Long term capital gains vs 401k taxed at regular income

[qofcc]

Thinking about 401k withdrawals in retirement... Married filing jointly tax rate is 12% for up to 94,300 (after standard deduction of $29,200), so that would be total SS income/401k withdrawals of $123,500. I also see long term capital gains tax is 0% for up to 94,300. So that makes me think it would be best to max out the withdrawals/income at $123,500 each year until the 401k is depleted to stay in the 12% rate, then move the excess not needed for living to long-term investments that when cashed in would be long-term capital gains. Obviously 401k offers protections, but also thinking about a trust, so part could go in there. Once pre-tax 401k funds are depleted, we would truly be living off assets not 401k income so our "income" would be very low in later retirement when funds would be running lower.

Does that make sense? what am I missing? I know tax rates are supposed to change in 2026 with the TCJA sunset, but still, concept seems to make sense.

Thoughts?

[jerseygirl]

401k is like IRA withdrawal taxed as ordinary income. No capital gains rate. These funds weren’t taxed when putting into 401k but are when withdrawn
Although you can put in taxed funds but it’s unusual

[haapai]

I sure hope that someone else answers soon because I've been kicking around a variant of the same idea. 

[minnesotapaintlady]

My taxable account is only 11K.  I don't think 0% LTCG tax will factor much into my retirement plans. 

[tallguy]

Feb 16, 2024 12:17:40 GMT -5 qofcc said:

Thinking about 401k withdrawals in retirement... Married filing jointly tax rate is 12% for up to 94,300 (after standard deduction of $29,200), so that would be total SS income/401k withdrawals of $123,500. I also see long term capital gains tax is 0% for up to 94,300. So that makes me think it would be best to max out the withdrawals/income at $123,500 each year until the 401k is depleted to stay in the 12% rate, then move the excess not needed for living to long-term investments that when cashed in would be long-term capital gains. Obviously 401k offers protections, but also thinking about a trust, so part could go in there. Once pre-tax 401k funds are depleted, we would truly be living off assets not 401k income so our "income" would be very low in later retirement when funds would be running lower.

Does that make sense? what am I missing? I know tax rates are supposed to change in 2026 with the TCJA sunset, but still, concept seems to make sense.

Thoughts?

It depends also on the amounts you are talking about in each type of account.  I would probably first roll the 401k into an IRA to not be limited to the plan's choices for investments, but there could be reasons for keeping it where it is.  Second, there is no need to fully deplete your tax-deferred balance.  Even if you are eventually subject to RMDs, if you get the balance down to a manageable level you can perhaps avoid overpaying your taxes until then.  Third, at the income level you are talking about, assuming continued health (and survival) for both of you, IRMAA should not be a concern.  Still, you should learn about it if you do not already know.  Next, I would urge Roth conversions rather than putting the excess money into taxable investments.  If you have to pay taxes on the money now, better to have gains tax-free in the future rather than even at LTCG rates.  Remember the goal is not necessarily to minimize taxes at a specific point, but to minimize taxes over the entire period. 

[teen persuasion]

Roth conversions, not withdrawal!

Tax cost would be the same, but it would be tax free forever. Moving tIRA or 401k money to taxable would mean tax drag in the future. Drawing from the taxable could also increase the amount of SS that is taxable, compared to drawing from Roth.

And as Tallguy said, you don't need to empty tax deferred, because you want to use up your standard deduction space each year.

We are doing small Roth conversions each year right now. In a few years we will increase them. I'm hoping to convert a good portion of DH's tIRA to Roth before we start SS at 70, and then reduce our annual conversions to adjust for the extra SS income. Keep the amount of tax paid roughly even over the years. By the time RMDs kick in, the tIRA balances should be low enough that the RMDs are no more than we'd want for additional income (over SS). If there's any extra space, convert a bit more to keep at the same tax level. I'm trying to get the tIRA balances low enough that RMDs won't throw a survivor into a higher tax bracket when they have to swap to Single rates/deduction. A few hundred K left in tIRA is low enough for us, rest in Roth.

[teen persuasion]

Just noticed - the LTCG 0% bracket isn't quite the same as the top of the 12% bracket, it's $250 less.

[The Walk of the Penguin Mich]

Feb 16, 2024 14:39:08 GMT -5 teen persuasion said:

Roth conversions, not withdrawal!

Tax cost would be the same, but it would be tax free forever. Moving tIRA or 401k money to taxable would mean tax drag in the future. Drawing from the taxable could also increase the amount of SS that is taxable, compared to drawing from Roth.

And as Tallguy said, you don't need to empty tax deferred, because you want to use up your standard deduction space each year.

