AGI question about retirement

[disneysteve]

Even though I come from a family of accountants and know the basic stuff, I never really got into the details especially when it comes to taxes.

Once I retire, all income will come from our portfolio, either in the form of interest, dividends, and capital gains or from selling holdings (untill SS gets added in). AGI is used to determine things like ACA subsidies. I see a lot of posts about keeping your AGI below the limit so that you qualify for the subsidy. At first, I didn't understand how we could do that if the limit is $69,000 but we need $85,000 in income to live.

Am I correct that when we sell holdings from a taxable account, only the gain counts toward AGI, not the basis? If we have a stock that we bought for $50/share and sell for $75/share, that's only $25 that counts toward our AGI, right? The other $50 does not since it isn't income.

If that's correct, then I now understand how staying under the limit would work. We have about half of our portfolio in taxable accounts so I would think we'd have no problem living primarily off of that stuff for the few years between retirement and Medicare.

[Jluke]

You will complete form 8949 and schedule D to account for the sale of the stocks.

so it’s the proceeds minus the basis that counts as the capital gains. Or losses.

this is then entered on form 1040 along with dividends and interest. The sum of the above goes into the AGI.

im not a tax professional but I did sell some taxable investments and that is the math behind it.

if I missed something I’m sure someone will note that.

[kork13]

For taxable accounts, you've got it right. For traditional IRA/401k, it's all treated as 100% income. The big deal is that qualified Roth IRA/401k distributions have zero impact on your AGI. So that's another way you can keep your AGI down while drawing what you need for your living expenses.

That's a big reason that I'm focusing 100% of my retirement savings into Roth. I'm planning to have a taxable pension, so the more I can use Roth for, the better I'll be able to control my taxable income in retirement.

[disneysteve]

For taxable accounts, you've got it right. For traditional IRA/401k, it's all treated as 100% income. The big deal is that qualified Roth IRA/401k distributions have zero impact on your AGI.

That all makes sense since the money in the traditional IRA/401k hasn't been taxed at all yet while the money in the Roth has. And the money in the taxable accounts has but the gains haven't.

[rennigade]

Does it make sense at all to sell some of your taxable accounts before you retire (while you still have benefits through employer.) Stash that money in a savings account and pull from savings the following year/years?

[Like2Plan]

Or, using specific ID you could harvest some long term gains and immediately reinvest in the same stock while you are still working (there is no wash rule when you are taking gains). You would have to look at your overall tax situation/ health care situation. You would have to weigh whether it would be more beneficial to pay the long term capital gain rate while working (and at a higher income) than maybe later on after you have retired with a possible lower LTCG rate.

Another popular option is the Roth conversion ladder explained here: https://www.madfientist.com/how-to-a...t-funds-early/
Again, you would have to weigh whether it would be worthwhile to do conversions now and pay a higher tax rate (and lower health care) vs lower tax rate later.

There are lots of ins and outs to figuring this all out.

[corn18]

I am planning to tax gain harvest in my taxable account starting next year. I will have room to get about $22k of LTCG out @ 0% each year between 56 and 70. That will pretty much harvest all my LTCG. I can't do it this year because my LTCG rate is 23.8% due to still working and a giant severance.

I will also be doing 401k conversions to the top of the 12% bracket from 56-69. Should be able to get almost everything converted by 70.

If I had to stay under the ACA limits, I would be doing none of this. The ACA subsidy far outweighs any tax arbitrage I might have.

[LivingAlmostLarge]

Monkeymama should weigh in. She said her parents pay almost nothing and they plan to pay almost nothing in retirement on taxes. Hence why they don't do Roth IRA. I am very similar to her where I think I will be doing rollover conversions after we retire to dispose of DH's 401k to Roth IRA.

My thoughts are roll around $75k/year and then use Roth and Taxable account to live on. Probably taxable account and harvest dogs. A lot depends on how much we have though. But as it stands now it'll be probably be a lot in pretax funding.

[disneysteve]

Does it make sense at all to sell some of your taxable accounts before you retire (while you still have benefits through employer.) Stash that money in a savings account and pull from savings the following year/years?

I don't know that it makes sense to sell now because of the taxes we'd owe. However, I am leaning toward building up our cash allocation for that very reason. Anything we draw from cash wouldn't count as income and wouldn't impact any of the income-limited determinations.

[srblanco7]

I don't know that it makes sense to sell now because of the taxes we'd owe. However, I am leaning toward building up our cash allocation for that very reason. Anything we draw from cash wouldn't count as income and wouldn't impact any of the income-limited determinations.

We are working to build up our cash allocation with the purpose that it could act as a cushion in the event of a significant market downturn (avoid "sell low"). We'll direct dividends and cap gains for the next couple years to a money market (vs. reinvest) to supplement our cash position. Once we figure out our retirement expenses - could also consider using to keep our retirement income low and qualify for ACA subsidy - something I had not considered.

[Like2Plan]

I don't know that it makes sense to sell now because of the taxes we'd owe. However, I am leaning toward building up our cash allocation for that very reason. Anything we draw from cash wouldn't count as income and wouldn't impact any of the income-limited determinations.

I think you mentioned you have some funds that throw off a lot of capitol gains in after-tax every year which might be an encumbrance to your plan because it increases your income, but you can't spend that for expenses. It would be hard to say without knowing your entire picture because sometimes there are unintended consequences... But, if you take a look at your entire picture, maybe it would make sense to phase your plan in over several tax years. Then, maybe move your tax inefficient funds over to pretax and buy more tax efficient funds in after-tax and build up cash, etc. Also, maybe harvest some of the gains now so that it would be easier to access the money for expenses.