Minimizing Income in FIRE

[Much Fishing to Do]

If one wanted (for the various reasons its helpful to) to minimize income/AGI in FIRE with a significant taxable portfolio they wanted in mostly in diversified equities, what would the approach be with that portfolio?  It seems like many equity tax efficient investments are not all that much lower than the regular 2% dividend you get from total market funds.

Owning a single portfolio o(or being reasonable heavy in) Berkshire Hathaway came to mind as a way to invest heavily in equities and be diversified in a known entity.  Are there other alternatives out there?

[seattlecyclone]

I wouldn't necessarily try too hard to avoid dividend-paying stocks. You're going to need to pull some money out of your portfolio to pay your bills. Every dollar you receive in dividends is a dollar you don't have to get from selling shares. Early on in retirement when your cost basis is still pretty close to the market value of your account, there can be a pretty big difference in the income you realize from dividends compared to the capital gains income you would receive from selling an equivalent value of shares. Wait long enough for your remaining shares to double in value a few times and this difference becomes much less pronounced.

[Bateaux]

In order to minimize income in FIRE, is my main reason for paying off my mortgage pre FIRE.  My housing expenses would consume 1\3 to 1\2 of my planned annual spending otherwise.  In order to afford the ACA I need to  keep income low.

[Monkey Uncle]

If, for example, you have a $1MM portfolio invested in a broad market index fund that generates 2% annually in dividends, that's $20,000.  The standard deduction for MFJ is $24,000, so you would have zero federal income tax liability.  For a couple, you need to have at least $23,335 in income to qualify for an ACA insurance plan instead of getting dumped into Medicaid (or worse, left out in the cold if you're in a state that didn't expand Medicaid). 

Is your portfolio substantially larger than $1MM?  Or do you have other sources of income?  In either of those cases, I could see that you might need to worry about greater tax efficiency than you get from a garden variety index fund.

Edit:  I forgot about the 0% tax bracket.  The 0% tax bracket for qualified dividends and LT capital gains goes up to 78,750 for MFJ.  So your portfolio would need to generate over 102k in capital gains and dividends (78,750 plus 24,000 standard deduction) before you would owe any federal income tax (assuming no other income sources).

[Patrick584]

I have also thought about this question. My insentive is the earned income tax credit. I live in a state that adds on to the federal credit, so this could have a value of 8k+, but there is an investment income cap of ~ 4k. There are about 80 Fortune 500 companies that don’t pay dividends. I think one could buy shares in several of these companies and still have a diversified portfolio. In my situation, I am still working, but plan to tax gains harvest this year. I will buy non dividend stocks in 10k amounts with the hope of reducing dividend below eitc threshold so that in my semi retirement in a few years, I can utilize this credit.

[Sand101]

Owning a single portfolio o(or being reasonable heavy in) Berkshire Hathaway came to mind as a way to invest heavily in equities and be diversified in a known entity.  Are there other alternatives out there?

Be well diversified in your taxable account so as to give yourself the best opportunities to tax loss harvest.  I try to ensure that every year I have enough to grab the 3k deduction to regular income as well as have some funds to tax gain harvest (wipe out accumulated capital gains).  Wipe out the taxation on the gains and you get yourself some free income.

[Much Fishing to Do]

If, for example, you have a $1MM portfolio invested in a broad market index fund that generates 2% annually in dividends, that's $20,000.  The standard deduction for MFJ is $24,000, so you would have zero federal income tax liability.  For a couple, you need to have at least $23,335 in income to qualify for an ACA insurance plan instead of getting dumped into Medicaid (or worse, left out in the cold if you're in a state that didn't expand Medicaid). 

Is your portfolio substantially larger than $1MM?  Or do you have other sources of income?  In either of those cases, I could see that you might need to worry about greater tax efficiency than you get from a garden variety index fund.

Edit:  I forgot about the 0% tax bracket.  The 0% tax bracket for qualified dividends and LT capital gains goes up to 78,750 for MFJ.  So your portfolio would need to generate over 102k in capital gains and dividends (78,750 plus 24,000 standard deduction) before you would owe any federal income tax (assuming no other income sources).

