• I was literally having this conversation with Wealthy Doc on my site yesterday in the comments of one of my recent posts. (Minus the math in this post, which was well done!)

    If you are smart, you can keep your taxable income low in retirement and this is a great example of that.


    • TPP,
      I don’t disagree with this.
      I have more outside of retirement funds than within them. That will be true for many doctors who efficiently grow wealth.

      My comment on your post was more about problem doctors (and others) have. People think their retirement money is all theirs. It isn’t. Uncle Sam needs to be paid.

      Right or wrong, most doctors have a lot of money in traditional IRAs and 401K. $3M in a 401K does not equal $3M in a Roth IRA. Doctors’ eyes glaze over when talking about this but the distinction is critical.

      The best option depends on your future income and your future marginal tax rate. Your guess is as good as mine.

      A case for hedging (tax diversification) can be made.

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  • Great work! Tax treatment of capital gains takes forever to wrap your head around.

    For the ultra nerdy, there are 4 capital gain tax brackets:

    • 0% if all of your income keeps you below the 12% (or 15%) tax bracket
    • 15% until NIIT
    • 18.8% between NIIT and 20% Capital Gain Bracket
    • 23.8% above the 20% Capital Gain Bracket

    If you want to see how to actually calculate capital gains (but the NIIT is added later!), then see page 40 of the following link: Line 11a– Qualified Dividends and Capital Gains Tax Worksheet https://www.irs.gov/pub/irs-pdf/i1040gi.pdf

    • So much fun!

      And the 0% cap gains bracket is no longer coupled to a federal income tax bracket — it was tied to the 15% bracket, but now the 12% bracket (up to $78,950 MFJ) and 0% cap gains (up to $78,750) are slightly different and can drift more over time.

      And most Americans will pay state income tax and some will pay county or city income taxes on capital gains, as well.


  • Don’t forget tax-loss harvesting in a taxable account!

    • Excellent point — that’s a featured that adds tremendous value to the taxable account. It’s been worth abou $1,400 a year in my working years.

      I’ve added a line to the content above. Thank you for the contribution, Big ERN.


    • SV Sabbatical

      Also remember step up in basis on death; especially beneficial to community property spouses.

      And state specific Muni bonds have a place in these accounts as well, although capital gains would still be s/t tax.

  • The 0% capital gains tax bracket would be ideal to shoot for but this is where creating a passive income machine during your working years can actually bump you out of it in a hurry (first world problems).

    I was not aware that if you bump out of the 0% capital gains bracket that your entire gains would not be taxed at the next level. I had assumed the opposite (ie if you were in the top tax bracket, all your capital gains would be taxed at 23.8%).

  • ShellyGP

    I’m wondering how you know exactly what your taxable income will end up being in any given year so that you exactly (closely) march up to, but don’t cross, that next bracket? Do you wait to make conversions (from tax deferred IRA to Roth) or sale of taxable funds until after you get your W2 but before April 15? TIA!

    • If you have ordinary income from investments you don’t know exactly but it tends to track +- 10% each year so you can make a reasonable plan. I Roth converted at 5K under my maximum conversion goal exactly for this reason.

    • You should have a pretty good idea based on the dividends you receive, any tax-deferred money you withdraw, and any other taxable income sources. If you work with a CPA or financial advisor, they can help you model this based on previous years and any changes, but you can also do it yourself.

      If you’re well under the limit in taxable income, it would be smart to either do Roth conversions or tax gain harvesting (taking gains and reinvesting to increase your cost basis) to put yourself closer to the top of the 0% tax bracket.


  • Mark C.

    Excellent points.
    Small point: Brokerage accounts are low hanging fruit when it comes to asset protection.
    A little bit of self employment income in “retirement” goes a long way. The 199A deduction gives you more LTCG “headroom” by reducing taxable income. Couple that with the ability to deduct business expenses (and pay no FICA) and you can enjoy very low tax income.
    Recent tax law changes make paying down your mortgage (especially with realized 0% tax LTCG) an excellent investment.
    Remember you can still fund a TIRA and/or HSA and not reduce your QBD,



    • All true. I ended the article with a mention of the asset protection benefits of a Roth IRA over a taxable account, but it probably belongs in the “limitations” section, as well.

      I am glad to have this other thing (the blog) in retirement. It will allow me to fund an individual 401(k) — which I’ll probably start making Roth contributions to next year so as not to lose some of that QBI deduction (as you will with tax-deferred 401(k) contributions). I will also have a health plan with HSA. I won’t actually enact my retirement drawdown plan until I move on from this website.

      And then, who knows what life (and the tax code) will look like?


  • Jack

    U mention investing in stocks/funds that dont pay dividends in taxable accounts – surprised you didn’t mention using DRIP’s and that many companies you can simply reinvest any dividend in their stock directly and since u set this up with the company themselves u skip the commission – Am I missing something?

    And not taking advantage of multiple streams of passive income just to stay under 78,750 as a tax play seems shortsided

    • You pay tax on the dividend as ordinary income regardless of who’s doing the re-investing. The tax code is quite progressive once you get out of the 12% bracket. The government considers 12% middle class and above 12% rich from a tax perspective and they actually DO soak the rich despite the “fair share” rhetoric. If you have multiple streams and have been maxing out your pretax, once you RMD you will be paying a ton in taxes and RMD itself is progressive so you will be in a progressive tax bracket and a progressive RMD bracket that’s progressive squared, and being in that progressive bracket will kick up your cap gains further increasing your tax bill. That’s how it works. Have a nice retirement paying your taxes.

