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Posts posted by krow36

  1. tnewin, welcome to the forum. Sorry for the delay in getting a reply to your questions. I'm traveling in Canada with only rare wifi. I suggest you ask further questions on the 403bwise forum, as this 457 forum doesn't get near as much attention. Folks on both forums that have experienced what you are dealing with.

    The first thing you should be aware of is that 457 plans (like 403b plans) can be either annuity based or mutual fund based. You should avoid the much more expensive annuity products. On MM's fees and ERs, you'll have to dig it out from the rep. He should refer you to online verification of the fees. I would strongly recommend that you do not sign up for anything at the meeting with the advisor. Just get information. Are you contributing to a 403b and maxing it? If not, that would be a good idea before using an expensive 457. Are there low-cost vendors for the 403b? Adding a 457 vendor usually involves talking the HR office and any third party administrator.

    What state are you in? About half the states have state-run low-cost 457 plans that are available to school district employees. If your state does have such a 457 plan, it's often relatively easy to get it added to the vendor list. 

    Any questions are welcome! We all started at an elementary level and most of us have lost a lot of money in the process of investing. Most of us are teachers, retired teachers or teachers' spouses.  

  2. 3 hours ago, KarenSLP said:

    Honestly, I have no idea how much I am currently paying in fees. I tried getting the information from the SB site but it was very confusing. It looked like about 2.5% plus underlying fund operating expenses .8-1.2% for each subaccount. This should be illegal, but is all too common with these variable annuities. Total fees of about 3.5% is outrageous. 

    This is what I found:  Contingent Deferred Sales Charge. If you withdraw Contract Value, the Company may deduct a contingent
    deferred sales charge (which may also be referred to as a withdrawal charge) on the withdrawal of Purchase Payments.

    Contract Year of Purchase Payment Being Withdrawn /Withdrawal Charge
    1 8%
    2 7%
    3 6%
    4 5%
    5 4%
    6 3%
    7 2%
    8 1%
    9 and later 0%

    Does this mean any amount paid in years 1---20 have a 0 % surrender fee? Only the last 9 years of purchases will have the surrender charge? Yes, I will call SB for total surrender fee. Yes, only the last 8 years will have the surrender fee. This is what is called a "rolling surrender fee". If you contributed the same amount for each of the 8 years, the overall surrender fee might work out to about 4% of those 8 years of contributions. 

    The Vanguard account I opened  was a 403b. OK, that's good. I think you may want to transfer your account to Vanguard, and be rid of having to deal with SB at all. If I were you I would stop contributions to the SB Variable Annuity tomorrow. Call up Vanguard and start the transfer process. They will send you info on their 403b transfer forms. You will no doubt have to fill out transfer forms for SB also. Does your district use a Third Party Administrator? If so, they may have forms to fill out also. This process will probably take weeks, maybe more than a month--it's hard to predict. Each party's forms may have to be signed by you and the other parties?? It's hard to be patient, but you will feel so good when you have escaped SB!

    Until you can make contributions to a Vanguard 403b, you could make contributions to an IRA if you are not already doing so. Or to a taxable account for retirement at Vanguard.

    I was hoping I could avoid the surrender charge by changing SB accounts ( VB annuity to nea direct invest)....wishful thinking? Probably. I'd be surprised if SB waived the surrender fees for a transfer from their VA to the NEA Direct Invest. I guess it doesn't hurt to ask for a waiver. 

    The 3.5% fee times $205,000 is $7,175 per year. Vanguard will charge an admin fee of $60 per year and about 0.05% expense ratio, or $60 plus $104 for a total fo $164. You probably know that Vanguard has contracted out their school district 403b plans to Newport Group. Vanguard (and Newport Group) do not use reps that sell on commission like SB does. 


    Thank you!


  3. 1 hour ago, KarenSLP said:

    I began my TSA in 1991 and have faithfully contributed every year. The value is around $205,000. It has a 9 year non-rolling surrender fee ( I believe). I will not retire for 4-5 years and will not need to draw from this account for at least 10 years. I found out that my employer offers Vanguard in the 403b list of providers and have opened an account for future withdraws. I was hoping to get some advice about my current TSA and/or if  I should contact a fee based financial advisor for help.




