Author Topic: Harvesting capital gains prior to starting IRA ladder?  (Read 2706 times)

Gone Fishing

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Harvesting capital gains prior to starting IRA ladder?
« on: October 16, 2015, 02:52:02 PM »
I have a good chunk of the stache (50%) in taxable accounts with around 20% gains.  My thought is that perhaps I should harvest those gains and reset my basis prior to starting my IRA ladder with the thought that the favorable capital gains rates may be at risk sometime in the future.  I could actually knock them out pretty quickly at great tax long term rates but I believe it would eat up a good bit of my AMA credits, so I would need to do it over a few years.  Between the taxable accounts and ROTH contributions, I should be in no hurry to get at my deferred funds. 

DaveR

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Re: Harvesting capital gains prior to starting IRA ladder?
« Reply #1 on: October 16, 2015, 04:18:20 PM »
I read this five times and still don't get the question...I'm probably just being especially dense today. You're looking sell/buy (avoiding wash sale rules) to step up your basis in the taxable account? It follows you are currently in the 10% of 15% tax bracket, so would keep the amounts such that you would have a 0% tax on the gains?

I'm not sure how the IRA ladder factors into things. If you can harvest gains tax free, then you should do it.

Some info here: https://www.kitces.com/blog/understanding-the-mechanics-of-the-0-long-term-capital-gains-tax-rate-how-to-harvest-capital-gains-for-a-free-step-up-in-basis/

Gone Fishing

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Re: Harvesting capital gains prior to starting IRA ladder?
« Reply #2 on: October 21, 2015, 12:10:56 PM »
Thanks, sorry if it I wasn't clear. This stuff gets complicated in a hurry!  I guess there are really two questions:

Beginning the IRA ladder (also projected to be taxed at 0%) will "use up" some of my 0% capital gains "room", should I go ahead and maximize the harvest of LTC gains at 0% by delaying my IRA rollovers?   

Would it be worth forgoing some or all AMA subsidies in order to take advantage of the 0% capital gains rate (or a mix of rollovers/LTCG harvesting) lest it disappear sometime in the future?

The way I see it, I could:

Harvest as much LT gains as possible at 0% (and lose AMA subsidies)

Roll as much IRA funds as possible at 0% into the ROTH then harvest as much LT gains as possible at 0% (and lose AMA subsidies).

Harvesting LT gains at 0% but a level less than the max to retain some amount of AMA subsidies.

Roll IRA funds in my ROTH at 0% at a self determined level to retain some amount of AMA subsidies.

Blend IRA rollovers and LT capital gain harvesting at a self determined level to retain some amount of AMA subsidies.   

Clear as mud, right?

seattlecyclone

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Re: Harvesting capital gains prior to starting IRA ladder?
« Reply #3 on: October 21, 2015, 04:56:58 PM »
Given that the ACA subsidy sliding scale acts as a de facto tax on capital gains, I don't plan to "harvest" these gains in any way during early retirement. My general plan is as follows:

1) Sell shares out of our taxable account to pay our bills, paying whatever tax rate is due on the capital gains.
2) Do enough Roth conversions to get our MAGI up to about 195% of the federal poverty level, since health insurance plans get a lot better below 200% of FPL.
3) When and if the taxable account is exhausted, start withdrawing Roth contributions and seasoned conversions. Continue making Roth conversions to get the MAGI up to about 195% of FPL.

Our overall long-term goal is to maintain a low tax bracket and high ACA subsidy by spreading our taxable income out pretty equally throughout our retirement. This means that it would be good to get most of our money out of traditional retirement accounts before RMDs and social security kick in. Given our spending levels and mix of assets in taxable/Roth/traditional/HSA, I expect the 195% of FPL MAGI goal will be at least enough to achieve this goal. It may even prove to be overkill; we'll monitor things and lower the MAGI goal a bit if it looks like we can get those traditional IRA/401(k) balances down while realizing a lower taxable income each year.

Shane

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Re: Harvesting capital gains prior to starting IRA ladder?
« Reply #4 on: October 21, 2015, 05:32:35 PM »
Go Curry Cracker's latest post deals with this subject. If you haven't read it already, it might be worth checking out:

Obamacare Optimization vs. Tax Minimization

Also another related GCC post:

Obamacare Optimization in Early Retirement

Shane

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Re: Harvesting capital gains prior to starting IRA ladder?
« Reply #5 on: October 21, 2015, 05:40:27 PM »
It may not work for everyone, but one way to harvest capital gains in taxable accounts without having to worry about losing ACA subsidies is to leave the U.S. for 330+ days. For those of us interested in traveling, we can time our trips abroad to make sure we stay out of the country for at least 330 days in a 12 month period, thus exempting ourselves from the requirement that we maintain ACA compatible health insurance. During the time we are out of the country we can max out harvesting of capital gains without any worries about the extra income pushing us over the ACA subsidy cliff. It's what we're planning on doing. 

Jeremy

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Re: Harvesting capital gains prior to starting IRA ladder?
« Reply #6 on: October 22, 2015, 06:40:20 AM »
Hi So Close

I've just been thinking through this myself.  Have you seen this post yet?  (Warning, it is really messy and complicated)
http://www.gocurrycracker.com/obamacare-optimization-vs-tax-minimization/

tldr: 25% marginal rate on all Roth conversions above 138% FPL, and up to 15% "tax" rate on dividends and long term capital gains as a result of ACA subsidy reductions, less if you do large scale conversion


Assuming 25 years worth of assets, 12.5 in taxable accounts with 20% gains, you are looking at maybe 2 years worth of spending in gains.  Trying to harvest all of that quickly would certainly require paying taxes.  The 0% space isn't going to be large enough, and if you harvest up to the top of the 15% tax bracket you wold have no ACA subsidies

I've also always prioritized Roth conversions in the 0% space since RMDs will bring tax rates of 25-39.6%, whereas the tax on gains is max 15%

If you spread the gain harvesting over n years so as to still be paying 0% (~$20k/year for MFJ), then your Roth conversions will lag.  Projecting 401k/TIRA account value forward to Age 70.5 will provide some guidance about relative importance (roughly having $500k in 401k/TIRA at age 40 for MFJ is the max for being able to pay zero tax on Roth conversions pre-ACA)


All of that said, if you are young and healthy, choose an ACA bronze plan for minimal/negative subsidy cliff, you might be able to pay something as low as 5-7% average tax on large gain harvesting in one year (see chart/table in that post.) 

Or you could go abroad for a year and pay 0% on the gain harvest.  Uncle Sam would help with your travel bills in that case





Gone Fishing

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Re: Harvesting capital gains prior to starting IRA ladder?
« Reply #7 on: October 22, 2015, 09:07:17 AM »
Thanks everyone!  Doubt we will spend the year overseas, but the 1-2 year bronze plan idea is very interesting!