Looks like our income will be about $12k of qualified dividends.
I want to take LTCGs and/or do Roth conversions.
I have enough cash to live on, so all LTCGs or Roth Conversions will
As I understand, We (MFJ) get a ~$24k deduction, so can I do
$78,750 + $12,000 = $90,750 in LTCGs at 0% tax?
But, what If I do Roth Conversions? I see they are taxed as regular
income, so I can convert the same $78,750 + $12,000 = $90,750, but I
would owe 10% of $19,400 and 12% of $78,950 - $19,400 = $59,550 or
$1,940 + $7,146 = $9,086.
I'm told I will come out ahead in just a short time doing the Roth
Conversions even though I paid the taxes. I haven't rationalized that
but the spreadsheet gurus have convinced me, (for now).
But, is there a combination of the two that would be better?
Or can you give me more guidance on how to minimize taxes now and in the
future with these two ideas.
Retired this year. :-)
Took me a while to get someones spreadsheet figured out and working,
it seems I'll be better off if I just do Roth Conversions up to about
12% tax rate, until I hit 70-1/2. Worry about Capital gains after that.
Any other feedback appreciated.
It looks like you understand how normal income tax rates and LTCG tax
rates interact. I'll describe my understanding of the situation and show
my math so others can correct whatever I have wrong.
For Married/Jointly the 2019 standard deduction is $24.4K, If total
taxable income (including long term capital gains) is less than $78.75K
the federal long term capital gains will be taxed at 0%. Non-capital
gains income below $78.95K will be taxed at 10% for the first $19.4K and
12% after that. For tax calculation purposes, qualified dividends are
treated like long term capital gains.
If a couple taking the standard deduction has $12K of qualified
dividends (and no other income), they can have up to $91.15K ($78.75K +
$24.4K - $12K) in LTCGs and the federal LTCGs (and the qualified
dividends) will be taxed at 0%.
For your particular scenario I would definitely do the Roth conversion
on $24.4K. This uses up the standard deduction (which is wasted if it
is used for LTCG/QualDivs that would be taxed at 0%) and costs nothing
in federal taxes. You now have $66.75K ($91.15K-$24.4K) that you can use
for LTCGs taxed at 0% or Roth conversions taxed at 10%/12%.
Whether you should use the remaining $66.75K to realize tax free LTCGs
or 10%/12% Roth conversions depends on information you didn't supply.
Right now, the LTCG rate would be 0%. In the future would you expect
your applicable rate to be 0%, 15%, 20% or 23.8%? Right now, the rate
applied to Roth conversion income would be 10/12%. In the future would
you expect the applicable rate to be 0%, 10%, 12%, 22%, 24%, higher? If
you are affluent enough that you plan on donating substantial amounts to
charity, you can donate appreciated securities to a charity and never
pay capital gains tax on the donated securities (so avoiding LTCG now is
of little value). After age 70.5 you can give up to $100K/year directly
from your IRA to charity as a QCD (the donation effectively reduces your
RMD requirement) and not pay taxes on the amount given to charity (so
paying for a Roth conversion now is of little value). What are your
expectations for the future?
Before accepting any conclusion from your "spreadsheet gurus", you
should make sure you understand and agree with the assumptions that are
built into the spreadsheet and the factors that are ignored.
Spreadsheets can lead to poor decisions when the GIGO (Garbage in,
Garbage out) principal is ignored.
Personally, the LTCG vs Roth conversion decision depends a lot on how
bad I want to sell the appreciated asset. It is real hard for me to
keep an appreciated asset I think should be sold if the LTCG rate is 0%.
You mentioned you just retired. If you are below age 65 and getting
Obamacare premium tax credits, be aware that any income (from Roth
conversions, LTCGs, Dividends, whatever) is included when calculating
Obamacare premium tax credits. The Obamacare premium tax credit
phaseout is equivalent to another substantial tax.
Much of that info is unknowable without an accurate crystal ball.
If I assume 6% growth into the future (could be more or less) When I
turn 70-1/2 between dividends, RMDs and S.S. I'll have a forced income
of close to $80k, four years later when my wife turns 70-1/2 it will be
over $100k, IF, I do nothing.
The only thing I can reduce are the RMDs, by doing Roth Conversions.
I don't have to sell the LTCGs.
QUESTION, How are the LTCGs taxed when transferred to our kids at our
A little more visibility there, fuzzy crystal ball says rates will be
higher than 10/12% in the future. Two reasons, (1) I will have a much
higher forced income, bumping me to a higher bracket, (assumes I do
nothing, but even if I do Roth Conversions every year I will still have
money left subject to RMDs).
(2) Rates are low now, I doubt they will go lower, but I think they will
My Charity will be my children
No doubt, but I do have some faith this spreadsheet has been tested
and corrected over and over by users and some tax accountants. Although
still comes with caveats.
I'll insert a link here, If this is not proper and the moderator
removes it, my address is good, anyone can contact me for the link.
Best to run with Excel. Be sure to only alter 'GREEN' highlighted Cells.
Most of my securities are in Vanguard Total Stock Market Index, VTSAX.
I have a little more LTCGs than what I have put in.
Yes, I was stubborn, kept my private policy, at some cost to us.
Still waiting for my $2,500 premium reduction, so far it has been a
$7,900 premium increase.
When you die, the cost basis of an investment with a built in capital
gain is "stepped up" to the market value of the investment on the day
you die and that cost basis is what your estate or heirs inherit.
Basically, the potential capital gain tax that built up during your life
dies when you do.
The reason I mentioned Obamacare premium tax credits was that the
strategy to optimize them is incompatible with a strategy to maximize
the tax value of Roth conversions and 0% LTCGs. Example: For a married
couple of 62 year olds who can manage the amount of income that shows up
on a 1040, it is quite possible to get $15-$29K/year worth (depending on
where you live and your precise income) of Obamacare premium tax
credits. A requirement to get these subsidies is to keep your Modified
Adjustable Gross Income (not taxable income) below 400% of Federal
Poverty Level and above 138% of FPL. For a married couple 4xFPL is
$65840 for 2019 (4x$16460). kff.org has a "Health Insurance Marketplace
Calculator" where you can enter your specific information to get an idea
of what this means for you. The retired, pre-age 65 people I know who
have taken Obamacare PTCs into account have significantly changed their
plans on how to manage Roth conversions and 0% LTCGs.
Thanks for pointing this out -- I didn't know such a resource existed
and didn't know I might be eligible for Premium Tax Credits.
The calculator is not exactly prominent on the Kaiser site, so a
direct URL might be helpful for others: