Post Fire Roth Pipeline - How to make your taxable account have NO GAINS?

[fairfaxbiker]

I am into my second full year of ER and used VTI/VXUS in my brokerage accounts and 60/40 allocation at Betterment to hold my taxable money along with cash for five years living expenses while I fill up my ROTH five year pipeline.  The only problem is that I am incurring about a 2% dividend return and that is limiting my maximum ROTH conversion.  The nice fellow over at Personal Capital says he can build me an all stock proprietary ETF that guarantees to not throw off any income until I sell.  The only problem is that it only includes 100 stocks vs. the thousands in VTI...and the little .89% annual fee. 

Just to be clear, I am trying to keep my income at around $32k or less (only by doing the conversion each year) so that I can maximize the ACA tax credits. I've saved enough cash to live for the five years while this percolates.

So, Mustachians...has anyone come across a good solution that allows you to earn nothing until you sell in a taxable account? 

[Eric]

Is the problem that the dividends from your taxable account are more than you spend in a year?  Because if not, just use the dividends you receive to fund a portion of your living expenses and sell from your taxable account to fund the remainder.

Aren't the dividends and capital gains treated the same if you're in the 15% tax bracket or lower?  Why does it matter which source you spend from?  I guess I'm not understanding why your Roth conversion is effected by one and not the other.

[Spork]

Aren't the dividends and capital gains treated the same if you're in the 15% tax bracket or lower?  Why does it matter which source you spend from?  I guess I'm not understanding why your Roth conversion is effected by one and not the other.

He's aiming at a specific ACA credit target.

[Eric]

Aren't the dividends and capital gains treated the same if you're in the 15% tax bracket or lower?  Why does it matter which source you spend from?  I guess I'm not understanding why your Roth conversion is effected by one and not the other.

He's aiming at a specific ACA credit target.

I get that, but not sure how dividends are relevant but capital gains are not.

[dandarc]

Do your conversion as late in the year as practical - this way you know what the dividends and capital gains distributions are already.  Then choose your conversion amount accordingly.  Remember for conversions, that the 5 year clock starts on January 1 of the tax year in which you made the conversion.

[redcedar]

Qualified or unqualified dividends? That would help determine the impact to taxes and therefore roth ira conversion amount but I admit to not knowing how the ACA income calculation treats this difference in dividends.

[fairfaxbiker]

Thanks for your responses guys.  Yes, I am aiming for the max ACA credit. Every dollar that comes my way as a dividend lowers dollar for dollar the amount I can ROTH convert. 
 
Here is a clearer picture of what I want to do:
-Live off of cash for five years and then start living off the ROTH conversion amounts forever (Current IRA's set at 60% VTI; 25% VXUS and 15% AGG)
-Have all other taxable money invested in the lowest cost investment that matches up with the Boglehead 3 Fund Portfolio of VTI/VXUS/AGG but does NOT send me any dividends or gains unless I choose to sell at a gain (this is really my question and my current ideas are: -find a no dividend ETF, go with Personal Capital and their 100 stock no-dividend portfolio, maybe create a Motif fund?
-The reason for not wanting dividends is so that my ROTH conversion of $32k each year keeps me in the "Sweet Spot" for ACA insurance

[fairfaxbiker]

Do your conversion as late in the year as practical - this way you know what the dividends and capital gains distributions are already.  Then choose your conversion amount accordingly.  Remember for conversions, that the 5 year clock starts on January 1 of the tax year in which you made the conversion.

I actually do my conversions on days with big dips or drops in the market because you are taxed on the conversion only...not how much it grows over the rest of the year.  If I go over, I can re-characterize or un-do a portion to get me back under my target.  Also, if we get another bigger drop this year I may try the "ROTH Horse Race".

[Eric]

Here is a clearer picture of what I want to do:
-Live off of cash for five years

Ahhhh, cash!  I get it now.  Unfortunately, I don't think there's anything (pratical) that you can do to stop the dividend payments.  I think the solution is just to convert less to the Roth by the dividend amount.  If you (re-)invest those dividends, they'll still be there for you to use for living expenses in 5 years as if they were in your Roth all along.

So receive $2k worth of dividends, convert $30k to Roth, $32k invested until 2021, tax free access (if still in the 15% tax bracket), and $32k income for ACA reporting
or
receive $0 worth of dividends, convert $32k to Roth, $32k invested until 2021, tax free access, and $32k income for ACA reporting

There should be little practical difference between the 2 scenarios as long as you're still in the 15% tax bracket and no tax laws change in the next 5 years.

[fairfaxbiker]

Eric,
Thanks so much, that is a great point.  After looking at this stuff for so long I totally missed that fact.  I did not realize that qualified dividends are taxed at the same ZERO percentage as long term capital gains in the 15% tax bracket.  Good stuff!

Do you know if Tax Loss Harvesting inside my taxable accounts will help me in the 15% bracket?  I did a $100k test portfolio in Betterment last year but never turned on TLH.

[dandarc]

Do your conversion as late in the year as practical - this way you know what the dividends and capital gains distributions are already.  Then choose your conversion amount accordingly.  Remember for conversions, that the 5 year clock starts on January 1 of the tax year in which you made the conversion.

