Tax advantaged investment account

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Topic Author
seanbaby
Posts: 23
Joined: Sun Dec 02, 2018 11:08 am

Tax advantaged investment account

Post by seanbaby »

Hi,
I've the following accounts:
  • 401K through employer - $20,500 limit/year
  • Traditional IRA - $6000 limit contributions/year, but can't take advantage of taxes due to income limits
  • Roth IRA - Used it for backdoor conversion from traditional - Can't contribute directly because of income limits
  • regular Brokerage - paying taxes on capital gains etc...
  • HSA - maxing out starting this year (edit)
Question: Is there another kind of investment account/strategy so I can put off paying capital gains taxes until retirement??

Thank you.
Last edited by seanbaby on Wed Nov 23, 2022 5:19 pm, edited 2 times in total.
jebmke
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Re: Tax advantaged investment account

Post by jebmke »

If you are paying for capital gains in a taxable account that means you are either selling equity or in the wrong investments (active funds that distribute capital gains). Which is it? If the latter, consider shifting your investments to index funds which do not generally distribute capital gains.
When you discover that you are riding a dead horse, the best strategy is to dismount.
stan1
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Re: Tax advantaged investment account

Post by stan1 »

seanbaby wrote: Wed Nov 23, 2022 12:23 pm Hi,
I've the following accounts:
  • 401K through employer - $20,500 limit/year
  • Traditional IRA - $6000 limit contributions/year, but can't take advantage of taxes due to income limits
  • Roth IRA - Used it for backdoor conversion from traditional - Can't contribute directly because of income limits
  • regular Brokerage - paying taxes on capital gains etc...
Question: Is there another kind of investment account/strategy so I can put off paying capital gains taxes until retirement??

Thank you.
Yes, buy and hold ETFs in a taxable account. Under current tax laws ETFs are very very unlikely to generate annual capital gains distributions. Because Vanguard's index ETFs are share classes of Vanguard index mutual funds you can also hold Vanguard index mutual funds and expect not to have any capital gains distributions under current tax law either.

If you prefer to use Fidelity or Schwab index funds over Vanguard funds any broad market index fund will be relatively tax efficient but might have small capital gains distributions in some years.

Also under current tax law if you leave the taxable account to your heirs they get stepped up cost basis, so essentially the taxable account becomes tax free at that time as the gains are never taxed. There are actually other tax preferences for taxable accounts including qualified dividends and donation of appreciated shares to charity.
Topic Author
seanbaby
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Joined: Sun Dec 02, 2018 11:08 am

Re: Tax advantaged investment account

Post by seanbaby »

jebmke wrote: Wed Nov 23, 2022 12:25 pm If you are paying for capital gains in a taxable account that means you are either selling equity or in the wrong investments (active funds that distribute capital gains). Which is it? If the latter, consider shifting your investments to index funds which do not generally distribute capital gains.
Thank you, its the latter. I need to swap into funds that don't distribute income.
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retired@50
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Re: Tax advantaged investment account

Post by retired@50 »

seanbaby wrote: Wed Nov 23, 2022 12:35 pm
jebmke wrote: Wed Nov 23, 2022 12:25 pm If you are paying for capital gains in a taxable account that means you are either selling equity or in the wrong investments (active funds that distribute capital gains). Which is it? If the latter, consider shifting your investments to index funds which do not generally distribute capital gains.
Thank you, its the latter. I need to swap into funds that don't distribute income.
There's a wiki page to help with the decision about swapping funds in your taxable account.
See link: https://www.bogleheads.org/wiki/Paying_ ... itch_funds

If the current tax-inefficient active funds are currently down for the year, this might be a good time to make the adjustment.

Regards,
This is one person's opinion. Nothing more.
Topic Author
seanbaby
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Joined: Sun Dec 02, 2018 11:08 am

Re: Tax advantaged investment account

Post by seanbaby »

Thank you. You answered my next question. I love this forum and the people. :thumbsup :sharebeer
retired@50 wrote: Wed Nov 23, 2022 12:38 pm
seanbaby wrote: Wed Nov 23, 2022 12:35 pm
jebmke wrote: Wed Nov 23, 2022 12:25 pm If you are paying for capital gains in a taxable account that means you are either selling equity or in the wrong investments (active funds that distribute capital gains). Which is it? If the latter, consider shifting your investments to index funds which do not generally distribute capital gains.
Thank you, its the latter. I need to swap into funds that don't distribute income.
There's a wiki page to help with the decision about swapping funds in your taxable account.
See link: https://www.bogleheads.org/wiki/Paying_ ... itch_funds

If the current tax-inefficient active funds are currently down for the year, this might be a good time to make the adjustment.

