Using 0% capital gains and dividend tax rate

[detailoriented]

Over the past few months I have been seeking ways to improve the efficiency of my investments.

Background information:

• My marginal tax rate is in the middle of the 15% band
• I am NOT maxing out contributions to any account (401k, rIRA, tIRA... etc)
• I am maxxing my company match into the 401k
• No plans for early retirement, I am seeking efficiency

I am considering an investment path but I have been unable to prove if it is worthwhile.  In the past when I received a salary increase I also increased my 401k contributions.  However now that I understand that I could be getting 0% tax rate on capital gains and dividend investments I had another idea. I am wondering if I should be taking the 15% tax hit and putting the money into a taxable account that can generate dividend and capital gains.  Once I have this account established the amount I can collect at 0% can then allow me to offset more of my income back into tax efficient vehicles.

I guess this boils down to... While sitting firmly in the 15% marginal tax bracket is their enough tax benefits in a properly managed taxable account to accelerate my long term portfolio growth

I believe the answer is no but I have not been able to prove it to myself on paper.  Can anyone help me?

Thank you,
DO

[MDM]

You could investigate various scenarios on the '401k vs Taxable' tab in the case study spreadsheet.

[wienerdog]

You might study here and see the two different scenario's.  http://www.madfientist.com/guinea-pig-experiment/ Read the archives there also it will help.

I would think eventually your dividends would in time push you out of the 15% bracket as more than likely your salary will also go up over time.

[sheepstache]

You also want to factor in state taxes now and throughout the time you'll have the investments.

In NY I pay 0% federal but 9% state.

[detailoriented]

@MDM

I have played with that spreadsheet and it mapped out that the two scenarios came out equal when using 15% as the expected withdrawal tax rate.  That is what got me curious enough to post.  It seems that if I manage the gains that a taxable and a Roth are very similar.  However in a taxable I can harvest capital loss and use dividend for living expense so more money can be tax free and be diverted into 401k.

@wienerdog
The article on mad fientist is a good one but not completely accurate to what I  suggesting.  You make a great point about my salary increasing.  I had not considered that.

@sheepstache
 I luckily do not currently live in a state with income tax but that could change in the future which could put a major drag on my plan.


I think the reason I can't pin this down is because it is unknown how much capital loss harvesting I will be able to take advantage of while in this current position of 15% marginal rate and no state income tax.

[MrStash2000]

This is actually my strategy. I built a sizable amount of $$$ in my trading account over time.

My wife and I are both teachers so I can contribute to both a 403 and 457 that will keep us out 15%.

I'd still hit 401ks / IRAs first then go to taxable.

[MDM]

I have played with that spreadsheet and it mapped out that the two scenarios came out equal when using 15% as the expected withdrawal tax rate.  That is what got me curious enough to post.  It seems that if I manage the gains that a taxable and a Roth are very similar.  However in a taxable I can harvest capital loss and use dividend for living expense so more money can be tax free and be diverted into 401k.

Yes, depending on the assumptions one uses this can be the result

You make a great point about my salary increasing.  I had not considered that.

Success can bring its own set of problems if it upsets some of the assumptions mentioned above. ;)

[johnny847]

With the current tax law, it seems that yes, for your current situation, a taxable will work out to be better under some assumptions.

But keep in mind that the 0% LTCG bracket is relatively new. And this is subject to change at any time.

Roth and Traditional retirement accounts, however, are a political guarantee. Sure, the US government could decide to change the rules at any point in time - oh you have to wait to 65 now, or actually Roth withdrawals will be subject to tax.
But to make changes to these rules, which are effectively a political promise, would take a massive amount of political maneuvering to the point where I consider the probability of this occurring to be lower than that of me dying before 59.5 (for context, I'm 24). Furthermore, the more money that ends up in these accounts, the safer they are from political change.

[detailoriented]

Thank you all.

I am glad to have my plan exposed as a house of cards.  Back to the creative drawing board.

DO