Federal Spouses FI/RE - Portfolio Review and Questions

[OfficeSpace]

What an outstanding forum! Thank you for sharing such an indispensable wealth of knowledge.

I resigned from Federal service in December 2021 at age 50 with 32 years of service. To avoid the age penalty, I deferred my Federal Employee Retirement System (FERS) annuity until my Minimum Retirement Age (MRA) of 57 years in 2028 when it will be approximately $48k per year (no adjustments for inflation until age 62). If I return to Federal service and retire at my MRA with immediate benefits, then I also would get credit for a full year of sick leave (increasing my annuity by $1,500 per year) and become eligible for the FERS Annuity Supplement, which would amount to about $27k per year until age 62.

My wife retired from Federal service in March 2023 at age 56 with 22 years of service. Her FERS benefits commenced immediately, so we are covered by the Federal Employee Heath Benefits (FEHB) Program (premiums are under $5k per year) and her annuity (reduced by ~28% due to the MRA+10 age penalty) is approximately $17k per year (no adjustments for inflation until age 62).

Our information is in the Bogleheads Wiki - Asking portfolio questions template below and in FireCalc.


Emergency funds: $35k in our Vanguard Settlement Account (VMFXX)
We actually have about $75k in the settlement account, half to cover living expenses for the rest of this year and half to remain available for unanticipated expenses.

Debt: $300k mortgage refinanced in 2021 at 2.375%
Current payoff balance is $283k. Current monthly payment including escrow for taxes and insurance is $1,900.
Our daughter and her husband live in the lower level apartment and contribute $675 per month, which covers the real estate taxes and some of the utilities, so our monthly outlay is closer to $1,225. The house would sell for about $750k. The roof is new, all major renovations are complete, and our two vehicles are aging (2009 RAV4 with 250k miles and 2010 G37x sedan with 170k miles) but reliable. We always pay off our credit card balances and have no other debt.

Tax Filing Status: Married Filing Jointly with no dependents
Our only child graduated college with a STEM degree, secured career employment in her field, and married a wonderful young man with a stable career job also in a STEM field; neither have student loans or other debt. Our parents are alive and well physically, mentally, and financially.

Tax Rate: 22% ?
We expect to have an AGI of about $150k this year thanks to her lump sum payout for accrued leave at retirement.

State of Residence: Maryland

Ages: He is turning 52 and she is turning 57.

Desired Asset allocation: not sure what the target should be now
While working, it was roughly 80% stocks, 15% bonds, 5% REIT in Vanguard (VG) and L2050 in the Thrift Savings Plan (TSP).


Current retirement assets

Taxable: $2.2M ($1.4M Basis)
03% in VMFXX - Vanguard Federal Money Market Fund (for living expenses and emergencies)
13% in VFIAX - VANGUARD 500 INDEX ADMIRAL CL (0.04%)
13% in VFIJX - VANGUARD GNMA ADMIRAL CL (0.11%)
06% in VGSLX - VANGUARD REAL ESTATE INDEX ADMIRAL CL (0.12%)
21% in VHCAX - VANGUARD CAPITAL OPPTY ADMIRAL CL (0.36%)
06% in VTIAX - VANGUARD TOTAL INTL STOCK INDEX ADMIRAL CL (0.11%)
38% in VTSAX - VANGUARD TOTAL STOCK MARKET INDEX ADMIRAL CL (0.04%)

Series I savings bonds: $60k
$20k in December 2021
$20k in January 2022
$20k in January 2023

His TSP (traditional): $1.4M
100% in L2050 - LIFECYCLE 2050 (0.066%)

His Roth IRA at Vanguard: $39k
100% in VTSAX - VANGUARD TOTAL STOCK MARKET INDEX ADMIRAL CL (0.11%)

Her TSP (traditional): $1M
100% in L2050 - LIFECYCLE 2050 (0.066%)

Her Roth IRA at Vanguard: $42k
100% in VTSAX - VANGUARD TOTAL STOCK MARKET INDEX ADMIRAL CL (0.11%)


Contributions

New annual Contributions : none
We have shifted from accumulation to preservation.


Expenses

Having tracked our spending over the past several years and considered changes going forward, $75k (excluding income tax and major purchases such as replacing a vehicle) is a generous estimate for the foreseeable future. Example:

Mortgage, Real Estate Tax, Homeowner's Insurance: $15k
Auto Insurance: $1,200
Umbrella Insurance: $700
Health Insurance: $4,500
Baseline Living: $42k
Travel & Leisure: $10k

Taxes will be considerably different without salaries and will depend on withdraws from accounts with significant capital gains (VG) and advantaged accounts (TSP).


Questions:

1. Is it sensible to continue using our VG settlement fund for living expenses and emergency funds? Distributions from all VG funds now are directed there rather than reinvested automatically.

