Tax discussion, strategies and questions

[ReddyLeaf]

yes, that’s for someone 72 TODAY I assumed ppl were younger now and AT 72 they would have much higher RMD amounts. That’s some time in the future though. I just used a straight 5% growth to estimate future balance.

Hmmm, this really doesn’t make much sense. Required minimums are only applicable after 70-1/2. So are you saying a 40 yo with $5M of TSLA (5000shr) TODAY in a regular IRA shouldn’t pay a boat load of taxes in 30 years? Crazy! I don’t have anywhere near 5000 shares and I will be happy to pay 35% taxes when I reach 72. Come on, what amount of work is required to hold TSLA for the next 30 years? Pay some taxes people, it’s not a burden.

Today I transferred my last big chunk of TSLA from IRA to Roth creating a large one time tax bill come 4/15/23. I hope to generate enough with option trading to pay the bill but as age > 59 1/2 I can pay with my Roth with 10% penalty.

I transfer a fraction of my regular IRA into my ROTH IRA every year. Calculate the amount necessary to reach the next tax bracket (e.g., 10%, 15%, 35%, whatever), and convert that amount. Pay your taxes people, it’s not a burden, it’s your responsibility. Yes, I minimize as much as legally possible, but I still pay, and it’s not a burden.

 

[tivoboy]

Unfortunately the best answer is to move at some point. Or for at least 183 days of the year.

That is my plan. Have had a business in NYC that is not passive income (as in real estate which runs the town) and have been subjected to 60% taxes for the past twenty years or so. Once it clears 50% I get ornery.

When I lived in Denmark in the 80’s their highest tax rate was 105%.. so it could be worse!

 

[EVCollies]

Hmmm, this really doesn’t make much sense. Required minimums are only applicable after 70-1/2. So are you saying a 40 yo with $5M of TSLA (5000shr) TODAY in a regular IRA shouldn’t pay a boat load of taxes in 30 years? Crazy! I don’t have anywhere near 5000 shares and I will be happy to pay 35% taxes when I reach 72. Come on, what amount of work is required to hold TSLA for the next 30 years? Pay some taxes people, it’s not a burden.

I transfer a fraction of my regular IRA into my ROTH IRA every year. Calculate the amount necessary to reach the next tax bracket (e.g., 10%, 15%, 35%, whatever), and convert that amount. Pay your taxes people, it’s not a burden, it’s your responsibility. Yes, I minimize as much as legally possible, but I still pay, and it’s not a burden.

I too had transferred a bit each year but I'm thinking this might be the last chance for backdoor Roth transfers thus the large transfer to complete. I don't mind paying taxes either, just need to plan ahead.

 

[tivoboy]

Hmmm, this really doesn’t make much sense. Required minimums are only applicable after 70-1/2. So are you saying a 40 yo with $5M of TSLA (5000shr) TODAY in a regular IRA shouldn’t pay a boat load of taxes in 30 years? Crazy! I don’t have anywhere near 5000 shares and I will be happy to pay 35% taxes when I reach 72. Come on, what amount of work is required to hold TSLA for the next 30 years? Pay some taxes people, it’s not a burden.

I transfer a fraction of my regular IRA into my ROTH IRA every year. Calculate the amount necessary to reach the next tax bracket (e.g., 10%, 15%, 35%, whatever), and convert that amount. Pay your taxes people, it’s not a burden, it’s your responsibility. Yes, I minimize as much as legally possible, but I still pay, and it’s not a burden.

Good news is, RMD aren’t required till the year one reaches 72 now so one gets a bit more time. Unless of course it’s a spousal or inherited retirement account where RMD’s had already begun. For ppl with very high retirement account balances, and out here there are a lot of folks with what was low priced company stock in these accounts, I’v encouraged them to look into moving some either via back door Roth or 72t plans, essentially setting up a program to move it out of the tax advantaged account and into a taxable one, albeit then would be taxed upon withdrawl at capital gains rates and not income rates. It’s a common misunderstanding what one wants all their money in a tax advantaged account. I’ve purposely tried to keep only about 60% in the tax defferred accounts, and 40% in my taxable ones. That will probably shift more to 40/60 as I move toward more real retirement, not just play retirement.

 

[mongo]

Good news is, RMD aren’t required till the year one reaches 72 now so one gets a bit more time. Unless of course it’s a spousal or inherited retirement account where RMD’s had already begun. For ppl with very high retirement account balances, and out here there are a lot of folks with what was low priced company stock in these accounts, I’v encouraged them to look into moving some either via back door Roth or 72t plans, essentially setting up a program to move it out of the tax advantaged account and into a taxable one, albeit then would be taxed upon withdrawl at capital gains rates and not income rates. It’s a common misunderstanding what one wants all their money in a tax advantaged account. I’ve purposely tried to keep only about 60% in the tax defferred accounts, and 40% in my taxable ones. That will probably shift more to 40/60 as I move toward more real retirement, not just play retirement.