We are doing small Roth conversions each year right now. In a few years we will increase them. I'm hoping to convert a good portion of DH's tIRA to Roth before we start SS at 70, and then reduce our annual conversions to adjust for the extra SS income. Keep the amount of tax paid roughly even over the years. By the time RMDs kick in, the tIRA balances should be low enough that the RMDs are no more than we'd want for additional income (over SS). If there's any extra space, convert a bit more to keep at the same tax level. I'm trying to get the tIRA balances low enough that RMDs won't throw a survivor into a higher tax bracket when they have to swap to Single rates/deduction. A few hundred K left in tIRA is low enough for us, rest in Roth.

The additional advantage to this is if you lose your spouse.   In this situation, your tax brackets almost halve, but you now have a second IRA that you'll need to take RMDs from so you'll need to pay more taxes on the money as a single person.  Depending on how much, you might find yourself getting hit with IRMAA on your Medicare.  

[teen persuasion]

Your other thread mentioned pension income, and planned rental income.

Those will both cut into space for withdrawal/conversion in the 12% bracket.

[tallguy]

Feb 16, 2024 14:39:08 GMT -5 teen persuasion said:

Roth conversions, not withdrawal!

Tax cost would be the same, but it would be tax free forever. Moving tIRA or 401k money to taxable would mean tax drag in the future. Drawing from the taxable could also increase the amount of SS that is taxable, compared to drawing from Roth.

And as Tallguy said, you don't need to empty tax deferred, because you want to use up your standard deduction space each year.

We are doing small Roth conversions each year right now. In a few years we will increase them. I'm hoping to convert a good portion of DH's tIRA to Roth before we start SS at 70, and then reduce our annual conversions to adjust for the extra SS income. Keep the amount of tax paid roughly even over the years. By the time RMDs kick in, the tIRA balances should be low enough that the RMDs are no more than we'd want for additional income (over SS). If there's any extra space, convert a bit more to keep at the same tax level. I'm trying to get the tIRA balances low enough that RMDs won't throw a survivor into a higher tax bracket when they have to swap to Single rates/deduction. A few hundred K left in tIRA is low enough for us, rest in Roth.

I am single, so wanted to get my traditional IRA balances down to about $300,000 before RMDs hit.  Still many years away but I won't get anywhere close the way I'm going.  I ended up taking survivor's benefits at 60 so gave up a lot of room for conversions.  I have still been doing small ($10-15,000) conversions tax-free for several years and can continue if I choose.  Biggest concern for me is not to pay zero income tax (which I could for about 13 years if I wish) but to not exceed the greatest property tax exemption income threshold.  That alone saves me about $10,000/year and will go up from there.  So, more money stays in my IRAs.  I'm good with that exchange.     

[qofcc]

Ok move from 401k to ira then convert to Roth IRA up to limit of tax bracket each year. Thanks!

[teen persuasion]

Feb 16, 2024 15:21:11 GMT -5 tallguy said:

Feb 16, 2024 14:39:08 GMT -5 teen persuasion said:

Roth conversions, not withdrawal!

Tax cost would be the same, but it would be tax free forever. Moving tIRA or 401k money to taxable would mean tax drag in the future. Drawing from the taxable could also increase the amount of SS that is taxable, compared to drawing from Roth.

And as Tallguy said, you don't need to empty tax deferred, because you want to use up your standard deduction space each year.

We are doing small Roth conversions each year right now. In a few years we will increase them. I'm hoping to convert a good portion of DH's tIRA to Roth before we start SS at 70, and then reduce our annual conversions to adjust for the extra SS income. Keep the amount of tax paid roughly even over the years. By the time RMDs kick in, the tIRA balances should be low enough that the RMDs are no more than we'd want for additional income (over SS). If there's any extra space, convert a bit more to keep at the same tax level. I'm trying to get the tIRA balances low enough that RMDs won't throw a survivor into a higher tax bracket when they have to swap to Single rates/deduction. A few hundred K left in tIRA is low enough for us, rest in Roth.

I am single, so wanted to get my traditional IRA balances down to about $300,000 before RMDs hit.  Still many years away but I won't get anywhere close the way I'm going.  I ended up taking survivor's benefits at 60 so gave up a lot of room for conversions.  I have still been doing small ($10-15,000) conversions tax-free for several years and can continue if I choose.  Biggest concern for me is not to pay zero income tax (which I could for about 13 years if I wish) but to not exceed the greatest property tax exemption income threshold.  That alone saves me about $10,000/year and will go up from there.  So, more money stays in my IRAs.  I'm good with that exchange.     