2. How should we approach Roth conversions? We each backdoored the maximum this year, which might complicate subsequent TSP conversions. i-ORP recommends an aggressive approach, but I don't know how to link results here persistently.
Bogleheads Wiki: Traditional versus Roth

3. Where should funds be withdrawn as needed for living expenses, large purchases, taxes, etc.? Stocks or bonds or REIT in VG? My or her TSP? I-Series bonds?
The Advantages of Living On Taxable Assets First in Early Retirement

4. What Social Security strategy makes sense for us? Making Optimal Social Security Claiming Decisions - A Four Stage Analysis is compelling, but the Open Social Security strategy calculator proposes the following:

The strategy that maximizes the total dollars you can be expected to receive over your lifetimes is as follows:

Your spouse files for his/her retirement benefit to begin at age 65 and 5 months. ($31,030 per year, PIA $2,891)
You file for your retirement benefit to begin at age 70 and 0 months. ($48,271 per year, PIA $3,244)

The present value of this proposed solution would be $967,659.

Any input would be greatly appreciated!

[walkindude]

Since nobody else has come by yet, I'll take a shot.

First off, you all look to be in great shape! However, it doesn't seem you list what you think your total expenses are and that is key. We have about the same amount in tax deferred, 15x your Roth, and much less in taxable, and much smaller pensions/future SS. We're about 10 years older. I'm doing Roth conversions up to the 1st IRMAA tier (which won't apply to you for a while because of your ages) and burning down the taxable for living expenses and Roth conversion taxes and suggest you go even higher because at age 73 you all will have about 200k coming in with 2 pensions/2 SSs/2 RMDs. I'd probably convert up to about that level.

1. Is it sensible to continue using our VG settlement fund for living expenses and emergency funds? Distributions from all VG funds now are directed there rather than reinvested automatically.
- Definitely

2. How should we approach Roth conversions? We each backdoored the maximum this year, which might complicate subsequent TSP conversions. i-ORP recommends an aggressive approach, but I don't know how to link results here persistently.
Bogleheads Wiki: Traditional versus Roth
- See above

3. Where should funds be withdrawn as needed for living expenses, large purchases, taxes, etc.? Stocks or bonds or REIT in VG? My or her TSP? I-Series bonds?
The Advantages of Living On Taxable Assets First in Early Retirement
- Most likely burning down your taxable while doing large Roth conversions is best. Probably not the TSP until at least 59.5 unless you meet the Rule of 55.

4. What Social Security strategy makes sense for us?
- I'd go with the opensocialsecurity plan, though your wife could take earlier without too much loss from the 65 and 5 months strategy.

It's really highly dependent on expenses to some extent. Congratulations on your planning for the good life!

[walkindude]

Oh, and welcome to the forum!

[OfficeSpace]

Thank you for the welcome and thoughtful reply!

Sorry for the lack of clarity regarding our expenses (per forum guidance, I have edited my original post accordingly). Having tracked our spending over the past several years and considered changes going forward, $75k (excluding income tax and major purchases such as replacing a vehicle) is a generous estimate for the foreseeable future. Example:

Mortgage, Real Estate Tax, Homeowner's Insurance: $15k
Auto Insurance: $1,200
Umbrella Insurance: $700
Health Insurance: $4,500
Baseline Living: $42k
Travel & Leisure: $10k

Taxes will be considerably different without salaries and will depend on withdraws from accounts with significant capital gains (VG) and advantaged accounts (TSP). According to page 3 of Tax Rules about TSP Payments, no penalty is incurred for early withdrawals from her TSP since she separated from Federal service after age 55. Our Required Minimum Distribution (RMD) age is 73 (16 years away), but the IRMAA age is 63 (6 years away), so it seems prudent to devise and begin executing a Roth conversion strategy sooner rather than later. Here is what i-ORP recommends with a 22% Tax Bracket Ceiling (Age is hers):

Code: Select all

Real Withdrawal Report - Plan's Income and Spending in Today's Dollars.

Age         RMD    TaxDef  AfterTax  RothIRA IRA2Roth AftxTrns  GuarInc   Yield    Taxes     DI    
057             0      111      142        0      111        0       17       67       45      181
058             0      117      149        0      117        0       16       63       46      181
059             0      104      155        0      104        0       16       58       48      181
060             0      110      162        0      110        0       15       53       49      181
061             0      116      169        0      116        0       15       47       50      181
062             0       54       99        0       54        0       85       44       46      181
063             0       58      105        0       58        0       83       41       47      181
064             0       64      111        0       64        0       81       37       48      181
065             0       30      106        0       30        0       80       34       39      181
066             0        0      100        0        0        0       78       30       27      181
067             0        0      104        0        0        0       77       27       27      181
068             0       11      117        0       11        0       69       23       28      181
069             0       17      123        0       17        0       67       19       29      181
070             0       23      130        0       23        0       66       15       30      181
071             0       29      136        0       29        0       65       11       31      181
072            16       34      125        0       18        0       64        7       30      181
073            16       39      131        0       24        0       63        3       31      181
074            15       42       53       46        0        0       61        1       23      181
075            15       15       28       56        0        0      106        0       24      181
076            16       16       78        0        0        0      105       17       35      181
077           116      116        3        0        0        0      104       17       59      181
078           119      119        1        0        0        0      103       17       59      181
079           122      122        0        0        0        0      102       17       60      181
080           126      126        0        0        0        2      101       17       61      181
081           129      129        0        0        0        3      100       17       62      181
082           132      132        0        0        0        5       99       18       62      181
083           135      135        0        0        0        7       98       18       63      181
084           138      138        0        0        0        8       97       18       64      181
085           140      140        0        0        0        9       97       18       65      181
086           143      143        0        0        0       11       96       19       65      181
087           146      146        0        0        0       12       95       19       66      181
088           148      148        0        0        0       14       94       19       67      181
089           151      151        0        0        0       15       94       20       68      181
090           152      152        0        0        0       16       93       21       68      181
091           154      154        0        0        0       17       92       21       68      181
092           155      155        0        0        0       18       91       22       69      181
093           156      156        0        0        0       18       91       22       69      181
094           156      156        0        0        0       19       90       23       69      181
LastYear      156      156        0        0        0       18       90       23       69      181

For comparison, here it is for Unlimited:

Code: Select all

Real Withdrawal Report - Plan's Income and Spending in Today's Dollars.

