxes in the past.
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by Tycoon »

livesoft wrote:This real-world example with a copy of Form 1040 was linked today in another thread:
http://www.gocurrycracker.com/the-go-cu ... 013-taxes/
Outstanding!
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livesoft
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by livesoft »

Please note the $12,000 of IRA conversions to a Roth IRA at the 0% tax rate. Tax-free going in; Tax-free coming out.

Thanks to johnny847 for the link, too.
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by freddie »

It is trivial to make 20 million in retirement and pay no taxes. Just buy a ton of tax free bonds.:)
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by Barefootgirl »

Great blog, thanks for the link.

Any similar blogs or sites or newsletters (do those even exist anymore?) or books to recommend for tax tips?..beyond an overview, seeking for more in-depth guidance.

Thanks, BFG
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livesoft
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by livesoft »

Perhaps the best site is irs.gov and its many publications. Reading them along with doing your own taxes are two of the best ways to get some more in-depth guidance and experience.
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by lululu »

BigFoot48 wrote: This will be the second year I will be paying zero or <$100 in Federal taxes as a result of taking SS and limiting my IRA withdrawals. It will be fun while it lasts! (Edit: Fixed who made the statement]
I am in the temporarily happy situation of no federal taxes, because most of my savings are in IRAs and my Schedule A stuff wipes out my taxable income, which is earnings on my taxable savings plus Social Security.

Things will not be so nice as of this tax year, since I'm now having to take required minimum distributions, but they won't be that bad either.

Too bad my state soaks people by ignoring Schedule A stuff and just using a standard deduction. That must be awful for people with high medical expenses.
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by pshonore »

lululu wrote:
BigFoot48 wrote: This will be the second year I will be paying zero or <$100 in Federal taxes as a result of taking SS and limiting my IRA withdrawals. It will be fun while it lasts! (Edit: Fixed who made the statement]
I am in the temporarily happy situation of no federal taxes, because most of my savings are in IRAs and my Schedule A stuff wipes out my taxable income, which is earnings on my taxable savings plus Social Security.

Things will not be so nice as of this tax year, since I'm now having to take required minimum distributions, but they won't be that bad either.

Too bad my state soaks people by ignoring Schedule A stuff and just using a standard deduction. That must be awful for people with high medical expenses.
Come to Connecticut; state tax is based on Federal AGI with very few adjustments (the biggest being only 25% maximum of SS is taxed). Particularly bad if you're in a nursing home or have high Medical costs and taking IRA withdrawals to pay it. Also bad for gamblers at the 2 big Casinos.
cowboysFan
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by cowboysFan »

The OP never really goes into detail on how he has no capital gains subject to taxes. By the end of 2010, stocks, domestic and international, had roughly recovered to where they were in 2005. So unless all the shares he is selling were purchased in 2006-2007, it would seem he would probably have some capital gains after 2009 or 2010. Does the OP have a 3-fund portfolio?
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livesoft
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by livesoft »

cowboysFan wrote:The OP never really goes into detail on how he has no capital gains subject to taxes. By the end of 2010, stocks, domestic and international, had roughly recovered to where they were in 2005. So unless all the shares he is selling were purchased in 2006-2007, it would seem he would probably have some capital gains after 2009 or 2010. Does the OP have a 3-fund portfolio?
The OP had an entire paragraph about tax-loss harvesting and carryover losses that would apply to any cap gains.
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retiredjg
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by retiredjg »

And I suspect the OP probably sold most everything somewhere along the line, so gains would not go back farther than 2007 anyway. You think? :happy
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livesoft
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by livesoft »

Yep, the OP probably sold everything in taxable in March 2009.
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retiredjg
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by retiredjg »

Such a market timer :wink:
cowboysFan
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by cowboysFan »

livesoft wrote:
cowboysFan wrote:The OP never really goes into detail on how he has no capital gains subject to taxes. By the end of 2010, stocks, domestic and international, had roughly recovered to where they were in 2005. So unless all the shares he is selling were purchased in 2006-2007, it would seem he would probably have some capital gains after 2009 or 2010. Does the OP have a 3-fund portfolio?
The OP had an entire paragraph about tax-loss harvesting and carryover losses that would apply to any cap gains.
It's not clear to me how much TLH eliminates capital gains. If I TLH VTI and VTS near the bottom of the 2008 crash, I would have lots of capital losses. However, I've just lowered my cost basis and increased the capital gains whenever the shares of VTI and VTS are eventually sold.
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Ged
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by Ged »

cowboysFan wrote: It's not clear to me how much TLH eliminates capital gains. If I TLH VTI and VTS near the bottom of the 2008 crash, I would have lots of capital losses. However, I've just lowered my cost basis and increased the capital gains whenever the shares of VTI and VTS are eventually sold.
You can also offset some of your ordinary income, or apply it to cap gains in a higher bracket.
DSInvestor
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by DSInvestor »

cowboysFan wrote:It's not clear to me how much TLH eliminates capital gains. If I TLH VTI and VTS near the bottom of the 2008 crash, I would have lots of capital losses. However, I've just lowered my cost basis and increased the capital gains whenever the shares of VTI and VTS are eventually sold.
Yes the cost basis of those shares has been lowered but maybe you're still accumulating and buying more VTI and VTS at various prices from 2009 to now. When it comes time to sell shares, you can use specific share identification to pick the long term shares with the highest cost basis (maybe those acquired in 2013) and thus realize a smaller capital gain. Those capital gains can then be offset by the loss carryovers.

