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What would you do?
A recent 60-yr.-old retiree with a pension over $100K/yr. and rental income of ~$30K/yr. My expenses are ~$70K/yr. As you can see I have no need to withdraw any $ from my retirement accounts (~$1.09M in trad. IRA and $2.2K in Roth) or two brokerage accounts ($1.5M-a bunch of mutual funds (18) & $500K- Schwab Intelligent Portfolio-robo advisor; overall asset allocation of 85% stocks & 15% bonds.) Seriously considering doing Roth conversions before reaching RMD at 75.
I have a checking account and some emergency cash held in MM muni funds in the four accounts mentioned. All of my assets are held at Schwab. I am a DIY, “buy-and-hold” investor who likes to manage a portfolio with no/low fees and expenses, and I’ve had the mutual funds (index funds from Vanguards, T. Lowe Price, and some mid & small cap funds) for a long time and they have appreciated greatly over the years with serious tax consequences; it appears that some/many of them are not tax-efficient!
Due to large distributions and gains from the mutual funds, last year my taxes were very high (tail end of 32% fed. & 9.3% CA brackets). I was recommended to gradually sell the mutual funds and invest in a direct-indexing product, such as Schwab Personalized Indexing or Fidelity’s “SMA- Direct Indexing, both of which have 0.4% advisory fee. Tax-loss harvesting was the major reason these products were recommended.
What are your thoughts on these products? There are pros and cons of this strategy, but directly owning hundreds of stocks will create a nightmare when unloading or discontinuing in the future. Also, pages of 1099 to upload during tax preparation!
How about robo advisors (Betterment, M1, Wealthfront) that do tax-loss harvesting automatically for a fee (~0.25%) or direct indexing, like Wealthfront’s S&P 500 Direct Indexing with .09% fee?
Any feedback, thoughts or recommendations would be deeply appreciated, for I’m having a hard time making a decision on how to invest in tax-efficient products that cost very little or have no/low fees.
For those of us in the upper middle class (barely) with maybe a couple to several million of total savings, I don’t believe direct indexing to save maybe a few tax bucks is worth the effort for the complexity added.
Also, despite being one of Humble Dollar’s hugest Roth proponents, I’d say at a 41+ percent marginal tax rate, Roth converting is not likely to deliver huge tax savings.
With your $1.1 million tax deferred account today, RMDs on today’s basis would add about 4% (at age 75) or $44k to your annual income of $130k plus Social Security (say $50K? but SS may even be exempted from taxes under Trump proposals). I’m also going to presume your tax-deferred accounts at least double between now and age 75, so let’s presume RMDs double to $88K. Still, today’s income plus SS plus doubled RMDs are going to place you in the middle of the 24% tax bracket. All this says that Roth may not be a huge winner in your situation. If you moved to a lower tax state or if your tax-deferred accounts grow bigger, it may be more beneficial, especially when tax-deferred accounts get into the $2-3 million range which start pushing RMD plus other income more toward the top of the 24% income bracket.
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?
Just a heads-up: to get premium-free Medicare Part A, you need 40 quarters (10 years) of work where Medicare taxes were paid. If you’re missing this, you might still qualify for Medicare, but you’d pay a premium for Part A. Don’t let this catch you off guard—double-check your work history to be sure!
Tha