How to pay no or low income tax in retirement

[Chahta]

Karen : big-bang-investors.proboards.com/post/39459

OK, I did not derail the other thread by asking there. What is the key to paying no ncome tax? 

Everyone please chime in.

The obvious is using muni funds for income. Also I used saved cash for spending. What else is there?

[Karen]

It would be best if my husband could take this one, but that's just not possible. I'll miss a lot of it but will give it a go.

For me, the "key" is my MBA, retired CPA/Investment Advisor husband and his love of/dedication to the old school axiom, "It's not how much you make, it's how much you get to keep."

Before starting his mental decline a few years ago, he had long ago duly fostered in me an intense disdain for personal income taxes, well, that is, to the extent WE pay any of them if we don't HAVE to.

We married as kids just before the EOY, and I learned early on that "our" tax planning actually started with our wedding: It was advantageous to us to file MFJ that year so we rushed the wedding date to save some tax dollars. He's quite the romantic!

From Day 1, he structured our portfolio to always keep ~95%-99% of our nest egg in tax-deferred accounts. "If you can control your taxable income, you can control your taxes."

At retirement, just enough money was left in taxable a/c's to bridge us to SS. Also, our pension lump sums were rolled to IRAs.

A few years into retirement, SS was claimed early but no taxes have ever been paid on the benes. Also, smallish, tax-free IRA withdrawals up to the MFJ taxable threshold have been made annually since retirement to keep just enough money inside taxable a/c's to make ends meet.

I guess bottom line, tax planning has been a lifelong pursuit to properly structure our portfolio in the most tax-efficient manner, with one of the ultimate goals being to NOT pay any personal income taxes in retirement until we absolutely MUST. That's looking like it'll be at age 73 and RMDs. 

So I guess the general "key" is to understand that the likelihood of success in this regard is greatly enhanced IF an investor understands that retirement tax planning starts WAY BEFORE retirement.

[chang]

Taking full advantage of tax deferred accounts is indeed probably the first and most important thing every investor should do. However, if one saves in excess of the amounts allowed to be tax sheltered, and is fortunate enough to grow a sizable taxable account, then taxes and tax management are a fact of life.

An old boss of mine once said “learn from the mistakes of others; you won’t live long enough to make them all yourself.” Well, he may have been wrong there — I think that I HAVE made them all. Every stupid, awful, ugly mistake that cost me extra taxes in my taxable account. And I’m still alive … and hopefully, now, not making those mistakes any more.

[Karen]

Jul 12, 2023 14:53:36 GMT chang said:

Taking full advantage of tax deferred accounts is indeed probably the first and most important thing every investor should do. However, if one saves in excess of the amounts allowed to be tax sheltered, and is fortunate enough to grow a sizable taxable account, then taxes and tax management are a fact of life.

An old boss of mine once said “learn from the mistakes of others; you won’t live long enough to make them all yourself.” Well, he may have been wrong there — I think that I HAVE made them all. Every stupid, awful, ugly mistake that cost me extra taxes in my taxable account. And I’m still alive … and hopefully, now, not making those mistakes any more.

In case you don't know, your old boss was quoting Elanor Roosevelt.

We would suggest that tax management is a fact of life for virtually everyone, NOT just people who "save(s) in excess of the amounts allowed to be tax sheltered, and is fortunate enough to grow a sizable taxable account."  And the sooner a person understands that, the better chance they'll have at efficient management. (Getting an MBA and becoming a CPA and Investment Advisor surely helps!)

On mistakes, you noted that you "think that (you) HAVE made them all. Every stupid, awful, ugly mistake that cost me extra taxes in my taxable account."  Perhaps if you would share some of those mistakes with the OP, they can avoid them.   

[chang]

I’m pretty sure Chahta doesn’t need to learn from my mistakes. But since you ask: the biggest one was using actively managed funds in taxable. I got creamed by CGs when I was younger. I’ve gotten rid of all but two now (fairly small positions with big tax handcuffs). Only passive funds in taxable from now on — no exceptions. (Individual stocks, of course, are fine.)

PS. The quote is much older than Eleanor Roosevelt:
quoteinvestigator.com/tag/eleanor-roosevelt/?amp=1

[steelpony10]

Chahta ,

          I never understood the fixation investors have on “paying little or no taxes”. The answer would be leave everything in a bank account. That’s about as small as you can get. Of course you’re losing purchasing power but do an ostrich pose and you’ll stay happy staying ignorant when it comes to money management 101.

          This discussion has been circling around as long as TR vs. Income investing. There is no disincentive to making as much as you can risk either way. Investing comes with risks and any greater reward includes higher taxes then a bank account. Just arrange your assets within the laws and rules to minimize the progressively higher taxes. 

           Some will invest 500k to make 15k in dividends and some will invest and make 40k from various income sources and with higher taxes will still net more then 15k. The more risk the more (possible) net reward (and taxes). That’s how things work in many of life’s pursuits. This is included in money management 102. Take a look at Publication 4012, it’s all there. Proper arrangement of your assets and learning to minimize your own screwups are 2 tools that should be in your investing toolbox. 

