AUTHOR: R L on 5/8/2025 FIRST: quan nguyen on 5/8 | RECENT: R L on 5/12
Comments
Thank you for the heads-up. I did pay Medicare taxes when I was working so I should be good to go for premium-free Medicare Part A. I suppose it doesn't hurt to check with the SS administration to be 100% sure. Medicare Part B on the other hand is a entirely different story and very likely I'd be facing IRMAA just with my ordinary income (pension + rental). It's a matter of which IRMAA bracket I'd be in with MAGI that includes Roth conversions and investment income. Now I see why health care cost is one of the highest expenses during retirement.
How timely! I am also considering converting the Vanguard mutual funds to equivalent ETFs without tax consequences. Luckily, six out of seven of my mutual funds have equivalent ETFs. Hopefully, the ETFs are more tax efficient than the mutual funds. I’ll investigate tax/distribution data of each ETF from Morningstar, but I have no clue on how changing the average cost method to FIFO method will affect future taxes. Perhaps we can inquire with Vanguard why they want to force this switch in the first place and what would be some of the consequences of this switch in taxes. Hopefully it's insignificant.
As for dividends, your estimate of $25-$35K might be close, but I don't know for sure since I don't usually check on the total amount until tax preparation time. I have the reinvesting turned off currently after seeing the 1099s and learning how much taxes I needed to pay for the investment income earlier in the year. Of course, I earn both qualified and non-qualified dividends from the mutual funds each year, but more non-qualified than qualified last year. They are one of the incomes I can live off if I suspended my pension and they will lower the amount of withdrawal I'd need to take from my traditional IRA as well. As suggested, I'm considering gradually moving the mutual funds to low-cost, index ETFs for tax efficiency purpose. Inevitably, this process will generate capital gains and thus I'd need to be more strategic in my implementation as much as possible. I am seriously considering using the services of a flat-fee, project-based, or hourly CFP/CPA/EA (or use an online financial planning application, like Boldin/New Retirement?) to run the numbers and different, possible scenarios. Hopefully, the advisory fees are worth it and not too painful for the DIYer in me:) lol... Again, deeply appreciate your outside-the-box, thoughtful and intelligent suggestions.
Last year, as a single filer, my taxable income ($242K) was at the top of the 32% ($243,725) income bracket, nowhere near top of 24% ($191,950). Due to a very strong bull market in 2024, my investment income (1099s) of over $150K pushed me into the top 32% bracket. Unless I get a part-time job that contributes to SS, currently I don't have enough credits to earn SS benefits, but modest increase (~2%) in pension and rental income with a decent investment gains both in taxable and tax-deferred accounts will definitely put me in 32% bracket with or without Roth conversion, I think. Thus, considering doing conversions up to the top of the 32% if it's worth doing it. That's the $64K question I have and uncertainty I'm facing. Or am I overlooking something here?
I'd definitely like to have an answer to that very wise question. It may not be "worth the squeeze," but I'd like to know for sure so I don't regret not trying at least. I'm considering consulting professionals, like CFP, EA, CPA, etc., to confirm. Does "simplifying" my life mean simply not doing anything about it, just keep whatever I have in my brokerage accounts (18 mutual funds & a robo advisor) and no Roth conversions? Hmm...very tempting, but don't know if it's wise to face very high tax bills year after year with large capital gains/distributions, RMD and IRMMA....these may cost more than "a bit more," I'd think. You certainly gave me some food for thoughts. Appreciate it!
Very interesting and intriguing suggestion! It's never crossed my mind to suspend my pension in order to make room for higher Roth conversions. If I suspend pension, rental income would be the only source of income and I'd need to withdraw from my taxable account to cover the rest of my expenses. Most likely, I wouldn't be able to cover for anything (i.e. travels) beyond basic living expenses. Of course, I'd be able to convert higher amount of Roth. Although I have "plenty of $$ in taxable" account, I'd be hit with 15% LT capital gain taxes when unloading the mutual funds to pay for the tax on conversions and source of income while paying ordinary income taxes for the conversions and the rental income. This idea is definitely unique and thought-provoking, but I'd think I'd need to do deeper analysis and/or seek further consultations from various professionals, like CPA and CFP before executing, idea of which I'm not particularly in favor of as a DIYer, but might be necessary. Thank you so much for giving me something to ponder and think outside the box! Deeply appreciate your wisdom!
