170R |A Capital Gains Case Study For 2020

You'll learn more about the implications of capital gains and the mechanics of tax optimization for these gains. With two case studies, you'll start to realize the power of optimizing your capital gains strategy.

  • On Monday, we saw the biggest daily drop in the DOW in history. With the extreme volatility in the market, it can be difficult to stick to your investment plans. However, for people in the accumulation phase, this is the perfect opportunity to stick to your plan and continue to invest in the market.
  • Brad quoted Warren Buffet's famous investment advice, “Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it's imperative that we rush outdoors carrying washtubs, not teaspoons.”
  • In volatile times, it is critical to follow the guidelines that you've set out in your investor policy statement. You can learn more about building an investor policy statement with Physician on FIRE.
  • In the coming months, we will be taking a closer look at a few different types of drawdown strategies. Three of these include a yield shield strategy, a bucket strategy, and a pay yourself from your retirement accounts like a regular paycheck approach.
  • Tax-deferred accounts are retirement accounts that you contribute to with pre-tax dollars. Instead of paying taxes now, you will pay taxes when you withdraw the funds.
  • Roth investment vehicles are a type of account that you can take advantage of to save for retirement. You will pay taxes on the money you contribute now, but you will not need to pay taxes when you pull out the funds.
  • Taxable accounts are a way to save for your Financial Independence that does not restrict you to certain age limitations or minimum account distributions. You’ll be able to contribute post-tax dollars to these accounts and invest in the securities of your choice.
  • A capital gain is a rise in the value of your security over your purchase price. For example, if you buy a security for $10 and it is currently worth $15, that creates a capital gain of $5. However, that gain will remain unrealized until you sell the security.
  • You create a short term capital gain by selling within a year of purchasing the security. You create a long term capital gain by selling the security more than a year after holding it. The tax code favors investors that are able to realize long term capital gains.


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8 thoughts on “170R |A Capital Gains Case Study For 2020”

  1. Hey!

    I liked the new podcast but just wanted to clear up one thing that was said and was a little confusing. When discussing what “equities” are, it was said that people usually mean “Mutual Funds, ETFs.” There are A LOT of bond ETFs and Mutual Funds as well! There are gold/precious metal ETFs/Mutual Funds and even Cryptocurrency ETFs. So ETFs/Mutual Funds do not necessarily mean equities.

  2. Thanks for reassuring everyone that it’s time to buy, not sell! I’m 40 and have been investing since age 14, so I know from experience how the market drops – I watched my investments drop when the tech bubble burst and after Lehman Brothers collapsed. Once you accept that this is a normal market occurrence, it becomes easier to realize the sky isn’t falling, it isn’t the end of the world, and everything is actually okay. Keep investing, folks! Don’t sell! And definitely don’t panic! Go about business as usual and buy, buy, buy! The underlying fundamentals of our market are still strong – we just have a nasty virus threatening us.

  3. Thanks for the newest pod. I thought the information you presented on capital gains and taxes was very useful, but I don’t think you mentioned dividends and how they impact the tax situation. In the first case study you said they had 2.5 million in a taxable account, that would almost surely mean substantial amount of dividend income. How is that figured into the AGI and the tax tables?

  4. I loved the episode on financial resilience. Thanks for helping us stay strong and see the positive sidde of social distancing. Can you please do an episode with Big ERN from early retirement now? He must have some interesting statistical models on bear markets and safe withdrawal rates. Cheers from Ottawa. Staying home and saving lives 🙂

  5. Can you explain why you’re only taking the ‘standard deduction’ amount out of your 401K in the scenario. Since learning about Choose FI I have kept moving my retirement up, and feel comfortable with the rule of 55 which occurs in about 5 years. Thinking I’ll be able to get to the retirement funds in there for awhile, until my husband turns 59.5 and we have access to his retirement funds about 2 years later. Then a few years after that I’ll turn 59.5 and we will have more access to additional retirement funds IRA rollover accounts from previous jobs.
    So, why does the case study specify the pulling from the different accounts in your example? Is there something I need to know on my withdraw strategy? I need to know, in case I need to make some changes to my strategy! Thanks!

  6. I loved this episode. I’d like to see/hear other scenarios that break down tax liability during draw down. Specifically, what if a couple had significantly more in their 401K and so used more of those funds for living expenses and less from capital gains. For example if the same couple used $50K from their 401K and then another $50K from their taxable account? What would the tax liability be?

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