TLH withdrawal in lower tax bracket discount?

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Topic Author
passive101
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TLH withdrawal in lower tax bracket discount?

Post by passive101 »

I have TLH on in my Betterment account. I'm currently in the 22% tax bracket. When I retire everything else is in Roth and I'll only have a small amount in after tax at betterment for my emergency fund and car/large repair fund there.

2 questions

If I wait to withdraw when I'm in the zero-15% bracket I'll then pay less taxes on the gains?

If I withdraw before I'm in the lower tax bracket I just basically get no advantage from the TLH?
prd1982
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Re: TLH withdrawal in lower tax bracket discount?

Post by prd1982 »

You will do better if you don’t sell until you use up the losses by deducting $3k a year against ordinary income. Then when you sell the funds, you will pay taxes at the capital gains rate. You will do even better if you never sell the stock for a gain because your heirs get a stepped up basis, and pay no taxes on the money.
Topic Author
passive101
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Re: TLH withdrawal in lower tax bracket discount?

Post by passive101 »

Ah so the losses are done yearly. I'm assuming this is at tax time when I will enter the info into TurboTax?

So there is really no downsides to TLH when it's available in down markets and you're not in the lowest tax bracket already?
prd1982
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Re: TLH withdrawal in lower tax bracket discount?

Post by prd1982 »

passive101 wrote: Sat May 28, 2022 10:36 am Ah so the losses are done yearly. I'm assuming this is at tax time when I will enter the info into TurboTax?
* Losses you harvest are used to offset any capital gains you have.

* If you have any losses left after the previous step, up to $3k of the remaining losses will offset your ordinary income (this is the best use of losses.

* Any losses you don’t use are carried over to the next year’s taxes.

So if you have 10k of losses this year, and no realized capital gains going forward, you will offset $3k of ordinary income this year and the next 2 years. You will offset $1k the 3rd year.
Topic Author
passive101
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Re: TLH withdrawal in lower tax bracket discount?

Post by passive101 »

[/quote]

* If you have any losses left after the previous step, up to $3k of the remaining losses will offset your ordinary income (this is the best use of losses.

* Any losses you don’t use are carried over to the next year’s taxes.

So if you have 10k of losses this year, and no realized capital gains going forward, you will offset $3k of ordinary income this year and the next 2 years. You will offset $1k the 3rd year.
[/quote]

How many years can it be carried over for?
livesoft
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Re: TLH withdrawal in lower tax bracket discount?

Post by livesoft »

passive101 wrote: Sat May 28, 2022 10:14 am I have TLH on in my Betterment account. I'm currently in the 22% tax bracket. When I retire everything else is in Roth and I'll only have a small amount in after tax at betterment for my emergency fund and car/large repair fund there.

2 questions

If I wait to withdraw when I'm in the zero-15% bracket I'll then pay less taxes on the gains?

If I withdraw before I'm in the lower tax bracket I just basically get no advantage from the TLH?
It depends on how much carryover losses your Betterment account has given you by the time you retire. If you are not contributing periodically relatively large amounts, then I doubt that you will have much in the way of tax-loss harvesting benefits.

Can you tell us what the new realized losses from your Betterment account have been in each of 2018, 2019, 2020, 2021, and so far in 2022 please? Thanks!
I am a very diligent tax-loss harvester, so for me the numbers from my actual tax returns are:
$-417 2015
$-5,632 2016
$0 2017
$0 2018
$0 2019
$0 2020
$0 2021
$0 2022

BTW, the advantages of carryover losses in retirement while withdrawing from a taxable account means more "room" for tax-free Roth conversions which can be a huge advantage.
Last edited by livesoft on Sat May 28, 2022 11:35 am, edited 4 times in total.
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Topic Author
passive101
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Re: TLH withdrawal in lower tax bracket discount?

Post by passive101 »

I only turned TLH on late last year. So far it's TLH just under $1500 this year
livesoft
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Re: TLH withdrawal in lower tax bracket discount?

Post by livesoft »

passive101 wrote: Sat May 28, 2022 11:24 am I only turned TLH on late last year. So far it's TLH just under $1500 this year
OK, thanks. I added my new losses for tax years 2015 to 2022. You easily see when we stopped contributing to our taxable account.
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Topic Author
passive101
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Re: TLH withdrawal in lower tax bracket discount?

Post by passive101 »

How does TLH help in a tax free Roth conversion?
livesoft
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Re: TLH withdrawal in lower tax bracket discount?

Post by livesoft »

passive101 wrote: Sat May 28, 2022 11:37 am How does TLH help in a tax free Roth conversion?
Suppose you need $120,000 to pay expenses each year. In order to get $100,000 you sell $100,000 of shares found in your taxable account. You also get $20,000 in Qualified Ordinary Dividend Income. Maybe the Cost Basis of those shares is $50,000 so you have $50,000 of realized gains. But you also have at least $53,000 of carryover losses, so your realized gains becomes $0. You get to offset $3,000 against ordinary income. So you create some ordinary income: Dividends and Roth Conversions are ordinary income. You get a standard deduction plus that -$3,000 which will help offset those Roth conversions perhaps leaving you with only Qualified Ordinary DIvidend Income which would be taxed at 0% if your tax bracket is low enough.
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FiveK
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Re: TLH withdrawal in lower tax bracket discount?

Post by FiveK »

passive101 wrote: Sat May 28, 2022 11:37 am How does TLH help in a tax free Roth conversion?
If you would have paid no tax on the conversion without benefit of any TLH, the TLH likely provides no benefit. There may be some niche conditions in which the TLH would enable a refundable credit, but none that come to mind quickly.
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grabiner
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Re: TLH withdrawal in lower tax bracket discount?

Post by grabiner »

passive101 wrote: Sat May 28, 2022 11:37 am How does TLH help in a tax free Roth conversion?
It might allow you to make a slightly larger conversion.

Suppose that you have $10,000 of room to make an untaxed conversion. If you have a $3000 capital loss, you can convert $13,000 and still owe now tax. Effectively, the $3000 loss is offsetting ordinary income that would otherwise be taxed at 10%.
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