Age         RMD    TaxDef  AfterTax  RothIRA IRA2Roth AftxTrns  GuarInc   Yield    Taxes     DI    
057             0      269      192        0      269        0       17       66       93      182
058             0      275      200        0      275        0       16       59       94      182
059             0      108      159        0      108        0       16       54       48      182
060             0      113      166        0      113        0       15       49       49      182
061             0      119      173        0      119        0       15       43       50      182
062             0        0       84        0        0        0       85       41       28      182
063             0        0       88        0        0        0       83       38       27      182
064             0        0       92        0        0        0       81       35       27      182
065             0        0       97        0        0        0       80       32       28      182
066             0        0      101        0        0        0       78       29       27      182
067             0        2      106        0        2        0       77       25       27      182
068             0       13      120        0       13        0       69       21       28      182
069             0       19      126        0       19        0       67       17       29      182
070             0       25      133        0       25        0       66       13       30      182
071             0       31      139        0       31        0       65        9       31      182
072             6       37      139        0       31        0       64        4       32      182
073             5       42      128        0       21        0       63        0       31      182
074             3       43        0       94        0        0       61        0       17      182
075             3        5        0       88        0        0      106        0       18      182
076             4        4       88        0        0        0      105       17       32      182
077           104      104       13        0        0        0      104       17       56      182
078           107      107       12        0        0        0      103       16       56      182
079           109      109        0        9        0        0      102       16       55      182
080           112      112        0        8        0        0      101       16       56      182
081           115      115        0        7        0        0      100       16       57      182
082           118      118        0        6        0        0       99       16       57      182
083           121      121        0        4        0        0       98       16       58      182
084           123      123        0        3        0        0       97       16       58      182
085           126      126        0        2        0        0       97       16       59      182
086           128      128        0        1        0        0       96       16       60      182
087           131      131        0        0        0        0       95       16       60      182
088           133      133        0        0        0        2       94       16       61      182
089           136      136        0        0        0        3       94       16       61      182
090           137      137        0        0        0        3       93       16       62      182
091           139      139        0        0        0        4       92       17       62      182
092           140      140        0        0        0        4       91       17       62      182
093           141      141        0        0        0        5       91       17       62      182
094           142      142        0        0        0        5       90       17       62      182
LastYear      141      141        0        0        0        5       90       17       62      182

It looks like you're right that it would make little difference if she takes Social Security earlier:



Thanks again for offering your insight!

[walkindude]

Wow, you're spending about half what we are with 30% more assets and better pensions! You'll be fine whatever you do. If you don't want/need to spend more, you're probably just optimizing what/how much your heirs will inherit. Because of this, you may consider the step-up in basis of taxable for heirs upon your demise and evaluate spending from your taxable vs tax deferred before 70 from that perspective.

[retiredjg]

b]Desired Asset allocation:[/b] not sure what the target should be now
While working, it was roughly 80% stocks, 15% bonds, 5% REIT in Vanguard (VG) and L2050 in the Thrift Savings Plan (TSP).

I'd dial it back to preservation mode for a number of years. Later on, invest solely for your heirs (increase risk if you want).

1. Is it sensible to continue using our VG settlement fund for living expenses and emergency funds? Distributions from all VG funds now are directed there rather than reinvested automatically.

Sure.

2. How should we approach Roth conversions? We each backdoored the maximum this year, which might complicate subsequent TSP conversions. i-ORP recommends an aggressive approach, but I don't know how to link results here persistently.
Bogleheads Wiki: Traditional versus Roth

You have over $2 million in tax-deferred accounts and nothing to spend it on. I agree that aggressive conversions are a good idea, especially before an increase in tax rates (2026) and before reaching 63 years old (IRMAA). Now is not the time for you to try to stay in a very low tax bracket. I would maybe convert into the 24% bracket for a couple of years and then dial it back. Also, put mostly bonds in the tax-deferred accounts for slower growth.

Since you used the backdoor Roth method this year, you will need to be sure your tIRAs are empty by the end of the year. So you can convert directly directly from TSP to Roth IRA. Or TSP to IRA to Roth IRA (keeping an eye on the end of the year). In future years, you will not need to worry about this.

3. Where should funds be withdrawn as needed for living expenses, large purchases, taxes, etc.? Stocks or bonds or REIT in VG? My or her TSP? I-Series bonds?
The Advantages of Living On Taxable Assets First in Early Retirement

I'm not sure it matters. If you take from taxable, you can convert less. If you take from TSP, you get to keep money in taxable and need to convert less.

Any input would be greatly appreciated!

You can make some improvements in your portfolio if you want.


