First, we need to identify what a Roth IRA is and how it’s beneficial. A Roth IRA is an Individual Retirement Arrangement that is funded with post-tax money. That is, you’re investing in the account with money that has already been taxed or you’re paying tax on the money when you convert it from tax-deferred to Roth.
So you want your taxable account to resemble a Roth IRA? The following criteria must be met: – No tax on the growth – No tax on withdrawals That’s pretty much it. How do we magically make these taxes disappear? No sleight of hand is required, but you do need to understand how dividends and capital gains are taxed at various income levels.
If you’re investing in a taxable account, I’m going to assume you’re already maxing out all tax-advantaged investing opportunities. If you’re able to afford to do so, there’s a very good chance your taxable income is above $80,000 (if married filing jointly in 2020) or $40,000 (for single filers in 2020).
When you’re working and earning a good income, your spending money should come from your paychecks. You should have no need to sell your taxable holdings to fund your lifestyle.
As long as your taxable income is below $83,350 (if married filing jointly in 2022) or $41,675 (for single filers in 2022), you will pay no tax on long-term capital gains and qualified dividends.
How might this work in real life? Let’s say you’re retired with a paid-off mortgage and want to live on $120,000 a year.