My taxable portfolio is about $2M (then $450k in trad ira/401k and $350k in Roth), with over half of that taxable in an account with no current gains (because my business's final year last year was a big one, am consulting now) so would be easy to make a move right now.  Right now its invested in mostly Vanguard's Lifestrategy growth fund.  For 2018 it distributed about $44k in dividends and about $16k in Long term capital gains.  There are a number of income thresholds (FAFSA automatic zero/simplified test EFC, ACA, etc) I may be interested in in FIRE that my current investments look like they would exceed unless I consider changing this, but I don't want to switch my general investing style much.  I don't know if this is something that would be worth considering, I'm just wondering what the legitimate options are.  Theoretically, if all that taxable were in BRK last year and I had been fired it seems like my income would show as close to zero as opposed to close to $60k as it was invested, right?, which seems like it may make a difference for different things.  Of course being invested in BRK is different than just picking a basic 80/20 index portfolio, so would have to consider the difference.  Just wondering what the options would be.  I would obviously have to figure out how to have money to spend without recognizing gains, but I suspect that wouldn't be that difficult if I was only concerned about the income amount for some years and not all.

[Monkey Uncle]

If, for example, you have a $1MM portfolio invested in a broad market index fund that generates 2% annually in dividends, that's $20,000.  The standard deduction for MFJ is $24,000, so you would have zero federal income tax liability.  For a couple, you need to have at least $23,335 in income to qualify for an ACA insurance plan instead of getting dumped into Medicaid (or worse, left out in the cold if you're in a state that didn't expand Medicaid). 

Is your portfolio substantially larger than $1MM?  Or do you have other sources of income?  In either of those cases, I could see that you might need to worry about greater tax efficiency than you get from a garden variety index fund.

Edit:  I forgot about the 0% tax bracket.  The 0% tax bracket for qualified dividends and LT capital gains goes up to 78,750 for MFJ.  So your portfolio would need to generate over 102k in capital gains and dividends (78,750 plus 24,000 standard deduction) before you would owe any federal income tax (assuming no other income sources).

My taxable portfolio is about $2M (then $450k in trad ira/401k and $350k in Roth), with over half of that taxable in an account with no current gains (because my business's final year last year was a big one, am consulting now) so would be easy to make a move right now.  Right now its invested in mostly Vanguard's Lifestrategy growth fund.  For 2018 it distributed about $44k in dividends and about $16k in Long term capital gains.  There are a number of income thresholds (FAFSA automatic zero/simplified test EFC, ACA, etc) I may be interested in in FIRE that my current investments look like they would exceed unless I consider changing this, but I don't want to switch my general investing style much.  I don't know if this is something that would be worth considering, I'm just wondering what the legitimate options are.  Theoretically, if all that taxable were in BRK last year and I had been fired it seems like my income would show as close to zero as opposed to close to $60k as it was invested, right?, which seems like it may make a difference for different things.  Of course being invested in BRK is different than just picking a basic 80/20 index portfolio, so would have to consider the difference.  Just wondering what the options would be.  I would obviously have to figure out how to have money to spend without recognizing gains, but I suspect that wouldn't be that difficult if I was only concerned about the income amount for some years and not all.

I'm not intimately familiar with BRK, but I know that they don't pay a dividend and they have low turnover, so I'll assume that you're correct that such an investment would put your taxable income close to zero.  But remember, you need at least 23,335 MAGI to qualify for an ACA plan, so there's that to consider.  Personally, I would be concerned about the lack of diversification that would come with putting $2MM in BRK.  A MAGI of $60k will still get you a decent PTC on your ACA plan.  And with the size of your total stash, I'd say not being able to completely max out the PTC and FAFSA qualifies as a First World problem.