Different reasons, but similar here, RN. I'm still working part-time, we have one last dependent on our tax returns, so we can stay eligible for EITC if we control AGI. Plus, FAFSA for DS5 means we want to control AGI for financial aid. I'm trying to pump up my SIMPLE IRA balance to take advantage of a state tax perk in retirement, so I'm pushing as much of my pay as possible to pre tax, but ironically need *enough* taxable earned income to qualify for max EITC, so can't max my S IRA. Then we convert enough ($16k) to take us to the point just before EITC begins to phaseout, to stay on the max EITC plateau. It actually puts us under the standard deduction, but the credit is too good to pass up, and 30% matched by NYS too.

Once DS5 falls off our returns, I will likely quit, and we will convert to the top of the 10% bracket. RPM from bogleheads suggests that's a good tax level to maintain indefinitely, reducing conversions to compensate for SS income at 70.

If it doesn't reduce the balance as much as I want, its because growth outstripped conversions, and we have more than expected. Good problem to have, I'll pay extra taxes gladly.

[minnesotapaintlady]

If you're using ACA you might want to look at where you lose subsidies.  It may not be worth converting a lot if you pay a lot more for health insurance. 

[CCL]

Currently, Social Security is only taxed up to 85%, so you may need to revise your numbers.

I don't expect tax rates to stay at 12%/0% forever, so I'm converting as much as I can to Roth. I do get some long-term capital gains and dividends and pay 0% on those.

[countrygirl2]

Yes and I believe that the 85% kicks in on SS at $85,000 for a single.
I need to check if the higher medicare premiums kick in for a single too, I have not looked at that.

I remember I had a friend that just had a fit because she paid the highest on everything as a single. She bitched and groaned, she was a Canadian citizen, lived here for probably 30 years, I said why not go back there? She also was upset she had to go through a lot of stuff once they tightened up things here for security and she had to do more with staying here. But she never went back. She had lots of money and income.

Hubs found out the guy did not get off on the culvert area but in the lawn, so he isn't sticking out on the state road. And hubs gave him a number of a guy and he is going to come up tomorrow and see if he can help him get out. So that's a good thing. So it may turn out ok yet. I hope so.

We have quite bit of snow here tonight.

[tallguy]

Feb 16, 2024 22:03:06 GMT -5 countrygirl2 said:

Yes and I believe that the 85% kicks in on SS at $85,000 for a single.
I need to check if the higher medicare premiums kick in for a single too, I have not looked at that.

I remember I had a friend that just had a fit because she paid the highest on everything as a single. She bitched and groaned, she was a Canadian citizen, lived here for probably 30 years, I said why not go back there? She also was upset she had to go through a lot of stuff once they tightened up things here for security and she had to do more with staying here. But she never went back. She had lots of money and income.

Hubs found out the guy did not get off on the culvert area but in the lawn, so he isn't sticking out on the state road. And hubs gave him a number of a guy and he is going to come up tomorrow and see if he can help him get out. So that's a good thing. So it may turn out ok yet. I hope so.

We have quite bit of snow here tonight.

You may be thinking about something else.  Taxation of Social Security benefits kicks in way before that.  If your combined income (adjusted gross income + nontaxable interest + half of SS benefits) is over $25,000 for a single or $32,000 for a couple, you may pay tax on up to 50% of your benefits.  If your combined income is over $34,000 for a single or $44,000 for a couple, you may pay tax on up to 85%.

[teen persuasion]

Feb 16, 2024 22:56:35 GMT -5 tallguy said:

Feb 16, 2024 22:03:06 GMT -5 countrygirl2 said:

Yes and I believe that the 85% kicks in on SS at $85,000 for a single.
I need to check if the higher medicare premiums kick in for a single too, I have not looked at that.

I remember I had a friend that just had a fit because she paid the highest on everything as a single. She bitched and groaned, she was a Canadian citizen, lived here for probably 30 years, I said why not go back there? She also was upset she had to go through a lot of stuff once they tightened up things here for security and she had to do more with staying here. But she never went back. She had lots of money and income.

Hubs found out the guy did not get off on the culvert area but in the lawn, so he isn't sticking out on the state road. And hubs gave him a number of a guy and he is going to come up tomorrow and see if he can help him get out. So that's a good thing. So it may turn out ok yet. I hope so.

We have quite bit of snow here tonight.

You may be thinking about something else.  Taxation of Social Security benefits kicks in way before that.  If your combined income (adjusted gross income + nontaxable interest + half of SS benefits) is over $25,000 for a single or $32,000 for a couple, you may pay tax on up to 50% of your benefits.  If your combined income is over $34,000 for a single or $44,000 for a couple, you may pay tax on up to 85%.

