Five Bear Market Moves for Tax-Savvy Investors

Rob from NC posted over 4 years ago:

Number 4 is very important and probably underused. In 2022, single person can harvest up to $54,625 in long-term capital gains without paying a penny in federal income tax (twice that much for a married couple). Of course, this is assuming they have no other income and are taking the standard deduction. But if a person has, say, $30,000 of earned income, that leaves them with $24,625 of long-term gain that they could harvest without any additional federal tax. This offers an excellent opportunity to constantly bump up one's basis in a "taxable" account without incurring taxes.

Dilbert from CA posted over 4 years ago:

What are you talking about ... ? If you sell an investment, the IRS is always waiting to get paid if you have a gain. The only question is: is it a short-term gain, or is it a long-term gain ... ? The answer to the last question determines how much you pay, but you must pay ... !

Rob from NC posted over 4 years ago:

Dilbert, I'm not making this up. Look up the federal long-term capital gains rates for 2022. You will see a 0% tax rate for the first $41,675 for a single person; 0% tax rate for the first $83,350 for a married couple filing jointly. But that refers to TAXABLE income, so you have deductions you can take from your total income. If you are single and the only income you have is from long-term capital gain (and qualified dividends, which are taxed at the same rate as long-term gains), and assuming you take the standard deduction ($12,950), you can harvest $54,625 in long-term capital gain (and qualified dividends) without paying a penny in federal income tax. This is yet another reason NOT to invest in bonds. Assuming the same deduction for a single person with the same income ($54,625) in taxable bond interest, that person would owe $4,795.50 according to the IRS's tax brackets for 2022. (Caveat: If you already have $54,625 in earned income with the standard deduction, you will get hit with taxes on long-term capital gain above that level, but it will only be at a 15% rate until you climb above $450,000 or so.)

Dave G from Texas posted over 3 years ago:

Charles, as to point #1, what you say is "technically" correct - if you have $1000 to spare for a tax conversion you can convert more shares the lower the price is. However, it is not true that this "gains" you any after-tax spendable income, for your hard-earned pretax dollars. In fact, for the average person, they may actually be putting more money into a place (the Roth) which will give them less spendable income as opposed to getting "something on sale" as you imply. In other words, if their retirement tax rate turns out to be less than the conversion tax rate the more money they convert to a Roth the smaller their spendable income will be. The price they convert it at makes no difference. To see this do not think of this example in terms of dollars but in terms of stock shares and then relate "pretax money earned" to aftertax money spent. The point where the "teeter toter" is balanced is with equal tax rates in and out. Think of a country that has a fixed tax rate of 25% for all money spent or earned. Now look at your same problem in this way: Investor A earns $1000 and buys 100 shares of company ABC in the IRA. The price of those shares grows 10x over 30 years, he takes them out gives 25 shares to the IRS ($2500) and keeps the 75 for himself which is worth $7,500. Investor B starts out at the same time with 100 shares of ABC company, but she knows that 25 of those shares will always belong to the IRS no matter what she does. One day when the price of those shares is $1, she converts the shares and thus gives 25 shares to the IRS ($25). At the end of 30 years Investor B still has 75 shares worth $7,500. Investor B can accomplish the same thing by putting $750 into the Roth directly and buying the 75 shares at $10 and watching the price drop to $1 and grow to $100 per share later.

Dave G from Texas posted over 3 years ago:

Charles, as to point #5, this is a similar problem as to #1. If your RMD is $20,000, it makes little difference (unless you know the future) whether this is 10 shares or 200 shares of stock. At the time it is still $20,000 and that is what you will have to pay the tax on. As you know there is absolutely no guarantee on which way the market will go and the risk is essentially equal up or down IMO. The more prudent advice is to not try and time the stock market but as most good financial planners would tell you if you need to pay any bill and the RMD is a kind of bill, you should have the cash in your account to do so ahead of time. In this case, if you don't need the money and are doing in-kind withdrawals you still should do a withdrawal for the taxes that should actually be part of the RMD requirement. In that way, you transfer fewer shares and don't have to worry about quarterly tax payments. I have a couple of years to go but my plan is to fund as much as possible of the RMDs with dividends and distributed capital gains. The planning is starting this year to "unhook" the reinvested dividends so that this can happen. You never want to be forced to sell either equities or bonds in a depressed market and many times like now equities and bonds are equally depressed depending on which ones you own.