Regards,
tibbitts
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Joined: Tue Feb 27, 2007 6:50 pm

Re: Tax advantaged investment account

Post by tibbitts »

seanbaby wrote: Wed Nov 23, 2022 12:40 pm Thank you. You answered my next question. I love this forum and the people. :thumbsup :sharebeer
retired@50 wrote: Wed Nov 23, 2022 12:38 pm
seanbaby wrote: Wed Nov 23, 2022 12:35 pm
jebmke wrote: Wed Nov 23, 2022 12:25 pm If you are paying for capital gains in a taxable account that means you are either selling equity or in the wrong investments (active funds that distribute capital gains). Which is it? If the latter, consider shifting your investments to index funds which do not generally distribute capital gains.
Thank you, its the latter. I need to swap into funds that don't distribute income.
There's a wiki page to help with the decision about swapping funds in your taxable account.
See link: https://www.bogleheads.org/wiki/Paying_ ... itch_funds

If the current tax-inefficient active funds are currently down for the year, this might be a good time to make the adjustment.

Regards,
On the one hand, you can find a lot of investments that will not pay capital gains (or at least almost no capital gains.) On the other hand, some of us are paying higher tax rates in retirement than we did when we were working. I think a lot of Bogleheads may be surprised when they find that to be the case for them. So you might actually wish you'd gotten some of those taxes out of the way earlier.
Topic Author
seanbaby
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Joined: Sun Dec 02, 2018 11:08 am

Re: Tax advantaged investment account

Post by seanbaby »

Can you give me a scenario when this might be true? Income from capital gains/distributions after retirement would exceed the current Income levels??
tibbitts wrote: Wed Nov 23, 2022 12:45 pm
seanbaby wrote: Wed Nov 23, 2022 12:40 pm Thank you. You answered my next question. I love this forum and the people. :thumbsup :sharebeer
retired@50 wrote: Wed Nov 23, 2022 12:38 pm
seanbaby wrote: Wed Nov 23, 2022 12:35 pm
jebmke wrote: Wed Nov 23, 2022 12:25 pm If you are paying for capital gains in a taxable account that means you are either selling equity or in the wrong investments (active funds that distribute capital gains). Which is it? If the latter, consider shifting your investments to index funds which do not generally distribute capital gains.
Thank you, its the latter. I need to swap into funds that don't distribute income.
There's a wiki page to help with the decision about swapping funds in your taxable account.
See link: https://www.bogleheads.org/wiki/Paying_ ... itch_funds

If the current tax-inefficient active funds are currently down for the year, this might be a good time to make the adjustment.

Regards,
On the one hand, you can find a lot of investments that will not pay capital gains (or at least almost no capital gains.) On the other hand, some of us are paying higher tax rates in retirement than we did when we were working. I think a lot of Bogleheads may be surprised when they find that to be the case for them. So you might actually wish you'd gotten some of those taxes out of the way earlier.
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KingRiggs
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Re: Tax advantaged investment account

Post by KingRiggs »

If one is available to you, an HSA would let you put aside more tax-deferred money yearly as well.
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Topic Author
seanbaby
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Joined: Sun Dec 02, 2018 11:08 am

Re: Tax advantaged investment account

Post by seanbaby »

Thank you. Yes, I also am maxing out the HSA account starting this year.
KingRiggs wrote: Wed Nov 23, 2022 1:07 pm If one is available to you, an HSA would let you put aside more tax-deferred money yearly as well.
tibbitts
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Re: Tax advantaged investment account