Bogleheads has this heat map showing the interaction of other income and SS, giving your marginal tax rate. If your other income pushes your SS into 85% range, it's effectively 1.85  * your bracket. One extra $ of other income plus .85 of SS income now being taxed.

Once you get beyond the bump zones, your SS is at the max 85%, and you go back to your bracket alone.

ETA: pic not showing. Here's the link

[soupandstew]

Here's the Medicare Part B 2024 premium table by income level.  Basically, the premium is dependent on the modified AGI whether filing singly or jointly.  A person losing their spouse or divorcing may not see a reduction in their Medicare premium if their income remains within their previous, joint-income bracket.  By way of example, DH and I file jointly and are in the less than $203,000 group, each paying $174.70 per month, the lowest premium category.  If one or the other of us is alone, that person's premium will remain the same as there isn't a lower bracket. www.cms.gov/newsroom/fact-sheets/2024-medicare-parts-b-premiums-and-deductibles

Obviously, IRMAA surcharges are a separate matter

ETA:  We are taxed on 85% of our SS income

[TheOtherMe]

I pay income tax on 85% of my social security and my taxable income is not even $40,000.

[minnesotapaintlady]

Feb 17, 2024 11:14:30 GMT -5 TheOtherMe said:

I pay income tax on 85% of my social security and my taxable income is not even $40,000.

Isn't your SS a tiny amount of your taxable income though?  If that 40K was all SS it wouldn't be taxed at all.

[tallguy]

Feb 17, 2024 11:14:30 GMT -5 TheOtherMe said:

I pay income tax on 85% of my social security and my taxable income is not even $40,000.

That is partially true.  While you may be at a level where UP TO 85% of your benefits are taxable, you are certainly not actually paying taxes on 85% of your benefits.  The math doesn't work out that way.  There is an interactive tool on the IRS website where you can plug in numbers and calculate the amount of benefits actually subject to tax.

Are my Social Security or railroad retirement tier I benefits taxable?  

[tallguy]

Feb 17, 2024 11:27:19 GMT -5 minnesotapaintlady said:

Feb 17, 2024 11:14:30 GMT -5 TheOtherMe said:

I pay income tax on 85% of my social security and my taxable income is not even $40,000.

Isn't your SS a tiny amount of your taxable income though?  If that 40K was all SS it wouldn't be taxed at all.

To be fair, she did say "taxable income."  That implies that the AGI was higher and then was reduced by either standard or itemized deductions, at least.  There is thus a lot of room for other income there.

[Rukh O'Rorke]

Feb 16, 2024 15:37:36 GMT -5 minnesotapaintlady said:

If you're using ACA you might want to look at where you lose subsidies.  It may not be worth converting a lot if you pay a lot more for health insurance. 

but won't that tend to compound the tax bill down the road? RMDs, etc?

[minnesotapaintlady]

Feb 17, 2024 12:56:07 GMT -5 Rukh O'Rorke said:

Feb 16, 2024 15:37:36 GMT -5 minnesotapaintlady said:

If you're using ACA you might want to look at where you lose subsidies.  It may not be worth converting a lot if you pay a lot more for health insurance. 

but won't that tend to compound the tax bill down the road? RMDs, etc?

Maybe, but the OP is only planning on being on ACA from 62-65.  That leaves a whole 10 years to convert before RMDs kick in. 

I've been digging around our ACA plans and for me at age 62 with 45K AGI the subsidy is almost $900/month.  So the most expensive Gold plan ($1100 deductible PPO) is only about $400/month.

For a lot of people RMDs aren't really an issue. With only a small amount of SS and no pension, unless the stock market goes bananas the next 20 years, I expect I'll be drawing the RMD amount every year to live off of anyhow.

[TheOtherMe]

Feb 17, 2024 12:08:09 GMT -5 tallguy said:

Feb 17, 2024 11:27:19 GMT -5 minnesotapaintlady said:

Isn't your SS a tiny amount of your taxable income though?  If that 40K was all SS it wouldn't be taxed at all.

To be fair, she did say "taxable income."  That implies that the AGI was higher and then was reduced by either standard or itemized deductions, at least.  There is thus a lot of room for other income there.

That is why I said taxable income.  However, I only have pension and interest income.  My pension is $54K gross.

Yes the AGI is higher and SS is a very small part of my income and I do pay taxes on 85% of it because of the pension.