Just to clarify for people Googling, a backdoor Roth to get new money in is different than Roth conversions of existing IRAs.
Moving from pre-tax to taxable due to the lower capital gains rate may be disadvantageous since the earnings are effectively double taxed. The account starts out reduced by the income tax rate, then the earnings are reduced by the capital gains rate. Depends on the amounts/ tax brackets involved.

 

[tivoboy]

Just to clarify for people Googling, a backdoor Roth to get new money in is different than Roth conversions of existing IRAs.
Moving from pre-tax to taxable due to the lower capital gains rate may be disadvantageous since the earnings are effectively double taxed. The account starts out reduced by the income tax rate, then the earnings are reduced by the capital gains rate. Depends on the amounts/ tax brackets involved.

And TIME

 

[mongo]

And TIME

Yah, area under the curve.
Roth conversion is handy to get money penalty free before 59.5 (still a 5 year waiting period though).
Higher interest rates help with 72t plan payouts (which have side effects when combined with Roth)

 

[Silent Ludicrosy]

So I learned the hard way about the net investment income tax last year. I sold 200 shares to pay off my mortgage, being careful to stay in the 15% bracket for long term capital gains. I only learned about the 3.8% NIIT after reading about it on TMC when Elon started selling. I got lucky selling near the top in November. Better lucky than good, but if I was smarter I would’ve made it a point to stay below $250,000 MAGI. If I was smarter-er I would’ve stayed below the $208,000 MAGI Roth IRA limit. If I was smarter-est I wouldn’t have sold at all. Live & learn…

 

[IndyToronto]

So I learned the hard way about the net investment income tax last year. I sold 200 shares to pay off my mortgage, being careful to stay in the 15% bracket for long term capital gains. I only learned about the 3.8% NIIT after reading about it on TMC when Elon started selling. I got lucky selling near the top in November. Better lucky than good, but if I was smarter I would’ve made it a point to stay below $250,000 MAGI. If I was smarter-er I would’ve stayed below the $208,000 MAGI Roth IRA limit. If I was smarter-est I wouldn’t have sold at all. Live & learn…

I’ve learnt after decades of stock holdings that letting tax avoidance alone dictate holding or selling shares can sometimes result in the problem going away and in a few cases the huge potential unrealized gains become smaller gains or even losses.

Americans are luckier than Canadians, unless you’re in California or other high tax states, your total taxes on capital gains on stocks are tiny. in Canada, even though capital gains are only half taxed ( ie: a $100 capital gain is taxed as a $50 income). For where I reside, that’s almost 27% while income is taxed at 53.53%.

 

[MP3Mike]

Americans are luckier than Canadians, unless you’re in California or other high tax states, your total taxes on capital gains on stocks are tiny. in Canada, even though capital gains are only half taxed ( ie: a $100 capital gain is taxed as a $50 income). For where I reside, that’s almost 27%.

Sure, while here long term capital gains are 15%, or 20% if you have lots, short term capital gains are treated as standard income, so they are in the 22-37% range. Then add ~9% for state taxes to both. Then, again if you make lots, add 3.8% for the Net Investment Income Tax.

So you are looking at 27.8% - 49.8% tax here.

And no taxing just half of it. Sounds to me like you have really cheap tax rates.

 

[IndyToronto]

Sure, while here long term capital gains are 15%, or 20% if you have lots, short term capital gains are treated as standard income, so they are in the 22-37% range. Then add ~9% for state taxes to both. Then, again if you make lots, add 3.8% for the Net Investment Income Tax.

So you are looking at 27.8% - 49.8% tax here.

And no taxing just half of it. Sounds to me like you have really cheap tax rates.

There is a special case where if the Canadian revenue agency ( our IRS ) deems trading patterns indicate this is a main source of revenue, the capital gains is now treated as employment income and the tax margins for employment will kick in. Seems to apply to people who are working as day traders as their main source. It’s not the same as the treatment of long term vs short term capital gains, it’s more a determination of investing outside of your regular job vs investing as a job.

I did look into Texas a while back, if I was living in Texas, the highest marginal rate would be 38% instead of the 53.53% it is today. I didn’t realize that the tax treatment in US was based on how long the stock must be held.