    You could transfer your 403b account with SB to a Vanguard 403b if Vanguard is on the list. What kind of account did you open at Vanguard? IRA, taxable Individual or 403b? You'll get advice here from other retired and working teachers. This website maintains a list of fee-only Certified Financial Advisors that have been checked out. It's at the top of the forum topics

  4. 1 hour ago, KarenSLP said:

    Hello!  I am a school based speech and language therapist with over 30 years of teaching in the Pa public schools. I was about to begin fully funding my Security Benefits Variflex Variable Annuity when I found your information and  podcasts. Thank you!!!! I have been listening to them all!  I now know variable annuity plans are very expensive with many hidden fees.   I am wondering though if it is ever a good idea just to hold on to a variable annuity (Does years of paying high fees get me anything of value??????).


    Because of the ongoing fees of the SB variable annuity (VA), I don't think there's a reason that is good enough to hang on to it. I would guess that you are paying at least 2% per year in fees. Every fund has an expense ratio (ER) and your VA probably has a "mortality & expense" fee of about 1%. By transferring your variable annuity to the SB NEA Direct Invest, your only fees will be the Vanguard Admiral class index fund expense ratio of about 0.05%. That's about $4,100 for the VA, and about $104 for NEA DI, every year!

    Do you know the surrender fee schedule? If the fee varies over the 9 years, it's probably a rolling surrender fee. That means that last year's contributions might have a 9% fee, and contributions made 8 years ago might have a 1% fee? You really need to know the total surrender fee in order to decide whether to pull the band-aid off and transfer it all, or just transfer that amount that is surrender fee free. You can call SB and ask for this info. 

  5. Sorry I have no experience with your situation, but I'll give your thread a push. In general I would rank your retirement ahead of your child's post-grad schooling. Is your 403b plan with a low-cost vendor? Are you invested with say at least 50 to 60% in equities, so that your account is growing significantly? By withdrawing 24k, you will slow the account's growth rate won't you? 

  6. On 4/30/2019 at 10:31 PM, Andrey said:

    I have 403(b) plan with Vanguard. It was 0 cost for a while, but I noticed that for a year or two, they started to charge me $60 annual fee. Is it legal? How can I fight it?

    Thank you 🙂

    Of course it's legal. Their previous 403b fee was $25 per fund per year I think, which could easily add up to more than $60. There is now no per fund set fee, just the $60/yr and each fund's low expense ratio. Their ERs are still between 5 and 10 times less expensive than the industry's average. Either fee schedule is a bargain. They have added a Roth 403b option and have Admiral class available.

    Granted, the $60/yr fee is a high percentage of a $10,000 account balance (0.6%), but is only 0.06% fee on a $100,000 account balance. Maybe that will help motivate you get your 403b balance up here! That's how you "can fight it".

  7. 5 hours ago, MoeMoney said:


    You are right. However, since contributing to a Roth IRA in 2018 before knowing your MAGI, and then filing taxes (on time or not) you have 6 months from April 15 2019 to "correct" the contribution without incurring a 10%withdrawal penalty. You will, however, have to pay a 6% penalty on any gains earned. 

    (Was this an answer on another thread?)

    Yes, another thread!!? I'm loosing it! My apologies. I'm glad to learn about avoiding the 10% withdrawal penalty for 6 months after April 15. So the 10% penalty is because you are under 59 1/2? And the 6% is the penalty for withdrawing gains from a non-qualified Roth IRA, meaning your first Roth contribution is <5 yrs old. Is that right? 

  8. 4 hours ago, whyme said:

    This is a good thing that you are doing, P.J.

    One thought about your draft: I think some teachers may turn off when reading the line about "you will make your own choices."  Many are clueless and feel that they definitely need help with investing, which makes them prey to "financial planning" from annuity salespeople and such.