Of course, achieving investment growth with tax-loss harvesting as a tax-smart investing strategy would be the objective of DI, but as Quan N. stated that no one can "...reliably predict...the good year or bad year for tax loss harvesting." Thus, DI can be very risky and may not be beneficial in the long run. Thanks for your comments!
For Roth conversions, I was thinking it'd be much more tax-efficient for my heirs when they inherit my Roth since I assume their tax brackets would be higher than mine now. I'm also thinking about doing both charitable giving through Donor Advise Funds (DAF) and Roth conversions during the years near the RMD age. This will mitigate paying too much taxes while doing good deeds:) Your last three sentences are so wise and true!! Of course, having this "challenge" is better than being broke or in red financially! Thanks!
The logic behind gradually unloading and taking the gains upfront and moving to more tax efficient ETFs is to avoid deeper appreciation of the fund basis and generate more taxes passively or actively when unloading it in the future. Of course, unloading the mutual funds will be done over many years, starting with the funds with the highest expense & tax ratios. No matter what there's no avoiding the taxes, but I either pay them now or later just like doing Roth conversions, I suppose. Thanks for your insightful comments, Michael!
Comments
Thank you for the heads-up. I did pay Medicare taxes when I was working so I should be good to go for premium-free Medicare Part A. I suppose it doesn't hurt to check with the SS administration to be 100% sure. Medicare Part B on the other hand is a entirely different story and very likely I'd be facing IRMAA just with my ordinary income (pension + rental). It's a matter of which IRMAA bracket I'd be in with MAGI that includes Roth conversions and investment income. Now I see why health care cost is one of the highest expenses during retirement.
Post: Tax Efficient Investing for Retirees with High Net Worth: Direct Indexing?
Link to comment from May 12, 2025
How timely! I am also considering converting the Vanguard mutual funds to equivalent ETFs without tax consequences. Luckily, six out of seven of my mutual funds have equivalent ETFs. Hopefully, the ETFs are more tax efficient than the mutual funds. I’ll investigate tax/distribution data of each ETF from Morningstar, but I have no clue on how changing the average cost method to FIFO method will affect future taxes. Perhaps we can inquire with Vanguard why they want to force this switch in the first place and what would be some of the consequences of this switch in taxes. Hopefully it's insignificant.
Post: Smart idea or not? Converting Vanguard mutual funds to Vanguard ETFs
Link to comment from May 12, 2025
Thank you for the resource. I shall look into that soon:)
Post: Tax Efficient Investing for Retirees with High Net Worth: Direct Indexing?
Link to comment from May 12, 2025
As for dividends, your estimate of $25-$35K might be close, but I don't know for sure since I don't usually check on the total amount until tax preparation time. I have the reinvesting turned off currently after seeing the 1099s and learning how much taxes I needed to pay for the investment income earlier in the year. Of course, I earn both qualified and non-qualified dividends from the mutual funds each year, but more non-qualified than qualified last year. They are one of the incomes I can live off if I suspended my pension and they will lower the amount of withdrawal I'd need to take from my traditional IRA as well. As suggested, I'm considering gradually moving the mutual funds to low-cost, index ETFs for tax efficiency purpose. Inevitably, this process will generate capital gains and thus I'd need to be more strategic in my implementation as much as possible. I am seriously considering using the services of a flat-fee, project-based, or hourly CFP/CPA/EA (or use an online financial planning application, like Boldin/New Retirement?) to run the numbers and different, possible scenarios. Hopefully, the advisory fees are worth it and not too painful for the DIYer in me:) lol... Again, deeply appreciate your outside-the-box, thoughtful and intelligent suggestions.
Post: Tax Efficient Investing for Retirees with High Net Worth: Direct Indexing?