I actually do my conversions on days with big dips or drops in the market because you are taxed on the conversion only...not how much it grows over the rest of the year.  If I go over, I can re-characterize or un-do a portion to get me back under my target.  Also, if we get another bigger drop this year I may try the "ROTH Horse Race".

That is a better way to do it - if you've got the funds, you could convert the full amount multiple times per year, then recharacterize such that only the one that happened closest to the bottom sticks.  Although that could be a record-keeping nightmare.

[fairfaxbiker]

Do your conversion as late in the year as practical - this way you know what the dividends and capital gains distributions are already.  Then choose your conversion amount accordingly.  Remember for conversions, that the 5 year clock starts on January 1 of the tax year in which you made the conversion.

I actually do my conversions on days with big dips or drops in the market because you are taxed on the conversion only...not how much it grows over the rest of the year.  If I go over, I can re-characterize or un-do a portion to get me back under my target.  Also, if we get another bigger drop this year I may try the "ROTH Horse Race".

That is a better way to do it - if you've got the funds, you could convert the full amount multiple times per year, then recharacterize such that only the one that happened closest to the bottom sticks.  Although that could be a record-keeping nightmare.

I like the idea, just wonder if anyone on the forum have tried this and can attest to the record keeping issue?  My inclination is that if you use a firm that can auto upload to your tax program it might not be an issue but not certain.

[seattlecyclone]

Do you know if Tax Loss Harvesting inside my taxable accounts will help me in the 15% bracket?  I did a $100k test portfolio in Betterment last year but never turned on TLH.

Net capital losses counteract regular income (such as Roth conversions) up to $3,000. You could get up to $450/year back on your taxes by harvesting losses in the 15% bracket.

[fairfaxbiker]

Do you know if Tax Loss Harvesting inside my taxable accounts will help me in the 15% bracket?  I did a $100k test portfolio in Betterment last year but never turned on TLH.

Net capital losses counteract regular income (such as Roth conversions) up to $3,000. You could get up to $450/year back on your taxes by harvesting losses in the 15% bracket.

Thanks SeattleCyclone, it makes sense to use TLH for this year.  BTW, your blog post on the ACA was totally awesome...I spent hours scratching that all out last year and testing all the scenarios...wish I have found your site sooner.  I've been on the hunt for the next level Mustachian site and yours is killer.  Just wish you had a few years of back posts for me to dig into!  Great work!  Wonder if anyone has a blog roll for next level post FIRE type stuff?  I'll do a search.

[Altons Bobs]

How do you reduce your MAGI if the dividends, capital gains, etc. are already higher than the 400% federal poverty level?  Is there a trick to reducing it below 400% to get ACA subsidy?

[Eric]

How do you reduce your MAGI if the dividends, capital gains, etc. are already higher than the 400% federal poverty level?  Is there a trick to reducing it below 400% to get ACA subsidy?

Yeah.  Spend less money.  You're retired.  You control your income because it's equal to your spending.

[dandarc]

How do you reduce your MAGI if the dividends, capital gains, etc. are already higher than the 400% federal poverty level?  Is there a trick to reducing it below 400% to get ACA subsidy?

Yeah.  Spend less money.  You're retired.  You control your income because it's equal to your spending.

And own tax-efficient funds.  Capital gains can come almost exclusively from selling shares if you own the right funds, say VTSAX.  Or just do everything with ETFs - ETFs with good liquidity push most of the capital gains onto the arbs.

[Altons Bobs]

How do you reduce your MAGI if the dividends, capital gains, etc. are already higher than the 400% federal poverty level?  Is there a trick to reducing it below 400% to get ACA subsidy?

Yeah.  Spend less money.  You're retired.  You control your income because it's equal to your spending.

I don't tell them to pay me less dividends, they just pay them out, I can't tell them to stop and hold and not pay me yet, can I?  It's not the amount of money I spend, it's the dividends and capital gains from my funds that I have to report as income.  How do I get that number low enough to qualify for ACA subsidy?

[fairfaxbiker]

They key to staying under the 400% is twofold as it was stated earlier:
1. Ensure you are and can live on less than that amount (your spending)
2. Structure your investments in such a way as to incur the very lowest automatic capital gains.
I fully understand #1, but #2 was really the basis of this whole post.  Fidelity has a nice ETF screener that you can use to find an ETF with no automatic gains (but I can't seem to find a VTI alternative that does not pay around the same 2% per year).  The other option I am considering is using Personal Capital Advisory service where they pick 75 individual stocks that pay GUARANTEED NO DIVIDENDS and create a personal ETF (this is what Cole over at PC is telling me).  I am super nervous about individual stocks but he assures me that 75 is enough to diversify.

[seattlecyclone]

The federal poverty level is $11,880 for a single person. 400% of this number is $47,520. If you have enough VTSAX in a taxable account that it's paying $47,520 of dividends, that means you have over $2 million invested in addition to any retirement accounts you may have. You can probably afford to pay full price for your health insurance policy. If you want to lower this amount anyway, you can trade some of your mutual funds for individual stocks that don't pay dividends.