    So if there is a way to sneak in a generic recommendation that makes the whole process seem simple and "idiot-proof," I think that might provoke more people to accept your advice. 

    Maybe something along these lines, unless there is a legal or personal reason not to make a specific recommendation:

    "To enroll in one of these plans, you do not require any help from a company sales representative.  (Financial sales reps are notorious for steering teachers into high cost products from which the salespeople draw commissions and bonuses.)  When enrolling, you will choose how much of each paycheck to direct into the 403b (I suggest 10% or more, but you can change this at any time) and which investment option to fund.  One good choice is a Target Date fund.  Pick one with a date close to the year you expect to retire.  (Your investment choices can be changed at any time if your investment goals change.)  A target date fund provides a low cost all-in-one diversified investment portfolio that becomes more conservative as you approach retirement.  It is rebalanced automatically, it is funded automatically with each paycheck and once enrolled, it requires virtually no further action from you."

    If the NEA Direct Invest plan offered low-cost Vanguard target date funds, I think I would agree with whyme. However, unlike the Lincoln plan's Vanguard TR funds, NEA DI's target date funds are TR Price actively-managed funds with ERs between 0.79% and 0.97%. Suggesting them would conflict with the very low-cost index fund message. 

    None of the links seem to work?

  9. I think you've done a great job, sticking to the essentials. Have you considered placing the "PLEASE NOTE:" after the plans? The LI PDP could include a comment: "This platform is also available for a 457 plan for no additional annual fee."

    I wish Dan would include an example of lower fees, at least as low as 0.09%, in the bar graph. Of course the average Vanguard fees for a 3 fund portfolio is probably about 0.06% or less? The "average index fund" fees have probably come down since the graph was made? In any case, a difference of over $200,00 should serve to get their attention. 

    In the paragraph below the graph where you introduce the 2 plans, maybe you should mention that Vanguard index funds fees are below average, around 0.05% to 0.10%. That would tie the graph to the reason the 2 plans have outstandingly low cost. 

    Is the LI PDP annual fee $60 or $35 in NJ? Or does it vary?


    Make all 403b with small b.

    " " around the NYT article title.

    ". . . a rep from either these companies. . ."

    "The plan gives . . ."

  10. Unfortunately I think filing an extension on your 2018 return will not allow you contribute to an IRA for 2018 after April 2019.




    Your tax return filing deadline (not including extensions). For example, you can make 2018 IRA contributions until April 15, 2019.








    Contribution Deadline

    Tax-filing extensions do not apply to your IRA contributions, except for SEP-IRA contributions. This means that your contributions must be deposited by your tax filing due date, which is usually April 15.



    I was also under the impression that an extension allowed an IRA contribution so a relative I help missed out on a contribution for 2018. A contribution to their taxable account for retirement was accepted as next best.

  11. As jebjebitz suggested he wanted, keep it short. Maybe just focus on the fact that there are 2 very low-cost providers 403b (and one 457) available. The target is teachers with variable annuities. Both the plans are somewhat hidden aren't they, especially LI's PDP. Maybe mention that expensive accounts can be transferred into a low-cost plan? I think a bar graph illustrating cost over time is necessary! 

    As Steve suggested, anything more is too difficult and complex for a short letter. 


    First thoughts:  Is your audience the 70% who do not have a 403b? Or is it the 25%-30% who have annuity-based, expensive 403b plans? Maybe you should focus on the latter? And of those, focus on those with a variable annuity, not those with a fixed annuity?

    How about starting out something like:  Your national union, the NEA, has developed a super low-cost 403b plan based on Vanguard index funds. It’s the Security Benefit NEA Direct Invest 403b. Why would they do that? They realized that there was a need for a low-cost 403b for K-12 employees. This plan is available in districts where Security Benefit is on the 403b vendor list.

    Meanwhile, your state union, the NJEA, has arranged for a super low-cost 403b and 457 plan, also based on Vanguard index funds. It’s the Lincoln Investment Group Participant Directed Platform (PDP). This plan is available in NJ districts where Lincoln Investment is on the 403b (and 457) vendor list. 