Taxable: $2.2M ($1.4M Basis)
03% in VMFXX - Vanguard Federal Money Market Fund (for living expenses and emergencies)
13% in VFIAX - VANGUARD 500 INDEX ADMIRAL CL (0.04%)
13% in VFIJX - VANGUARD GNMA ADMIRAL CL (0.11%) <---not tax efficient
06% in VGSLX - VANGUARD REAL ESTATE INDEX ADMIRAL CL (0.12%) <---not tax efficient
21% in VHCAX - VANGUARD CAPITAL OPPTY ADMIRAL CL (0.36%) <---not tax efficient?
06% in VTIAX - VANGUARD TOTAL INTL STOCK INDEX ADMIRAL CL (0.11%)
38% in VTSAX - VANGUARD TOTAL STOCK MARKET INDEX ADMIRAL CL (0.04%)


Also, would not hold the exact same funds in taxable as in the other accounts - to avoid wash sales.

It appears you will have way more money and income than you will need. Job well done.

[OfficeSpace]

consider the step-up in basis of taxable for heirs upon your demise and evaluate spending from your taxable vs tax deferred before 70 from that perspective.

Thank you. That's an alternative with considering!
Leaving Assets to Your Heirs: Could You Benefit From a Step Up in Basis?

Even for us!
Inheriting assets from elderly parents tax-free by using upstream gifting strategies

I agree that aggressive conversions are a good idea, especially before an increase in tax rates (2026) and before reaching 63 years old (IRMAA). Now is not the time for you to try to stay in a very low tax bracket. I would maybe convert into the 24% bracket for a couple of years and then dial it back. Also, put mostly bonds in the tax-deferred accounts for slower growth.

Since you used the backdoor Roth method this year, you will need to be sure your tIRAs are empty by the end of the year. So you can convert directly directly from TSP to Roth IRA. Or TSP to IRA to Roth IRA (keeping an eye on the end of the year). In future years, you will not need to worry about this.

Thank you. Can you please elaborate on the bonds suggestion? Though slower growth would limit the amount to convert, it seems counterintuitive to forfeit gains (akin to avoiding a salary raise in order to owe less income tax). Our tIRAs are empty, and my interpretation of Rollovers from the Thrift Savings Plan to Eligible Retirement Plans is that partial rollovers can go directly to our Roth IRAs. Below is what i-ORP recommends with a 24% Tax Bracket Ceiling (surprisingly different from 22% and identical to Unlimited, above); if our 2023 AGI is $150k (wages we know, but interest, ordinary and qualified dividends, STCG and LTCG we won't know until late December when all have been realized), and our cost of living is $75k (we don't need anywhere near $182k of Disposable Income), then how much could we rollover, what would be the tax burden, and from which taxable accounts should we withdraw? If we rollover too much (e.g.- initiate earlier because the market tanks), then would only the margin be taxed at 32%? Sorry for our ignorance on this; we have more reading to do!

Code: Select all

Real Withdrawal Report - Plan's Income and Spending in Today's Dollars.

Age         RMD    TaxDef  AfterTax  RothIRA IRA2Roth AftxTrns  GuarInc   Yield    Taxes     DI    
057             0      269      192        0      269        0       17       66       93      182
058             0      275      200        0      275        0       16       59       94      182
059             0      108      159        0      108        0       16       54       48      182
060             0      113      166        0      113        0       15       49       49      182
061             0      119      173        0      119        0       15       43       50      182
062             0        0       84        0        0        0       85       41       28      182
063             0        0       88        0        0        0       83       38       27      182
064             0        0       92        0        0        0       81       35       27      182
065             0        0       97        0        0        0       80       32       28      182
066             0        0      101        0        0        0       78       29       27      182
067             0        2      106        0        2        0       77       25       27      182
068             0       13      120        0       13        0       69       21       28      182
069             0       19      126        0       19        0       67       17       29      182
070             0       25      133        0       25        0       66       13       30      182
071             0       31      139        0       31        0       65        9       31      182
072             6       37      139        0       31        0       64        4       32      182
073             5       42      128        0       21        0       63        0       31      182
074             3       43        0       94        0        0       61        0       17      182
075             3        5        0       88        0        0      106        0       18      182
076             4        4       88        0        0        0      105       17       32      182
077           104      104       13        0        0        0      104       17       56      182
078           107      107       12        0        0        0      103       16       56      182
079           109      109        0        9        0        0      102       16       55      182
080           112      112        0        8        0        0      101       16       56      182
081           115      115        0        7        0        0      100       16       57      182
082           118      118        0        6        0        0       99       16       57      182
083           121      121        0        4        0        0       98       16       58      182
084           123      123        0        3        0        0       97       16       58      182
085           126      126        0        2        0        0       97       16       59      182
086           128      128        0        1        0        0       96       16       60      182
087           131      131        0        0        0        0       95       16       60      182
088           133      133        0        0        0        2       94       16       61      182
089           136      136        0        0        0        3       94       16       61      182
090           137      137        0        0        0        3       93       16       62      182
091           139      139        0        0        0        4       92       17       62      182
092           140      140        0        0        0        4       91       17       62      182
093           141      141        0        0        0        5       91       17       62      182
094           142      142        0        0        0        5       90       17       62      182
LastYear      141      141        0        0        0        5       90       17       62      182


