Posts Tagged ‘investing’
Two weeks ago I wrote about the tax strategy to use during a sabbatical, career transitions, and early retirement. This week’s article is a continuation of that theme, focusing on tax gain harvesting.
This discussion stems from the fact that investment gains are taxed differently than our ordinary income. In fact, they have their own tax brackets. See below:
Let’s take Joe Doe for example. He is a lawyer and his usual taxable income is $600k. That puts him squarely in the 20% capital gains tax bracket. On top of that, based on his income, he must also pay the Obamacare surtax of 3.8%. That makes the tax rate on his investment gains (and qualified dividends) 23.8%.
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Tax Saving Strategies for Sabbaticals, Career Transitions or Early Retirement
Posted on: April 10, 2024
I have a client who is planning to take a year off to take care of her mother, another one who has quit his job to launch a new business, and yet another one who has retired early and needs to wait a few years to receive her pension and social security.
What they all have in common is that they will have at least one year during which they will have very low or even no income. I have been thinking about how they can take advantage of their situations to increase their lifetime wealth-being, or more specifically to reduce their lifetime tax liabilities. Here are two strategiesI came up with: 1) Roth Converstion and 2) Tax Gain Harvesting.
Folks who save money for retirement usually stash their money in three types of accounts: taxable accounts like banks and brokerages; tax-deferred accounts like IRAs, SEPs and 401ks, or tax-exempt accounts like Roth IRAs and HSAs.
With tax-deferred accounts, once you are over 71 years old, there will be a RMD (required minimum distribution) that will increase as you age. If you invest well, eventually this RMD will push you into the higher tax brackets like 35% or even 37%. Here is a table of tax brackets for 2024.
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I have done many portfolio reviews over the years and I’ve seen all kinds of mistakes people make with their investments. Starting today I will do a series of articles on this specific topic. Hopefully, you will learn from these examples and therefore avoid repeating them.
First let me clarify a couple of terms:
- Financial Advisor: the guy who gives you financial advice and tells you where (what funds) to invest your money. Most of them work for big brokerages like Merrill Lynch, Morgan Stanley, and others (therefore the conflict of interest), and most of them can direct your money.
- Fund Manager: the guy who works at a mutual fund who does not interact directly with you, but nevertheless decides what stocks and bonds or other funds your money should be invested in once your financial advisor has invested your money in his fund.
To review a portfolio, first and foremost, I examine the hidden costs:
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The Investment Scientist 