Long-Term Capital Gains and Tax Question

[Ape86]

Hey Mustaches,

Suppose a married couple has $2M index funds & bonds investments and withdraws 4% per year ($80,000) to live on.

Assuming those are long-term capital gains (and married, filing jointly), would that make the capital gains rate on that 0%?

If that is the only income for the couple, does the Standard Deduction ($25,100) apply to that, making your taxable income actually $54,900 -- putting you in the 12% marginal tax bracket?

Have I got that right so far?

[MustacheAndaHalf]

Some of that money will be taxed even if you do nothing.  If you had half bonds and half stock, it might look like:
$1,000,000 Vanguard Total Bond with 1.4% interest/year : $14,000
$1,000,000 Vanguard Total Stock with 1.23% dividends/year: $12,300

In this case, if you stop reinvesting dividends, your first $26,300 should come from investments without selling anything.  You could then sell another $53,700 worth of stock & bonds for living expenses, which should be taxed in the LTCG tax bracket of 0%.

Rebalancing is especially important early in retirement to protect against stock market crashes.  Stocks have tended to grow much faster than bonds, so usually rebalancing involves selling stocks and buying bonds.  If you sell stocks with the least gains, you can sell more stocks and stay within the 0% LTCG bracket.  After taking what you need for living expenses, the rest could go into your bond allocation.

[Dee18]

Keep in mind that for money withdrawn from traditional 403(b) accounts, 401(k) accounts, and IRAs (i.e. investment accounts that were funded with pre-tax money and never converted to Roths), withdrawals will be taxed as ordinary income, not capital gains. 

[secondcor521]

Hey Mustaches,

Suppose a married couple has $2M index funds & bonds investments and withdraws 4% per year ($80,000) to live on.

Assuming those are long-term capital gains (and married, filing jointly), would that make the capital gains rate on that 0%?

If that is the only income for the couple, does the Standard Deduction ($25,100) apply to that, making your taxable income actually $54,900 -- putting you in the 12% marginal tax bracket?

Have I got that right so far?

Taxes on capital gains depend on whether the couple has any ordinary income.

So if the couple has no ordinary income (such as W-2 income, self employment income, or ordinary interest), then yes, the first ~$80K of LTCG falls into the 0% capital gains bracket.

If there is no ordinary income to offset, then yes, they could subtract the standard deduction of ~$25K from their LTCG and their taxable income would only be about ~$55K.

But now you mention the 12% bracket.  The 12% bracket is an ordinary income tax bracket, so it applies to ordinary income, not LTCG.  And in the example you give, we're assuming no ordinary income.  So it wouldn't be applicable in this case.

You might want to play around with this web page to see how this stuff works:

https://engaging-data.com/tax-brackets/?fs=1&reg=0&cg=80000

[getmoneyeatpizza]

It all depends on what account the $2 million is in.  If in a taxable account, yes you will probably pay zero taxes.

If the $2 million is in a 401k, your calculation is correct, however just know those are not long term capital gains.

Read this and pick through the links: https://www.gocurrycracker.com/never-pay-taxes-again/

In terms of value of money, for your use, once in the account in retirement I view it as roughly:

taxable > roth (depending on your age, estate purposes) > 457 > trad IRA, 401k