Federal Tax Bracket Report - Amount of Taxable Income in Each Tax Bracket

Age        NoTax     10%      12%      22%      24%      15%      25%      28%     Total    Taxes   Penalty Capgains 
057            25       20       62       94      160        0        0        0      362       86        0        9
058            26       21       64       96      165        0        0        0      372       89        0       11
059            23       21        0        0        0       64       86        0      194       42        0       10
060            24       21        0        0        0       66       89        0      200       44        0       11
061            25       22        0        0        0       68       91        0      206       45        0       13
062            25       23        0        0        0       70       26        0      144       27        0        7
063            26       23        0        0        0       72       22        0      143       26        0        8
064            27       24        0        0        0       74       17        0      142       25        0        9
065            29       25        0        0        0       76       10        0      140       24        0       10
066            30       26        0        0        0       78        4        0      138       23        0       11
067            31       26        0        0        0       81        0        0      138       22        0       12
068            32       27        0        0        0       83        0        0      142       23        0       15
069            33       28        0        0        0       86        0        0      147       24        0       16
070            36       29        0        0        0       88        0        0      153       25        0       18
071            37       30        0        0        0       91        0        0      158       26        0       20
072            38       31        0        0        0       94        0        0      162       27        0       21
073            39       31        0        0        0       96        0        0      167       27        0       20
074            40       32        0        0        0       99        0        0      172       28        0        0
075            42       33        0        0        0      102        0        0      177       30        0        0
076            43       34        0        0        0      105       26        0      208       39        0       16
077            44       35        0        0        0      109      146       63      398       97        0        2
078            45       37        0        0        0      112      151       68      413      101        0        2
079            47       38        0        0        0      115      155       74      429      105        0        0
080            48       39        0        0        0      119      160       80      445      110        0        0
081            50       40        0        0        0      122      165       86      463      114        0        0
082            51       41        0        0        0      126      170       93      480      119        0        0
083            53       42        0        0        0      130      175      100      500      124        0        0
084            54       44        0        0        0      134      180      107      518      129        0        0
085            56       45        0        0        0      138      186      114      538      135        0        0
086            58       46        0        0        0      142      191      122      558      140        0        0
087            59       48        0        0        0      146      197      130      579      146        0        0
088            61       49        0        0        0      150      203      138      601      152        0        0
089            63       51        0        0        0      155      209      147      624      158        0        0
090            65       52        0        0        0      159      215      154      645      164        0        0
091            67       54        0        0        0      164      222      161      667      169        0        0
092            69       55        0        0        0      169      228      168      689      175        0        0
093            71       57        0        0        0      174      235      174      711      181        0        0
094            73       59        0        0        0      179      242      181      734      187        0        0
LastYear       75       60        0        0        0      185      249      184      753      192        0        0


IRMAA Report - Medicare Means Testing Premium Adjustments

Age       B174D00  B218D12   Total    IRMAA  
065           181       31      212        2
066           187       30      217        2
067           192       34      226        2
068           198       47      245        3
069           204       56      260        3
070           210       68      278        3
071           216       79      296        3
072           223       84      307        3
073           230       78      308        3
074           178        0      178        1
075           195        0      195        1
076           251       81      332        3
077           258      175      433        4
078           266      182      448        4
079           274      175      449        4
080           282      184      466        4
081           291      194      485        4
082           300      203      503        4
083           309      214      523        4
084           318      224      542        4
085           327      235      562        4
086           337      246      583        4
087           347      258      605        4
088           358      270      628        4
089           369      283      651        4
090           380      294      673        4
091           391      305      696        5
092           403      316      719        5
093           415      327      742        5
094           427      339      766        5
LastYear      440      346      786        5

You can make some improvements in your portfolio if you want.

Taxable: $2.2M ($1.4M Basis)
03% in VMFXX - Vanguard Federal Money Market Fund (for living expenses and emergencies)
13% in VFIAX - VANGUARD 500 INDEX ADMIRAL CL (0.04%)
13% in VFIJX - VANGUARD GNMA ADMIRAL CL (0.11%) <---not tax efficient
06% in VGSLX - VANGUARD REAL ESTATE INDEX ADMIRAL CL (0.12%) <---not tax efficient
21% in VHCAX - VANGUARD CAPITAL OPPTY ADMIRAL CL (0.36%) <---not tax efficient?
06% in VTIAX - VANGUARD TOTAL INTL STOCK INDEX ADMIRAL CL (0.11%)
38% in VTSAX - VANGUARD TOTAL STOCK MARKET INDEX ADMIRAL CL (0.04%)

Also, would not hold the exact same funds in taxable as in the other accounts - to avoid wash sales.

You're right: we failed to appreciate the ramifications of including those three investments in our taxable account decades ago. The capital gains realized involuntarily from VHCAX each December in particular wreaked havoc on our taxes while we were earning salaries, but those and the other dividends shouldn't be as much of an issue now that we need the money to cover expenses. I do hope new investors learn from our mistake on this front!

Thank you for pointing out the potential for wash sales; we will investigate alternatives to VTSAX in our Roth IRAs and are open to suggestions! VTWAX - Vanguard Total World Stock Index Fund Admiral Shares (0.10%) looks reasonable, but Google Bard made a suggestion I hadn't considered:

Q: I hold VFIAX and VTSAX in a taxable account. What comparable fund should I hold in my IRA to avoid wash sales?