 

[capster]

If I made a large Roth conversion in Q1 2022, but don’t plan to make any more conversions during the rest if the year, must I pay all of the estimated tax on the conversion by April 15 (or 18 this year)? Or can I divide it into four equal chunks to pay as estimated tax for each of the four quarters?

paging @mongo

Thanks in advance.

 

[ReddyLeaf]

If I made a large Roth conversion in Q1 2022, but don’t plan to make any more conversions during the rest if the year, must I pay all of the estimated tax on the conversion by April 15 (or 18 this year)? Or can I divide it into four equal chunks to pay as estimated tax for each of the four quarters?

paging @mongo

Thanks in advance.

It’s been awhile since I’ve had to do quarterlies, but it appears that you pay 4/15 for anything realized in January-March.
Estimated taxes
Dates

 

[capster]

It’s been awhile since I’ve had to do quarterlies, but it appears that you pay 4/15 for anything realized in January-March.
Estimated taxes
Dates

That was my impression too, but I wanted to double check with the knowledgeable folks here.

 

[mongo]

If I made a large Roth conversion in Q1 2022, but don’t plan to make any more conversions during the rest if the year, must I pay all of the estimated tax on the conversion by April 15 (or 18 this year)? Or can I divide it into four equal chunks to pay as estimated tax for each of the four quarters?

paging @mongo

Thanks in advance.

Mostly yes, unless you or your spouse has a W-2 job you can crank up the withholding on.
Form 2210 has the calculations for penalties.
Depending on your feels, penalty may be less than gains...
I Rothed in Q1 also, but too soon apparently.

 

[mongo]

If I made a large Roth conversion in Q1 2022, but don’t plan to make any more conversions during the rest if the year, must I pay all of the estimated tax on the conversion by April 15 (or 18 this year)? Or can I divide it into four equal chunks to pay as estimated tax for each of the four quarters?

paging @mongo

Thanks in advance.

Addendum:
It appears that, if you have an IRA that you are living off, then witholdings done by the administrator are treated as if taken throughout the year. So, theoretically, you can pay your year's worth of federal taxes in December with no estimated payments. The also works for W-2 incone by cranking up witholding in December .
Not advice, not an accountant YMMV.
IRA Trick - Eliminate Estimated Tax Payments

 

[tivoboy]

If I made a large Roth conversion in Q1 2022, but don’t plan to make any more conversions during the rest if the year, must I pay all of the estimated tax on the conversion by April 15 (or 18 this year)? Or can I divide it into four equal chunks to pay as estimated tax for each of the four quarters?

paging @mongo

Thanks in advance.

If you do regular quarterly payments, you could probably get away with whatever the safe harbor amount would be for 2022 for Q1

 

[capster]

Addendum:
It appears that, if you have an IRA that you are living off, then witholdings done by the administrator are treated as if taken throughout the year. So, theoretically, you can pay your year's worth of federal taxes in December with no estimated payments. The also works for W-2 incone by cranking up witholding in December .
Not advice, not an accountant YMMV.
IRA Trick - Eliminate Estimated Tax Payments

Thank you very much for that tip. It is most interesting.

 

[tivoboy]

Thank you very much for that tip. It is most interesting.

I’d dig into this just a tad more.. it MAY only apply to whatever required RMD amount one might have for a given year and not just whatever amount one chooses to take out of a tax deferred retirement account type. Most IRA/401K setup for tax purposes and RMD’s have an annual December withdrawal and distribution setting, so it would make sense that the IRS allows all the taxes to be held and withdrawn at that time. As well, it’s sort of the same thing essentially having all the income in one quarter, then of course only all of the estimated taxes would be due in that quarter. Don’t know, but just thinking.

 

[capster]

Addendum:
It appears that, if you have an IRA that you are living off, then witholdings done by the administrator are treated as if taken throughout the year. So, theoretically, you can pay your year's worth of federal taxes in December with no estimated payments. The also works for W-2 incone by cranking up witholding in December .
Not advice, not an accountant YMMV.
IRA Trick - Eliminate Estimated Tax Payments

My accountant said he did not think the plan outlined in the article would work with an uneven IRA distribution, e.g. convert to a Roth in January and pay the taxes the following December directly to the feds from a Traditional IRA. In any case, I had decided against doing this.

I sold yesterday and this morning to cover the taxes. Even though I have high confidence in Musk & Tesla and I’ll continue to hold, I don’t want a large tax liability hanging over my head in such a hairy macro environment—pandemic creating trouble again in China, war in Europe, energy supplies in flux, inflation, rising rates, etc.

I came out ahead maybe $75 a share on average in between the conversions and the sales—I’m calling that a win and will move on.