Harvest long term capital gains tax free

018R | Capital Gains Harvesting | Never Pay Taxes Again

In Today’s Podcast we cover how to harvest long term capital gains tax free.

  • Friday Roundup 7
  • Review of Monday’s episode with Jeremy from Go Curry Cracker
  • Brad and his family just visited Washington DC for the weekend and used Chase Ultimate Rewards points to stay at the Hyatt Place National Mall
  • Brad’s trip to Walt Disney World with his family, parents and in-laws
  • Jonathan now understands harvesting capital gains and losses after the episode with Jeremy
  • Unconventional choices: Jeremy and Winnie haggling at the farmer’s market near the close of business. Brad going to Disney World before Molly turned 3 so they could get her park ticket for free. Jeremy taking his son on a flight the day before he turned 2 so he could be a lap child on a business class flight
  • Quick hit takeaways from the Jeremy episode: He told his mom he had a ’60 year emergency fund’; he opened a Roth-IRA for his son for earned income on the website.
  • The power of having money and financial independence enabled Jeremy to walk out of his job instead of doing something that he didn’t want to do.
  • Brad’s story of when he left his job and taking the power back from corporate America
  • Investing philosophy and the importance of taking your brain out of financial decisions
  • His financial freedom clock started when he ‘got to broke’ and paid off his student loans

Capital Gains Harvesting | Avoiding long term capital gains tax

  • Case study: Married couple with one child. 30 years old.  $120,000 of income and maxing their 401k ($36k in total)
  • Qualified dividends and long-term capital gains are taxed at 0% if you’re in the 10% or 15% marginal tax bracket
  • Understanding how marginal tax rates work for income taxes
  • The definition of FI: having 25 times your annual expenses saved up and invested

The long term capital gains tax

  • The long term capital gains tax  defined & explained
  • How the Roth-IRA conversion ladder would work for this couple and how they can harvest long term capital gains tax free by using advanced FI techniques

Itunes reviews and questions from the community

  • Reader case study from Kevin: How to work with a spouse from an ultra-wealthy lifestyle and bring them over to the FI lifestyle
  • Find what makes you happy in life and what you value and spend accordingly
  • Kevin’s scenario is almost exactly like our case study on this episode
  • Travel Rewards question: How to maximize hotel points with Hyatt and Starwood hotels
  • What’s coming up on ChooseFI: JL Collins talks about the Stock Series, the Stapes of FI, JD Roth and Kristy from Millennial Revolution, the true cost of car ownership

Links from the show:

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16 thoughts on “018R | Capital Gains Harvesting | Never Pay Taxes Again”

  1. In your case study, you have a married couple whose gross income is $120,000. Each take the standard deduction ($12,600), so the adjusted gross income (AGI) is $94,800. Why wouldn’t the couple each have a Traditional IRA and contribute $5500 each? Because their AGI is < $99,000, they can claim the full deduction for not only their 401(k) accounts (each contribute the $18,000 max) but also their Traditional IRA ($11,000).


    Am I missing something here?

    • yeah you are right, The purpose of the example was to demonstrate 1 specific tool, Capital gains harvesting and how it might be used. We are trying to break down one tool at a time and build a frame work that people can work in. If we get carried away and go off in too many directions, I felt we would lose people, We are trying to stay on focus. We will continue to demo these different tools and in the near future we will put every single one together in a single case study…. shhhh don’t tell anyone 😉

    • A married couple takes a standard deduction of $12,600. A married couple is taxed as one unit. They do not each take a standard deduction of $12,600. Hence their AGI is $107,400.
      They can take a partial deduction for tIRA contributions.

        • Thanks Jonathan — looking forward to hearing more case studies!

          Thanks for the correction Fiby and Danielle G.

          So that brings their AGI to $99,300 (120,000 – 12600 – 4050 – 4050). So most of a maxed Traditional IRA contribution could be deducted after including the standard deduction and personal exemption.

  2. So am I understanding this correctly to think that I should put the assets with the highest growth potential in my taxable accounts and bonds into tax advantaged 401k and Traditional IRAs? Then go into my taxable account at the end of every year and do a simple sell/buy transaction to realize the gains? That is totally backward of what I previously thought and is going to take me a while to wrap my head around…

    This is a really cool concept that I have not come across before. Thanks for “unpacking” this for us!

      • Yes, I think the best strategy would be to max out the tax-advantaged accounts first, putting some bonds in those accounts (which is what you already said).

        In your taxable account, yes you would want to wait 1 year before sell/buy any funds in order to get the long term capital gains tax rate. And if your tax bracket is 10% or 15%, you have a 0% tax rate on the gains.

  3. FYI: $18,000 is not always the max employee 401k contribution for those of us under the age of 50. There is also a $54,000 employee / Co max contribution. I put the max $18K into my ROTH 401k and another $20k into my after tax (traditional 401k) and my Co contributes another $16k bringing it up to a total of $54K for the year all into my 401k. Even better the day after my after tax contribution to my traditional IRA, I call Fidelity and tell them I would like to do a “Roth In Plan Conversion” of my after tax contribution that just arrived. I pay no additional tax on this contribution unless it gained something in the last day, and the $ ends up in my ROTH 401K.

    I look forward to using the Roth IRA conversion ladder technique after I retire but it seems a little limited on the total amount I will be able to convert that way at a lower tax bracket.

    $54,000 limit:

    • Thats pretty cool, it sounds like it there might be a great tip there especially for the higher income brackets. I am very interested in building or Seeing what an optimized FI plan looks like for different Tax brackets and I will keep this idea in mind. Thanks for sharing

  4. I think it’s important to remember that most states will tax the capital gains so you’re not actually getting away tax free depending on where you live. In my state for instance the capital gain is treated as ordinary income which is taxed at 6% for any income over $9,000. I looked at a chart showing capital gains tax rates by state and a lot of them had similar tax structures.

    • This is a great point, which we need to address in the future. Geo Arbitrage in the states may have real value for the FIRE community
      I just went back and checked and these nine states do not tax capital gains
      New Hampshire
      South Dakota

  5. Thanks guys – this episode really helped me in my journey to FI. I will most likely pull the trigger in a matter of months, instead of a couple of years, as I think this game of capital gains/loss harvesting will make it possible. So basically, you’ve changed my life for the better. Just left you guys a review on itunes – if I could have put more stars I would have! Keep up excellent work!

  6. Does it make sense to increase my basis yearly within my Roth and Traditional IRA accounts until I retire? I am 30 and am probably 20 years out to retirement. You cant realize any capital gains or losses until you move the money outside of IRA’s, correct?

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