A: VFIAX and VTSAX are both index funds that track the S&P 500 and the total stock market, respectively. The comparable funds in an IRA to avoid wash sales would be:

For VFIAX: Vanguard S&P 500 ETF (VOO)
For VTSAX: Vanguard Total Stock Market ETF (VTI)

These funds have the same investment objectives and track the same indexes as VFIAX and VTSAX, but they are traded as ETFs, which are not subject to the same wash sale rules as mutual funds.

A wash sale is a sale of a security within 30 days of buying it back. If you sell a security at a loss and then buy it back within 30 days, you will not be able to deduct the loss on your taxes. This is because the IRS considers wash sales to be artificial losses.

By holding comparable funds in your IRA, you can avoid wash sales and still get the benefits of investing in these index funds.

[walkindude]

I agree that aggressive conversions are a good idea, especially before an increase in tax rates (2026) and before reaching 63 years old (IRMAA). Now is not the time for you to try to stay in a very low tax bracket. I would maybe convert into the 24% bracket for a couple of years and then dial it back. Also, put mostly bonds in the tax-deferred accounts for slower growth.

Since you used the backdoor Roth method this year, you will need to be sure your tIRAs are empty by the end of the year. So you can convert directly directly from TSP to Roth IRA. Or TSP to IRA to Roth IRA (keeping an eye on the end of the year). In future years, you will not need to worry about this.

Thank you. Can you please elaborate on the bonds suggestion? Though slower growth would limit the amount to convert, it seems counterintuitive to forfeit gains (akin to avoiding a salary raise in order to owe less income tax).

The point isn't to slow the growth of your portfolio overall, just the tax deferred portion. If your asset allocation is 60/40, ideally you should probably have all your bonds/fixed income in tax deferred. Your GNMA is a prime candidate to move to tax deferred (or change to another fixed income investment if you can't hold it in tax deferred). This way, the growth of the tax deferred slows. Does that make more sense.

And yes, only amounts above the bracket cutoff get taxed at that rate. If you get to the 24% bracket, some ordinary income is taxed at 0%, 12%, 22%, and 24%.

[OfficeSpace]

The point isn't to slow the growth of your portfolio overall, just the tax deferred portion. If your asset allocation is 60/40, ideally you should probably have all your bonds/fixed income in tax deferred. Your GNMA is a prime candidate to move to tax deferred (or change to another fixed income investment if you can't hold it in tax deferred). This way, the growth of the tax deferred slows. Does that make more sense?

Yes, I'm tracking. With both FERS annuities and Social Security on the horizon, a more aggressive allocation is tolerable, but perhaps liquidating some VFIJX from our taxable account makes sense considering that account has nearly $43k of unrealized capital losses, and shifting from VTSAX to VBTLX (rather than VTWAX) in our IRAs would help with rebalancing? Thanks!

[walkindude]

The point isn't to slow the growth of your portfolio overall, just the tax deferred portion. If your asset allocation is 60/40, ideally you should probably have all your bonds/fixed income in tax deferred. Your GNMA is a prime candidate to move to tax deferred (or change to another fixed income investment if you can't hold it in tax deferred). This way, the growth of the tax deferred slows. Does that make more sense?

Yes, I'm tracking. With both FERS annuities and Social Security on the horizon, a more aggressive allocation is tolerable, but perhaps liquidating some VFIJX from our taxable account makes sense considering that account has nearly $43k of unrealized capital losses, and shifting from VTSAX to VBTLX (rather than VTWAX) in our IRAs would help with rebalancing? Thanks!

Right, but I don't think you want fixed income in your Roth IRAs. I would personally have all of my fixed income investments except for maybe 2 years of expenses in your tax deferred (which for you all are only the TSP accounts, I think). That 2 years spending COULD consist of just your iBonds and the VMFXX in taxable. There are different ways to accomplish all of this.

[OfficeSpace]

I don't think you want fixed income in your Roth IRAs. I would personally have all of my fixed income investments except for maybe 2 years of expenses in your tax deferred (which for you all are only the TSP accounts, I think). That 2 years spending COULD consist of just your iBonds and the VMFXX in taxable. There are different ways to accomplish all of this.

Okay, sounds like a plan: Shift all VG Roth IRA holdings from VTSAX to VTWAX (wash avoidance), initiate TSP partial direct rollover (transfer) to VG Roth IRA (amount TBD), liquidate some VG taxable VFIJX (conversion tax offset), and shift some TSP deferred holdings to the F Fund (fixed income). Thanks!

[retiredjg]

Officespace, sorry to disappear. Apparently I forgot to hit the send button yesterday. In the meantime, walkindude has said pretty much what I thought I had posted.

Since you have losses in the 500 index in taxable, sell that and eliminate it from your taxable account. Then you are free to use 500 index in the other accounts without worrying about wash sales. That's a plus.

Do get rid of the bonds in taxable (unless they are for some short term goal and you'd rather keep it there). I too would put all your bonds (for long term goals) into the TSP.

These funds have the same investment objectives and track the same indexes as VFIAX and VTSAX, but they are traded as ETFs, which are not subject to the same wash sale rules as mutual funds.

