Hi fellow frugal friends,
I have found myself in a particularly special financial situation and I want to make sure it isn't too good to be true (usually I find that most good-looking things are as such).
I am a young professional making a reasonable amount of money. I have access to a 401k plan at work, which I have been aggressively saving in for years (part of the reason for this is that I am able to reduce my taxable income AND tax bracket and as such pay lower taxes to lock in a low tax rate to make Roth IRA contributions). So, long story short, I've been manipulating my tax rate to lower my effective rate and keep my top marginal rate to keep taxes low for my Roth IRA contributions (e.g. 15%).
Here's the twist. A few years ago, I was granted some stock options at a company I used to work for. The strike price was super duper low, so as soon as the company went public, I bought up my shares for very little cost and sat on them. The one year holding period to make this into a long-term investment is rapidly approaching, and I was in the magical middle-zone for this investment so I am not subject to AMT. Since my purchase, the shares have increased in value a lot (not retire-at-27 a lot, but it's a bunch of money for sure).
I know that long-term capital gains tax rates are 0% for people in the 15% tax bracket. Does this mean that, by doing what I was already doing (plowing money into my 401k in order to manipulate my tax rate to 15%), I do not have to pay federal income tax on my very large long-term investment return? I see nothing in the tax code that prevents this, nor do I see any ceiling on the amount of money I can theoretically do this with (it could be millions of dollars for Pete's sake!).
Can someone confirm this for me? If it's true, I will be very happy for sure.
Thanks guys!