[Greystache]

There are things yo can do outside of your portfolio to reduce your MAGI. If a high deductible health insurance plan makes sense for your situation, you can contribute to an HSA. Your HSA contribution reduces your MAGI dollar for dollar. Individuals can contribute $3500 and families can contribute $7000. If you are over 55, you can contribute another $1000.

[Dancin'Dog]

I'm glad to find this thread.  I've recently had similar questions.  We have a second home in the mountains (same state, 100 miles away) & I was surprised to see the different rates I received depending on which address we chose to consider as our primary residence.  I was also surprised by the cost based on income level.


I tested a couple of income levels to get check the rates in both loactions, for a couple & college age child.  At $80K per year the cost was $0 and at $100K the cost was $25K per year, which was eye-opening. 


I can understand why so many people complain about the cost of health insurance.

[Much Fishing to Do]

And with the size of your total stash, I'd say not being able to completely max out the PTC and FAFSA qualifies as a First World problem.

Ha, with that I totally agree.  But I've felt it this ridiculous every step of the way ;-)  I couldn't believe when I finally got my first good job, that actually offered a 401k, and I couldn't believe I get a great job and on top of that the government allows me to deduct a whole lot more than the $3k they did in an ira when I was at my crappy job.... then I get to the point I can afford a house and I get a tax break on top of finally being able to afford the american dream.... then I'm starting to make money off of money instead of hard work and they tax that money less? ...

Its all pretty crazy how it works so i just make sure I'm following the rules and see whats avail....It was getting FU money built through trying to be frugal and smart that gave me the confidence to start my own business that led to that the huge last couple years that led to the now portfolio much larger than I ever predicted.

[Monkey Uncle]

Yep, once you get past a certain point, FI seems to snowball and things get easier.  I'm nowhere near as successful at it as you are.  But I definitely had to pinch myself when I reached the point where I had enough money to stop working, and by living like a trust fund baby I no longer had to pay taxes.

[Laura Ingalls]

I have also thought about this question. My insentive is the earned income tax credit. I live in a state that adds on to the federal credit, so this could have a value of 8k+, but there is an investment income cap of ~ 4k. There are about 80 Fortune 500 companies that don’t pay dividends. I think one could buy shares in several of these companies and still have a diversified portfolio. In my situation, I am still working, but plan to tax gains harvest this year. I will buy non dividend stocks in 10k amounts with the hope of reducing dividend below eitc threshold so that in my semi retirement in a few years, I can utilize this credit.

This will work but you still really can’t sell winning stocks.  In other words if your earnings, refundable credits, an unearned income, money in your mattress, can’t meet your monthly nut your still going to have issues. 

[BTDretire]

I have an older friend ( I think about $2M portfolio) with a mix of stocks and bonds, approximately 50/50.
 Many of his bonds were bought at high interest rates.
His complaint is always that he has to much income and ends up in high tax bracket.
This has kept me away from bonds, I hope with the ~2% from VTSAX and some interest
income I can keep income low enough to be tax free.
 2019 will be my first tax year to find out.

[uwp]

  Are there other alternatives out there?

One thought I had to do this was use something like Folio to create my own basket of all the non-dividend stocks in the S&P (I think there are 90ish), then buy SDY (the S&P dividend ETF) in my IRA.  So you you basically have the S&P, just split.  Having the basket of multiple stocks in the taxable account also allows for tax-loss selling to offset gains when you are raising spending money.

Other ideas were to basically split up smaller/growthier equity indexes in the taxable account vs value/large cap in retirement accounts using ETFs.  And obviously stick your bond exposure in the retirement accounts as well. Without an equally large tax-advantaged account, it gets hard to stay diversified while avoiding taxable income on 500K+in taxable investments.

[Much Fishing to Do]

  Are there other alternatives out there?

One thought I had to do this was use something like Folio to create my own basket of all the non-dividend stocks in the S&P (I think there are 90ish), then buy SDY (the S&P dividend ETF) in my IRA.  So you you basically have the S&P, just split.  Having the basket of multiple stocks in the taxable account also allows for tax-loss selling to offset gains when you are raising spending money.

Very interesting, thanks!