Post by tibbitts »

seanbaby wrote: Wed Nov 23, 2022 1:04 pm Can you give me a scenario when this might be true? Income from capital gains/distributions after retirement would exceed the current Income levels??
Absolutely, because of: pension + annuities + RMD + SS + dividends + capital gains. That will be true for me assuming I live a few more years; I will "earn" more from those sources every year than I earned in most years during my career, plus will pay taxes at a far higher rate due to filing status now vs. then. Of course I'm making some assumptions about investment returns, etc. If we get that 90% drop and stay there, I won't have any problems - at least not these problems!
jebmke
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Re: Tax advantaged investment account

Post by jebmke »

tibbitts wrote: Wed Nov 23, 2022 1:35 pm
seanbaby wrote: Wed Nov 23, 2022 1:04 pm Can you give me a scenario when this might be true? Income from capital gains/distributions after retirement would exceed the current Income levels??
Absolutely, because of: pension + annuities + RMD + SS + dividends + capital gains. That will be true for me assuming I live a few more years; I will "earn" more from those sources every year than I earned in most years during my career, plus will pay taxes at a far higher rate due to filing status now vs. then. Of course I'm making some assumptions about investment returns, etc. If we get that 90% drop and stay there, I won't have any problems - at least not these problems!
But unless the CG kicks you to the 20% bracket and/or NIIT, the CG tax is the same now vs. later right?
When you discover that you are riding a dead horse, the best strategy is to dismount.
tibbitts
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Re: Tax advantaged investment account

Post by tibbitts »

jebmke wrote: Wed Nov 23, 2022 1:46 pm
tibbitts wrote: Wed Nov 23, 2022 1:35 pm
seanbaby wrote: Wed Nov 23, 2022 1:04 pm Can you give me a scenario when this might be true? Income from capital gains/distributions after retirement would exceed the current Income levels??
Absolutely, because of: pension + annuities + RMD + SS + dividends + capital gains. That will be true for me assuming I live a few more years; I will "earn" more from those sources every year than I earned in most years during my career, plus will pay taxes at a far higher rate due to filing status now vs. then. Of course I'm making some assumptions about investment returns, etc. If we get that 90% drop and stay there, I won't have any problems - at least not these problems!
But unless the CG kicks you to the 20% bracket and/or NIIT, the CG tax is the same now vs. later right?
Yes, although the CGs will also affect other thresholds like IRMAA, and so indirectly they can still result in higher tax rates. It's not the hugest issue but you don't have to deal with IRMAA while working, so that's just another example of a case where later may not be better.
dbr
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Re: Tax advantaged investment account

Post by dbr »

seanbaby wrote: Wed Nov 23, 2022 1:04 pm Can you give me a scenario when this might be true? Income from capital gains/distributions after retirement would exceed the current Income levels??
It is true that taxable income in retirement can be more than you were thinking it might be. The big items that can boost up your baseline taxable income are pensions and RMDs. Also there can be a phase in of SS taxation at a pretty high marginal rate until it is all at full taxation (85%). Roth conversions are also taxable.

There are only capital gains if you sell something at a gain assuming you still have funds with little or no capital gains distributions. It would be a good planning exercise to look at how much you might want in withdrawals from sellling taxable assets and how much gain would be realized by tax lot if you are doing that.

Note there will already be dividends you can take rather than reinvest that will be taxed anyway. Dividend payments will be larger for larger accrued portfolio in retirement.
hoofaman
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Re: Tax advantaged investment account

Post by hoofaman »

seanbaby wrote: Wed Nov 23, 2022 12:23 pm Hi,
I've the following accounts:
  • 401K through employer - $20,500 limit/year
  • Traditional IRA - $6000 limit contributions/year, but can't take advantage of taxes due to income limits
  • Roth IRA - Used it for backdoor conversion from traditional - Can't contribute directly because of income limits
  • regular Brokerage - paying taxes on capital gains etc...
Question: Is there another kind of investment account/strategy so I can put off paying capital gains taxes until retirement??

Thank you.
Does your company allow after-tax 401k contributions and in plan roth conversions? That can give you an additional 30k or so of Roth space if your company plan allows it

Also what about HSA?
lakpr
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Re: Tax advantaged investment account

Post by lakpr »

You might want to think about the I-bonds and EE-bonds as extensions of your tax-deferred space (like a non-deductible IRA), you can buy $10k per SSN per year for each of these types. There is a 1-year lock up period during which you cannot redeem those bonds, but after that you can redeem them at a minimum of $25 per withdrawal and 1cent increments thereafter. Taxes are not due until you either redeem the bonds or at maturity, which is 30years later.

