What are these other sources of capital that aren’t throwing off some sort of income?
I think he means income and not capital gains/divided income (which are taxed at a different rate)
Yeah this is similar to my plan: begin shifting towards 100% traditional by the time I retire
I mean if you have a bunch of stocks then your qualified dividends are taxed at a low rate (possibly 0% depending on what else you’ve got going on), and your principal isn’t taxed when you sell.
If you’ve got municipal bonds you don’t pay federal income tax on those. If you’ve got municipal bonds issued in your own state then you might not pay state tax either. (Like if you live in Ohio then Ohio munis are exempt from federal, state, and local taxation.)
Also it is a violation of federal law for states to tax income derived in the territories (and the feds don’t tax such income either.) So the dividends on Puerto Rico bonds are exempt from both federal and state taxation. Same for Guam, American Samoa, Northern Marianas and USVI, but of course Puerto Rico is by far the biggest. Be careful though because OIDs on PR bonds are not considered “income derived in the territories”, and that can be taxed.
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Growth Stocks or Growth ETFs. They theoretically grow over time. WHen you want some capital, you sell some and the growth proceeds are capital gains, not income.
Capital gains are income, but if they’re long term gains then taxed at a lower rate. And no tax on the principal.
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Yeah, primarily sales from an after-tax brokerage account. You can harvest capital gains up to ~$118k or so (I think) at 0% tax, so if you spend a few years in retirement doing that before doing Roth conversions, you can set yourself up so future brokerage sales are nearly all principal.
Yeah, this is where my question stemmed from.
Are you planning to retire early then? The tricky thing is that if you harvest at a high level of gains you can’t do any conversions at the same time and keep the 0% LTCG rate, so in a sense you’ve wasted the space in the lower tax brackets that year.
I’m planning to attempt to thread this needle in the next 10 years or so and have too much weight in traditional, which is why I keep bringing up the marginal vs effective tax rate issue. I was limited because my company didn’t offer a Roth 401k for so long, but there was a window of time where I was at a lower marginal rate (MFJ as the primary wage earner with kids) and should have used it.
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Yes, retiring early is the plan. I agree it’s a tough needle to thread, and I haven’t fully thought through the mechanics yet. Avoiding LTCG tax and minimizing taxes on Traditional accounts are the main goals, but you’re right in that there is only so much space to do both each year. I think a lot of the strategy comes down to your age and account allocation between Roth/Trad/Brokerage at retirement. If you’re retiring early enough and you’re split 33% between each, you’ll likely approach differently than retiring at 60 with 50% of your money in Traditional accounts.
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So a traditional 401k lets me avoid marginal income taxes at 40%.
A Roth IRA/401k lets me pay the 40% now in order to avoid the 15% marginal capital gains tax down the road.
I still fail to see why anyone is enamored with the Roth as a preferred savings vehicle.
You don’t pay capital gains tax on traditional 401k earnings growth
It’s hard to predict future tax rates and investment performance (you’ll have to make mandatory distributions if your assets are still sky high when you reach 72)
Roth investments are a good way to hedge against this
I hope you’re smart enough to understand that there is more to the equation than comparing your current tax bracket to your future tax bracket 
I agree with this but the way you start off by saying this is non-sequitor.
I can avoid a 40% marginal income tax now and take the money after I have stopped working and dole it out at an average income tax rate of about 9% (via maxing out the bracket tranches of 0%, 10%, and 12%)
Of course I am assuming that tax brackets do not materially change structure, and I understand this is only an assumption.
But by paying tax now on Roth directed savings, I pay that 40% now and the prize for doing so is only the avoidance of 15% capital gains tax in my retirement years on the Roth IRA earnings..
I don’t see why most people (or anyone, really) would prefer the Roth option.
The avoidance of currently paying the 40% marginal rate is the real prize, and overpowers the smaller tax benefit of the ROTH.
I’m lost on the 40% marginal income tax. Probably am just being stupid but where is that derived?
Perhaps state income tax.
Because not just “anyone” is privileged to be in the 40% tax bracket right now …and if anyone’s investments (which are only inside of a retirement account, btw) do exceptionally well, they’ll be in the 80% tax bracket when they retire.
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Probably works fine if you have less than a few million in your 401k
It’s tough to stay in those lower tax brackets when your 401k balance is growing faster than you can withdraw
Sometimes I forget that poor people exist
Anyways my employer 401k contributions provide me with all the tax diversification I need to offset my fully maxed out Roth contributions
The top marginal Federal Tax rate is currently 37%, it’s possible some are just “rounding to 40%”
But much more likely is they are adding in the top marginal State Tax rate. California, Hawaii and New Jersey all have a top marginal rate over 10% with CA at 13.3% so you can get to 50% in that case and there are 38 states that have a top marginal rate of 3% or more so it’s not hard to hit 40% if your income is high enough. Of course, the problem of earning too much money is usually a good one to have.
Tax rates may well increase, I agree. But capital gains taxes will never go from 15% to 80%. That’s just not reasonable to assume or even consider.
No, I am throwing state and local tax rates on top of the Federal Tax rates.
Yes I am being somewhat effusive by not being specific and generalizing to keep some of my anonymity, but 40% is not only for the mega-incomes, when the fed marginal rate is at 35% at an income of 231k (which is a fellowship level income).
Here, according to DW Simpson, most FSA’s are over 200k.