[habsui]

If one has a large(r) PV with most of it in taxable accounts with decent returns, then one will pay taxes (and I'm fine with that).
I have a higher % of munia again.
Cheers..

[Chahta]

steelpony10, I don’t believe in supplying dope to druggies.

The point of the thread was Karen saying she has not paid taxes in years. I was curious how that happened. I have been able to minimize mine the last 4 years. So much I have paid no CG taxes. Of course the saved cash I use to supplement my SS had taxes paid years ago.

[steelpony10]

Jul 12, 2023 23:58:28 GMT Chahta said:

steelpony10 , I don’t believe in supplying dope to druggies.

The point of the thread was Karen saying she has not paid taxes in years. I was curious how that happened. I have been able to minimize mine the last 4 years. So much I have paid no CG taxes. Of course the saved cash I use to supplement my SS had taxes paid years ago.

       Ha. Ha. Your funny. I sent you a message. Not everyone is as fortunate as the investing class.  

       I hope you don’t invest in treasuries then which helps to finance deficit spending.

       If you’re referring to the white stuff they found hidden in the west wing I’ll venture a guess it was left there by Larry Kudlow, the Pillow Guy” or Biden’s son who might be dumb enough. You’ll have to research that especially if the investigation leads nowhere. Hush. Hush. 😎

[anitya]

Better to buy individual stocks in a tax deferred account so you can take profits before they evaporate while you are handcuffed in a taxable account.  Same goes for sector and specialty bets.

[bb2]

Only the rich pay no tax.  Relatively.  Start with business deductions. 

[judger]

RUTF's!!!!! :-)))

[fritzo489]

anitya,  What if the stock sinks ? No tax loss harvest !

[shridog]

We can't say that we have paid zero persoanl income tax, but we have kept them pretty darn low during retirement. In our taxable account investment is in C-Corp preferred stocks. High yield types like Shipping and some energy. I generally buy the intial preferred at distressed price in Roth and then do some trading between accounts when most cap gain is realized. Dividends are QDI. About half of our IRAs are Roths so zero tax there. Of course the RMDs from the Trad are doing what was intended. I am 81 and wife is 72. RMDs are becoming relatively sizeable. No way to avoid tax now. We have never taken any $$$ from our Roths. We are 95% income investors. If I add up the amounts from Taxable account dividends plus RMDs plus SS our Fed tax bill is less than 3% of that total.

At this point in time finding high yield C-Corp preferreds is getting next to impossible and the Taxable account keeps growing. So now going to go the Steelpony way with a equity ETF or move to high yield income plays and pay more taxes, but keep more cash. Muni bonds just don't pay enough because of our low tax bracket. BTW there is no pension (just 4K per year).

Darrell

[anitya]

Jul 13, 2023 3:37:25 GMT fritzo489 said:

anitya ,  What if the stock sinks ? No tax loss harvest !

True but we do not start an investment thinking that it is going to be a loser.  May be you are thinking about lottery tickets.  Yes, I would buy lottery tickets in taxable accounts and make the IRS your silent partner.  The IRS shares in your losses (tax benefit) and gains, which is fair for windfalls!

(Even the best of the companies do not grow or survive into perpetuity, not to mention every change in leadership is a reset for the company prospects and thus better to have these in tax deferred / exempt accounts.  All equity index funds should ideally be bought in taxable accounts, unless they are short term bets.)

   

[anitya]

"At this point in time finding high yield C-Corp preferreds is getting next to impossible and the Taxable account keeps growing."

shridog ,

I am not in that space right now but I would have thought with interest rates this high you would find a lot of high yielding preferreds. May be the preferred yields have compressed with the recent rise in common stocks.  There is a separate preferred thread richardsok started and he invests heavily in them. Check it out and may be post in that thread why you are not finding desirable preferreds.

Thanks.

[johntaylor]

If jealousy is "green-eyed" (Shakespeare), I'm green over smarter folks paying little federal tax

[judger]

That's ROTHs!!!!

[Broozer]

Jul 13, 2023 1:35:08 GMT bb2 said:

Only the rich pay no tax.  Relatively.  Start with business deductions. 

Legitimate business deductions means YOU NO LONGER HAVE THAT MONEY, you spent it to run/expand your business in various ways.

It's no different than an individual not being taxed on mortgage interest or supporting dependents at home.

In general, you are only taxed on the money you keep. Money spent on legitimate deductions is gone, so is not taxed.

[liftlock]

Jul 27, 2023 14:30:26 GMT Broozer said:

Jul 13, 2023 1:35:08 GMT bb2 said:

Only the rich pay no tax.  Relatively.  Start with business deductions. 

Legitimate business deductions means YOU NO LONGER HAVE THAT MONEY, you spent it to run/expand your business in various ways.

It's no different than an individual not being taxed on mortgage interest or supporting dependents at home.

In general, you are only taxed on the money you keep. Money spent on legitimate deductions is gone, so is not taxed.

Deductions for depreciation expense might be one notable exception.  It's a non cash-expense that can help a taxpayer report a tax loss when there is a cash profit.  It makes real estate investing attractive to some.