So if you decide to take advantage of it, there is a $20k additional tax-deferred space available to you. You can't choose STOCKS in this particular tax-deferred space, only bonds, but then surely you are allocating SOME portion of your portfolio to bonds?

Both I-bonds and EE-bonds come with a guarantee of never losing principal, when you go to sell them either in whole or partially, which is a big advantage over regular bond funds.
jebmke
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Re: Tax advantaged investment account

Post by jebmke »

tibbitts wrote: Wed Nov 23, 2022 2:30 pm
jebmke wrote: Wed Nov 23, 2022 1:46 pm
tibbitts wrote: Wed Nov 23, 2022 1:35 pm
seanbaby wrote: Wed Nov 23, 2022 1:04 pm Can you give me a scenario when this might be true? Income from capital gains/distributions after retirement would exceed the current Income levels??
Absolutely, because of: pension + annuities + RMD + SS + dividends + capital gains. That will be true for me assuming I live a few more years; I will "earn" more from those sources every year than I earned in most years during my career, plus will pay taxes at a far higher rate due to filing status now vs. then. Of course I'm making some assumptions about investment returns, etc. If we get that 90% drop and stay there, I won't have any problems - at least not these problems!
But unless the CG kicks you to the 20% bracket and/or NIIT, the CG tax is the same now vs. later right?
Yes, although the CGs will also affect other thresholds like IRMAA, and so indirectly they can still result in higher tax rates. It's not the hugest issue but you don't have to deal with IRMAA while working, so that's just another example of a case where later may not be better.
True. The good thing about CG is you can defer them forever.
When you discover that you are riding a dead horse, the best strategy is to dismount.
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celia
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Re: Tax advantaged investment account

Post by celia »

tibbitts wrote: Wed Nov 23, 2022 1:35 pm
seanbaby wrote: Wed Nov 23, 2022 1:04 pm Can you give me a scenario when this might be true? Income from capital gains/distributions after retirement would exceed the current Income levels??
Absolutely, because of: pension + annuities + RMD + SS + dividends + capital gains.
It doesn’t even have to be this complex. When we retired and just had pensions (with the lower payout so the surviving spouse could continue both pensions after one spouse died), we did Roth conversions to about the top of our previous wages. Along the way, one of us received an Inherited IRA (pre-SECURE Act) which required RMDs higher than if it was our own IRA. That took up room in our tax brackets so the Roth conversions decreased.

This is before dividends and capital gains are included.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
tibbitts
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Re: Tax advantaged investment account

Post by tibbitts »

jebmke wrote: Wed Nov 23, 2022 3:07 pm
tibbitts wrote: Wed Nov 23, 2022 2:30 pm
jebmke wrote: Wed Nov 23, 2022 1:46 pm
tibbitts wrote: Wed Nov 23, 2022 1:35 pm
seanbaby wrote: Wed Nov 23, 2022 1:04 pm Can you give me a scenario when this might be true? Income from capital gains/distributions after retirement would exceed the current Income levels??
Absolutely, because of: pension + annuities + RMD + SS + dividends + capital gains. That will be true for me assuming I live a few more years; I will "earn" more from those sources every year than I earned in most years during my career, plus will pay taxes at a far higher rate due to filing status now vs. then. Of course I'm making some assumptions about investment returns, etc. If we get that 90% drop and stay there, I won't have any problems - at least not these problems!
But unless the CG kicks you to the 20% bracket and/or NIIT, the CG tax is the same now vs. later right?
Yes, although the CGs will also affect other thresholds like IRMAA, and so indirectly they can still result in higher tax rates. It's not the hugest issue but you don't have to deal with IRMAA while working, so that's just another example of a case where later may not be better.
True. The good thing about CG is you can defer them forever.
Yes, "forever" unless you have/want to use them to, for example, pay the taxes on your Roth conversions. Realistically someone who needs to live off a portfolio can't defer them forever.
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