You may ask what about the low cost basis shares? Those can be held for as long as possible. If you make charitable donations, instead of donating cash, donate highly appreciated shares like those acquired in March 2009. If you die before using up the taxable account, your heirs get a step up in cost basis to the value on the day of your death.
Last edited by DSInvestor on Sun Jun 01, 2014 3:42 pm, edited 1 time in total.
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livesoft
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by livesoft »

@cowbosyFan, Here is how it works.

Suppose the OP, bought Vanguard Total Stock Market index fund on September 30, 2008 at a price of $28.42, then exchanged from Vanguard Total Stock Market index fund on April 7, 2009 at a price of $19.80 into Vanguard Large-cap Index fund at a price of $18.68. That's a loss of 30%. So the large-cap index fund would have to increase by about 44% to get back to even or a price of about $26.81 or so.

The previous closing price of large-cap index was $44.70 or a gain of about 139%. The question then is does the OP have to pay taxes on that entire gain? The answer is probably not. First, the OP does not sell all those shares in one year. Instead the OP sells some of the shares every year for the next 15 years. At first any realized gain is offset by the carryover losses created by that exchange on 4/7/2009. Note also that $18.68 of the share price is return-of-capital and tax-free.

Now follow closely: Once the carryover losses are used up, the OP does not sell more shares than he needs to and that means he sells enough shares to remain in the 15% marginal income tax bracket.

Here comes the homework questions:
(1) How much income can the OP get tax-free based on exemptions, allowances, deductions, and credits?
(2) If one is in the 15% marginal income tax bracket, what is the tax rate on long-term capital gains?
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by PoeticalDeportment »

plnelson wrote:Read his research and come to your own conclusions:

Jagadeesh Gokhale & Laurence J. Kotlikoff & Todd Neumann, 2001. "Does participating in a 401(k) raise your lifetime taxes?," Working Paper 0108, Federal Reserve Bank of Cleveland.

B. Douglas Bernheim & Lorenzo Forni & Jagadeesh Gokhale & Laurence J. Kotlikoff, "How Much Should Americans Be Saving for Retirement?," American Economic Review, American Economic Association, vol. 90(2), pages 288-292, May 2000.
Before anyone spends time reading the papers or doing the math... have a quick look at how qualified dividends and capital gains were taxed in 2000 and 2001 when the papers were written:

http://en.wikipedia.org/wiki/Capital_ga ... ted_States
http://en.wikipedia.org/wiki/Qualified_dividend

Notice the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA)
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by Novine »

"This real-world example with a copy of Form 1040 was linked today in another thread:
http://www.gocurrycracker.com/the-go-cu ... 013-taxes/"

I couldn't find any info on their site about how much they have tucked away in their retirement and taxable accounts. One would have to have a pretty healthy sized portfolio to be generating $35,000 annually in interest and dividends. Anyone know if they've discussed this on their blog?
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livesoft
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by livesoft »

Novine wrote:I couldn't find any info on their site about how much they have tucked away in their retirement and taxable accounts.
The math is pretty easy to do. If they had the tax-efficient Vanguard Total US Stock Market index fund or the Vanguard Total Int'l Stock Market index fund, one can come up with an amount. Actually, they had way too much interest income and could have invested even more tax efficiently.
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Epsilon Delta
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by Epsilon Delta »

livesoft wrote:
Novine wrote:I couldn't find any info on their site about how much they have tucked away in their retirement and taxable accounts.
The math is pretty easy to do. If they had the tax-efficient Vanguard Total US Stock Market index fund or the Vanguard Total Int'l Stock Market index fund, one can come up with an amount. Actually, they had way too much interest income and could have invested even more tax efficiently.
They also missed about $50 of foreign tax credit. But once you get to zero tax it may be hard to become more tax efficient. Credits can give a negative tax rate, but it usually takes quite a large drop in income to go from the top of zero rate band to a negative rate.

Most people cannot fine tune their life the way a hypothetical can. If you're trying to optimize somebodies life time taxes it seems best to take certain numbers as fixed (e.g. wages, inheritances, SS) and use the available tools (IRA, ROTH, capital gains, muni bonds etc., SS timing) to maximize spendable (after tax) money. Usually there is a solution with a constant marginal rate. If your life time income is below median that rate is probably zero or below, but at some earnings level you are going to have to pay some taxes, and reducing taxes to zero in any one year just moves them to another, or becomes incompatible with your goals (e.g. leaving capital appreciation to heirs when you have no heirs).
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by misslucy »

Watty wrote:
When they do the Roth conversion in 2012 they could do it in January of 2012 so they could recharacterize it back to a IRA until their filing deadline the next year which if I remember correctly is as late as October 2013 with extensions. With different his and her accounts can they do two Roth conversions in one year and invest one on "black" and the other on "red" and then just recharacterize the one that loses? This would effectively cut the taxes on the Roth conversion in half.
.
I know this is an old thread... but I'm new here.

I'm going to be doing a Roth conversion so I'm curious about the quote above. How does it cut taxes on Roth conversion if you do it in January and then recharacterize in Oct of the following year? I'm single, so this may not apply to me.

Thank you!
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