Link to comment from May 11, 2025
Last year, as a single filer, my taxable income ($242K) was at the top of the 32% ($243,725) income bracket, nowhere near top of 24% ($191,950). Due to a very strong bull market in 2024, my investment income (1099s) of over $150K pushed me into the top 32% bracket. Unless I get a part-time job that contributes to SS, currently I don't have enough credits to earn SS benefits, but modest increase (~2%) in pension and rental income with a decent investment gains both in taxable and tax-deferred accounts will definitely put me in 32% bracket with or without Roth conversion, I think. Thus, considering doing conversions up to the top of the 32% if it's worth doing it. That's the $64K question I have and uncertainty I'm facing. Or am I overlooking something here?
Post: Tax Efficient Investing for Retirees with High Net Worth: Direct Indexing?
Link to comment from May 11, 2025
I'd definitely like to have an answer to that very wise question. It may not be "worth the squeeze," but I'd like to know for sure so I don't regret not trying at least. I'm considering consulting professionals, like CFP, EA, CPA, etc., to confirm. Does "simplifying" my life mean simply not doing anything about it, just keep whatever I have in my brokerage accounts (18 mutual funds & a robo advisor) and no Roth conversions? Hmm...very tempting, but don't know if it's wise to face very high tax bills year after year with large capital gains/distributions, RMD and IRMMA....these may cost more than "a bit more," I'd think. You certainly gave me some food for thoughts. Appreciate it!
Post: Tax Efficient Investing for Retirees with High Net Worth: Direct Indexing?
Link to comment from May 11, 2025
Very interesting and intriguing suggestion! It's never crossed my mind to suspend my pension in order to make room for higher Roth conversions. If I suspend pension, rental income would be the only source of income and I'd need to withdraw from my taxable account to cover the rest of my expenses. Most likely, I wouldn't be able to cover for anything (i.e. travels) beyond basic living expenses. Of course, I'd be able to convert higher amount of Roth. Although I have "plenty of $$ in taxable" account, I'd be hit with 15% LT capital gain taxes when unloading the mutual funds to pay for the tax on conversions and source of income while paying ordinary income taxes for the conversions and the rental income. This idea is definitely unique and thought-provoking, but I'd think I'd need to do deeper analysis and/or seek further consultations from various professionals, like CPA and CFP before executing, idea of which I'm not particularly in favor of as a DIYer, but might be necessary. Thank you so much for giving me something to ponder and think outside the box! Deeply appreciate your wisdom!
Post: Tax Efficient Investing for Retirees with High Net Worth: Direct Indexing?
Link to comment from May 10, 2025
Of course, achieving investment growth with tax-loss harvesting as a tax-smart investing strategy would be the objective of DI, but as Quan N. stated that no one can "...reliably predict...the good year or bad year for tax loss harvesting." Thus, DI can be very risky and may not be beneficial in the long run. Thanks for your comments!
Post: Tax Efficient Investing for Retirees with High Net Worth: Direct Indexing?
Link to comment from May 9, 2025
For Roth conversions, I was thinking it'd be much more tax-efficient for my heirs when they inherit my Roth since I assume their tax brackets would be higher than mine now. I'm also thinking about doing both charitable giving through Donor Advise Funds (DAF) and Roth conversions during the years near the RMD age. This will mitigate paying too much taxes while doing good deeds:) Your last three sentences are so wise and true!! Of course, having this "challenge" is better than being broke or in red financially! Thanks!
Post: Tax Efficient Investing for Retirees with High Net Worth: Direct Indexing?
Link to comment from May 9, 2025
The logic behind gradually unloading and taking the gains upfront and moving to more tax efficient ETFs is to avoid deeper appreciation of the fund basis and generate more taxes passively or actively when unloading it in the future. Of course, unloading the mutual funds will be done over many years, starting with the funds with the highest expense & tax ratios. No matter what there's no avoiding the taxes, but I either pay them now or later just like doing Roth conversions, I suppose. Thanks for your insightful comments, Michael!
Post: Tax Efficient Investing for Retirees with High Net Worth: Direct Indexing?
Link to comment from May 9, 2025