This quote (I think from someone else) is entirely incorrect. Do not do this.

[OfficeSpace]

Since you have losses in the 500 index in taxable, sell that and eliminate it from your taxable account. Then you are free to use 500 index in the other accounts without worrying about wash sales. That's a plus.

Do get rid of the bonds in taxable (unless they are for some short term goal and you'd rather keep it there). I too would put all your bonds (for long term goals) into the TSP.

The unrealized losses in our VG taxable account are VFIJX - VANGUARD GNMA ADMIRAL CL, not VFIAX - VANGUARD 500 INDEX ADMIRAL CL, but the plan I summarized above should address both issues (right?). What is a good way to determine the amount of TSP to convert and the amount of GNMA to liquidate? We have read just enough about conversions and harvesting to be intimidated. We sincerely appreciate the input!

[retiredjg]

I would not hold any GNMA in taxable myself (for long term). I'd liquidate all of it.

There is no good way to determine how much to convert. It's a guess. It's an art. It's a gamble and an unknown. And people have all kinds of opinions and preferences about it.

What you know is that your huge tax-deferred accounts are going to get much larger over the next 20ish years. You have little need to spend that money - your expenses are low and there will be good income. If you don't spend and/or trim down the TSP, your RMDs are going to be large, pushing you into higher brackets late in life, expecially when one dies and the other moves into a higher bracket (which frequently happens).

Some people don't care. Others want to try to smooth out the taxes over the years and prevent an increase later.

How much? My personal opinion is that $500k to $1 million is plenty for a couple to keep in tax-deferral. I don't know if that is realistic for your situation or not. Some people don't want to keep any.

Don't look for an exact answer on this. There isn't one. Just start converting and see how it works and how you feel about it. Converting to the top of the current 22% bracket seems like a no-brainer to me. Converting to the top of the 24% bracket for a few years seems reasonable, but not necessarily a no-brainer.

Again, don't look for exact guidance. There is none. That is because the future is not yet known.

[OfficeSpace]

Understood. Thanks again!

[Tub84]

Some people don't care. Others want to try to smooth out the taxes over the years and prevent an increase later.

How much? My personal opinion is that $500k to $1 million is plenty for a couple to keep in tax-deferral. I don't know if that is realistic for your situation or not. Some people don't want to keep any.

Again, don't look for exact guidance. There is none. That is because the future is not yet known.

Would one valid reason to maintain a decent balance in tax-deferred be a hedge for medical expenses (at possibly tax exemption)? As stated, the future is not yet known, and there are many roads to Rome.

[retiredjg]

Some people don't care. Others want to try to smooth out the taxes over the years and prevent an increase later.

How much? My personal opinion is that $500k to $1 million is plenty for a couple to keep in tax-deferral. I don't know if that is realistic for your situation or not. Some people don't want to keep any.

Again, don't look for exact guidance. There is none. That is because the future is not yet known.

Would one valid reason to maintain a decent balance in tax-deferred be a hedge for medical expenses (at possibly tax exemption)? As stated, the future is not yet known, and there are many roads to Rome.

Yes. Some people want to convert it all, for heirs or whatever reason. But it is certainly reasonable to leave some in tax-deferred in order to pay some long term care/major medical bills with money that will never be taxed.

The bills would need to be significant in order to have enough to deduct (I think it has to be be more than 7.5% of AGI, but sometimes it's 10% - not sure which is current). And that has to be more than the standard deduction to be worth it. But for people paying $50k to $100k a month year for assisted living/skilled nursing care/memory care, it sees certainly worth it.

[OfficeSpace]

To avoid the potential for unintentional wash sales, both of our Roth IRA accounts now hold VTWAX rather than VTSAX. Thanks again for highlighting that concern!

[Nestegg_User]

Some people don't care. Others want to try to smooth out the taxes over the years and prevent an increase later.

How much? My personal opinion is that $500k to $1 million is plenty for a couple to keep in tax-deferral. I don't know if that is realistic for your situation or not. Some people don't want to keep any.

Again, don't look for exact guidance. There is none. That is because the future is not yet known.

Would one valid reason to maintain a decent balance in tax-deferred be a hedge for medical expenses (at possibly tax exemption)? As stated, the future is not yet known, and there are many roads to Rome.

Yes. Some people want to convert it all, for heirs or whatever reason. But it is certainly reasonable to leave some in tax-deferred in order to pay some long term care/major medical bills with money that will never be taxed.

The bills would need to be significant in order to have enough to deduct (I think it has to be be more than 7.5% of AGI, but sometimes it's 10% - not sure which is current). And that has to be more than the standard deduction to be worth it. But for people paying $50k to $100k a month (?) for assisted living/skilled nursing care/memory care, it sees certainly worth it.

I'm thinking that you mean $100k - $120k a year, otherwise I really don't know what part of the country you're in.

We've got about $700 k that we didn't convert, figuring that between pension (full or only half, surviving spouse) and the lesser SS, this should mostly cover assisted living for generally expected timeframe (likely five to eight years) without incurring taxes on those funds. Our taxable and Roth would cover even longer and then the home equity (for the case where the surviving spouse is the last to need assistance) would be further gravy towards those needs. If all those are depleted, it's unlikely that anything would have helped prevent ruin due to that cause.