      There are things you can do to mitigate that reality but you have to plan and begin to implement the plan a decade or two before you retire. If you’re going o retire a tycoon get a good tax lawyer, the boggleheads ain’t gonna save you

    • If you’re interested in retirement income, the last thing you want to do is reinvest the dividends. You’ll pay taxes regardless of what you do, so you might as well take that as a portion of your spending money.

      Also, note that we’re not eschewing passive income in this article. It’s quite the opposite. A taxable account can give you plenty of passive income and put you in charge of the tax consequences.

      Would you prefer an asset that paid a 5% dividend and appreciated 4% annually or an asset that pays no dividend and appreciates 10% annually? I’d take the latter 10 times out of 9 and decide how much passive income I want from it each year. I’ve said it before, selling shares beats collecting dividends.


  • Such a good article. My portfolio consists of 5 accounts in retirement cash TIRA Roth Brokerage and TLH. Brokerage and TLH allowed me to generate cash to live on tax free while I Roth converted allowing for maximized tax efficiency in conversion. I’m leaving a small TIRA to go to RMD which will be mostly in 80% bonds and 20% stocks, very stable and reliable income and the increasing RMD will act like an inflator so I will get a slightly larger payout each year pretty close to inflation, so that account will act as an inflation adjusted annuity. SS taken at 70 is my second source of ordinary income. My brokerage will act as the source that completes my yearly budget and will require about a 2% WR to get the job done. Between SS and the small RMD I will be in the 12% bracket for 15-20 years before I grow into the next bracket and higher taxes. 15-20 years is pretty much my life expectancy. SS + TIRA + Brokereage = my retirement money machine. My Roth is available for self insurance and will get tapped if we get a bad diagnosis like cancer or NDD. If you are married you have 2 end of life scenarios to fund. Roth also protects against high inflation (and SORR to some extent) If I want a new car or a trip to Europe, I just go see Mr Roth it is open to an occasional purchase as well. Tax planning is paramount in retirement and a nice large brokerage + some TLH is just the ticket. You can’t generate TLH unless you own a brokerage account.

    • Thanks, Gasem!

      It is important to understand the tax code well in advance of retirement and have a plan to actually access that money. In the early years of my career, I was focused simply on earning good money and investing “for the future.” The latter half of my short career, I’ve put a lot of thought into the logistics of turning my invested dollars and the dollars they generate into an income that I can actually spend.

      I’m happy with the way things turned out, and especially glad that I built my taxable account into the largest account I own — it’s worth more than all tax-advantaged accounts (which I did max out) combined.


      • U da Man PoF for sure. I maxed out my pretax slightly longer than you, to age 50. I already had a brokerage which I started in the 70’s and was able to TLH for many decades resulting in a massive Harvest. At 50 I started investing heavily in the brokerage so I could use it as a source of income to Roth convert. So our plans are similar but the scope of our time frames different. I would have retired a 58 but a business opportunity popped up which I decided to pursue till I retired. It paid well and had benefits including health care that covered out of state children and I had 2 kids in college so what the hell. Your plan is going to fly just fine

        • Much appreciated. You’re setting a great example.

          I see a lot of focus on “income” and people don’t seem to realize that with a well-set-up portfolio, you can create the income you need and be in control of how it’s taxed.

          The ACA subsidies also come into play here.


  • Mark C.

    Not exactly on topic, but another great article by Kitces on the 4% rule and flexible spending.

  • This is a great look at an important concept. It seems the way most people talk, if you don’t have a Roth IRA you will never be able to retire. I retired from medicine in 2017 and I don’t have a single Roth product. The Roth products were not available when I started my retirement savings plan. It seems there are more than one way to skin the retirement cat. I’m putting this into my Fawcett’s Favorites this week.

    Dr. Cory S. Fawcett
    Prescription for Financial Success

  • Pingback: Fawcett’s Favorites 7-22-19 – Dr. Cory S. Fawcett

  • ACA subsidies — yes you may end up with tax free capital gains and dividends. However, in calculating the subsidy, those items are present in the 4X poverty calculation. We file as a married couple and have to keep our income below 67K, otherwise the whole subsidy is gone. For us in California, we’re talking about 20K we’d have to pay back. So, people need to be very careful.

  • You really walked through this very simply and clearly, Thanks! Because of income most of our investments are in taxable brokerage accounts and this is something I’ve been reading as much as I can on. Really well written!
    Also, one of the perks of vanguard is their tax advantaged funds. I use VTCLX in my taxable account. Still some dividends and minimal capital gains but great exposure to the large/mid cap sectors of the market with less tax inefficiency. And I keep my high dividend payers in the Roth.

  • Kay

    Great Info. Between a pension and social security we will be about $75K or could be more. While most money is in a taxable acct. we do have a TIRA (about $300K between both of us) that will have RMD and boost our income. Was planning to convert some to a ROTH and just curious, if you know, does inheriting money (parents TIRA) count as income? I do know I will have to pay taxes on it. I have not looked into it as this in the future but asking as others may be interested as well. So if I am converting TIRA to ROTH at the time I have this inheritance, that could put be in the next tax bracket or is there a away around that since it is inherited.? (just another reason why I am glad to have more in a taxable vs TIRA or 401. We do have ROTHs) thanks

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