[Rukh O'Rorke]

Feb 17, 2024 13:15:52 GMT -5 minnesotapaintlady said:

For a lot of people RMDs aren't really an issue. With only a small amount of SS and no pension, unless the stock market goes bananas the next 20 years, I expect I'll be drawing the RMD amount every year to live off of anyhow.

Those rmds keep growing! need to be careful in the begining years.

[minnesotapaintlady]

Feb 17, 2024 19:27:54 GMT -5 Rukh O'Rorke said:

Feb 17, 2024 13:15:52 GMT -5 minnesotapaintlady said:

For a lot of people RMDs aren't really an issue. With only a small amount of SS and no pension, unless the stock market goes bananas the next 20 years, I expect I'll be drawing the RMD amount every year to live off of anyhow.

Those rmds keep growing! need to be careful in the begining years.

Yes, but assuming you're giving yourself a COL raise every year you should be withdrawing more every year anyhow.  I worked it out figuring drawing 45K year one with a 3% COL increase every year and the portfolio making an annualized 6% and it doesn't ever really seem to be an issue.  Now SS getting tossed in there at 70 will be over and above and if I have a lot larger return than expected maybe, but everything will be indexed up for inflation so that 132K income at 95 is the same as 45K at 59. 

There's always the option to use the extra RMD money for QCDs if they start causing problems as you don't need to itemize to take advantage of that. Of course, tax laws could (and probably will) be completely different in 40 years. I can only plan off what I know to be true right now.

[teen persuasion]

Feb 17, 2024 20:43:14 GMT -5 minnesotapaintlady said:

Feb 17, 2024 19:27:54 GMT -5 Rukh O'Rorke said:

Those rmds keep growing! need to be careful in the begining years.

Yes, but assuming you're giving yourself a COL raise every year you should be withdrawing more every year anyhow.  I worked it out figuring drawing 45K year one with a 3% COL increase every year and the portfolio making an annualized 6% and it doesn't ever really seem to be an issue.  Now SS getting tossed in there at 70 will be over and above and if I have a lot larger return than expected maybe, but everything will be indexed up for inflation so that 132K income at 95 is the same as 45K at 59. 

There's always the option to use the extra RMD money for QCDs if they start causing problems as you don't need to itemize to take advantage of that. Of course, tax laws could (and probably will) be completely different in 40 years. I can only plan off what I know to be true right now.

"but everything will be indexed up for inflation"

Except for the SS taxation numbers - those are not adjusted for inflation, unfortunately.


I want to whittle down our tIRA balances so that when RMDs start they are smaller. Or at least keep them from growing much larger. Let the Roth grow instead.

We are at 60% tIRA 40% Roth IRA now.

[minnesotapaintlady]

Feb 18, 2024 0:48:59 GMT -5 teen persuasion said:

I want to whittle down our tIRA balances so that when RMDs start they are smaller. Or at least keep them from growing much larger. Let the Roth grow instead.

We are at 60% tIRA 40% Roth IRA now.

I'm 55 now, and until age 65 it will be way too costly to convert anything.  There might be some room from 65 to 75.  We'll see what the tax situation is like come then.

But, that reminds me.  I never pulled the Roth money out of my spreadsheet when I added the RMDs column.  About 20% of that starting balance is Roth money, so the RMDs aren't as high as I posted. 

[teen persuasion]

Feb 18, 2024 10:20:09 GMT -5 minnesotapaintlady said:

Feb 18, 2024 0:48:59 GMT -5 teen persuasion said:

I want to whittle down our tIRA balances so that when RMDs start they are smaller. Or at least keep them from growing much larger. Let the Roth grow instead.

We are at 60% tIRA 40% Roth IRA now.

I'm 55 now, and until age 65 it will be way too costly to convert anything.  There might be some room from 65 to 75.  We'll see what the tax situation is like come then.

But, that reminds me.  I never pulled the Roth money out of my spreadsheet when I added the RMDs column.  About 20% of that starting balance is Roth money, so the RMDs aren't as high as I posted. 

Ugh, the math is so crappy for singles!

Our state exchange says we could have $50k AGI and pay ~$100/ month, MFJ. But switch to a single, and it's $34k AGI to get near half that (because one person, right?). My expenses wouldn't drop much if I was widowed, just food, really. Some stuff would likely increase, w/o DH around to DIY things. So I don't budget less for when one of us passes away.

That's why I'm planning to convert as much as I can every year, even if its just $15k now. Every bit shifted to Roth and out of tIRA is a win. Hopefully I have many years to do conversions as MFJ, but maybe I won't (or DH won't). Pre-SS  is my prime time to do them, because no pension income to get in the way. Once SS and RMDs kick in, there's much less room.