[retiredjg]

I'm thinking that you mean $100k - $120k a year, otherwise I really don't know what part of the country you're in.

Thanks for catching that. I'll fix it.

[Wannaretireearly]

Wow, you're spending about half what we are with 30% more assets and better pensions! You'll be fine whatever you do. If you don't want/need to spend more, you're probably just optimizing what/how much your heirs will inherit. Because of this, you may consider the step-up in basis of taxable for heirs upon your demise and evaluate spending from your taxable vs tax deferred before 70 from that perspective.

+1 Amazing achievements.
Bravo and well done. Please enjoy your retirement!

I’d like to show this to friends/family/kids on what can be achieved. And the benefits of govt jobs long term!!

[OfficeSpace]

Wow, you're spending about half what we are with 30% more assets and better pensions! You'll be fine whatever you do. If you don't want/need to spend more, you're probably just optimizing what/how much your heirs will inherit. Because of this, you may consider the step-up in basis of taxable for heirs upon your demise and evaluate spending from your taxable vs tax deferred before 70 from that perspective.

+1 Amazing achievements.
Bravo and well done. Please enjoy your retirement!

I’d like to show this to friends/family/kids on what can be achieved. And the benefits of govt jobs long term!!

Thank you! Absolutely no regrets. Super interesting, challenging, and patriotic work, promoted early and often, a decade overseas with expenses covered, generous benefits, and ability to separate on our terms (early). We lived well, yet considerably below our means for at least the last two of our three career decades.

[OfficeSpace]

It seems wise to convert up to the NIIT threshold of $250,000 in the coming months and perhaps up to the top of the 24% bracket (effectively 27.8%) of $364,200 closer to the end of the year.

• Final paychecks, payout for accrued leave, initial annuity payments, Solar Renewable Energy Credits (SRECs), ETSY (hobby) income, and bank account interest will total about $85k, which will be taxed at our marginal rate.

• The Consolidated 1099 we received from VG for 2022 shows total dividends & distributions of about $75k, of which about $60k came from Qualified Dividends or Long-Term Capital Gains and $15k came from Non-Qualified Dividends, Section 199A Dividends, or Non-Dividends. For simplicity (* see below), we'll assume the same for 2023.

• We can liquidate enough VFIJX - VNGRD GNMA ADML to cover the taxes for converting from traditional TSP to Roth IRA.
  Total Cost was $329k, Market Value is $285k, unrealized capital losses are long-term $43k and short-term $1k.

$85k income + $75k investments = $160k - $27k standard deduction - $3k realized capital loss deduction = $130k AGI
$250k - $130k = $120k convert to avoid NIIT (scenario 1)
$364k - $130k = $234k convert to avoid 32% bracket (scenario 2)

Are we correct above that 1) the distribution from VFIJX would not be taxed due to realizing a capital loss, 2) $3k could be deducted from income, allowing AGI headroom for $3k more to be converted, and 3) the capital loss would be deducted from other LTCGs? Are we correct below regarding how this would be taxed (generally)?

$85k income + $15k investments + $120k conversion - $27k standard deduction - $3k loss deduction = $190 taxed at marginal rate
$85k income + $15k investments + $234k conversion - $27k standard deduction - $3k loss deduction = $304 taxed at marginal rate
$60k QD / LTCG investments - $??? VFIJX Long-Term Capital Loss proportional to withdrawal = <$60k taxed at 15% rate (both scenarios)


(* see above)

The most recently posted distributions listed on the Dividend and capital gains distributions page are not characterized, and while the 2022 qualified dividend income page "shows both the year-to-date estimates and the historical year-end figures for the percentage of Vanguard funds' net income eligible for reduced tax rates as qualified dividend income (QDI) under the Jobs and Growth Tax Relief Reconciliation Act of 2003," it's unclear how that helps estimate the following types of dividends and capital gains distributed by the accounts in our taxable portfolio:

Non-Qualified Dividends (marginal rate) - $9k last year
VMFXX - VANGUARD FEDL MONEY MKT
VTIAX - VNGRD TTL INTL STK ADML
VFIJX - VNGRD GNMA ADML
VTSAX - VNGRD TTL STK MKT ADML

Section 199A dividends (marginal rate) - $4k last year
VGSLX - VNGRD RL EST IDX ADML
VTSAX - VNGRD TTL STK MKT ADML

Non Dividends ("not taxable until basis recovered")
VGSLX - VNGRD RL EST IDX ADML

Qualified Dividends (15% rate) - $23k last year
VTIAX - VNGRD TTL INTL STK ADML
VGSLX - VNGRD RL EST IDX ADML
VHCAX - VNGRD CAP OPP ADML
VFIAX - VNGRD 500 IDX ADML
VTSAX - VNGRD TTL STK MKT ADML

Long-term Capital Gains (15% rate) - $36k last year
VHCAX - VNGRD CAP OPP ADML


Bogleheads Wiki: Roth IRA Conversion

Vanguard Research: A “BETR” approach to Roth conversions

[FiveK]

It looks like you're right that it would make little difference if she takes Social Security earlier:

By the same logic, it would make little difference to the SS benefits if she takes SS later - but if you are being aggressive about Roth conversions, deferring her SS by a few years might improve your total after-tax results. Of course, you have years before needing to decide....