    In my experience, I get folks’ attention when I show them the large amount of money they are paying in fees, compared to the much smaller amount they would pay at low-cost plan.

    I think an example is needed, for example, comparing an AXA fund with total fees of say 2%, with a Vanguard fund with a fee of 0.04%. For a $10,000 account, that’s $200 vs $4 in fees per year. For a $100,000, that’s $2000 vs $40 in fees per year. A bar graph is very eye-catching way to illustrate the difference. Maybe use an estimate of the average 403b account balance, and calculate the fees over 5, 10 and 20 years? (The annual account maintenance fee of $35 for NEA Direct Invest for balances under $50,000, and $60 for the PDP are relatively insignificant compared to the fees based on a percentage of the fund’s balance.)

    I think you can avoid the use of terms like “expense ratio” and others that most teachers are not familiar with, by just sticking to terms like cost, fees, percent and $$$. Make it as simple as possible. Maybe a second letter describing the 2 plans in more detail would be allowed by the union? Or you could provide links to threads on this forum?

    Trying to convince teachers to invest in a 403b(7) plan that uses the stock and bond index funds, rather than contribute to a fixed annuity, is maybe a discussion best left out of this letter? It seems most teachers prefer the fixed annuity, and we'd like to change that, but that is a complex challenge.

  13. I just occurred to me that you want to do a backdoor Roth IRA (because of your high MAGI) and your tIRA would result in a pro rata tax problem? If that is the reason you want to convert your tIRA to a Roth IRA, have you considered rolling your tIRA into your 403b plan? You would want the 403b plan to be low-cost. (Vanguard does not allow rollovers into their 403b plan.)

  14. I think Ed answered your question. There is an employee contribution limit to employer based retirement 403b plan. For 2019 it's 19k if you are under 50, 25k if you are over 50. The limit applies to any combination of traditional and Roth contributions to your 403b.

    There is an income limit to contribute directly to a Roth IRA, based on your modified adjusted gross income (MAGI).

    As Ed mentioned there is no IRS limit if you want to convert a Traditional IRA to a Roth IRA. The conversion will add to your taxable income. It might make sense to wait on conversions until your income tax bracket is lower, say in retirement before you start social security? Or during a year between jobs? But the IRS is always willing to have you pay the tax on the conversion now.

  15. It looks like IL will get a state-run 457 plan in the near future, according to this newspaper article. You will probably learn about its details before we do. Please send us a link to any article on it you come across.

    Teachers who are part of either the Tier 1 or the Tier 2 pension plans can enroll, although Martwick acknowledged it will most appeal to teachers in the Tier 2 plan that has far less generous benefits.

    But it’s going to be a while before the new program is available. TRS spokesman Dave Urbanek said it won’t be available before June 30, 2019, the end of the current fiscal year.


    The forum discussion of this article is here:


  16. 5 hours ago, Mewhite23 said:

    Thank you all so much! I have some investigating to do.

    Dan-no problem on the delay. I can’t explain how much your podcast has helped me and I’ve been passing it along to fellow teachers who love it just as much, so thank you! I am teaching in Illinois (Cicero to be exact). I do not have a Roth IRA, but definitely interested in looking into that option. 

    You may have lucked out with the Lincoln Investment Participant Direct Platform! There is at least one Chicago area district that is allowed to use it, but you will have to call to see if your district is allowed. The annual fee is either $35 or $65--it seems to vary. You should call a Lincoln Investment regional office to ask for permission. They are the only source of the application form, which states the rules for the plan. They will email you a link to the application form if they allow your district to use it. A local LI rep can't give you permission but would be able to give you the number to call. 

    You can read about the plan in this thread from last year. https://board.403bwise.com/topic/6780-lincoln-investments-participant-direct/

    There is nothing on the internet about this option, except on this forum and on the bogglehead.com forum. Lincoln Investment obviously wants to control its use. I have a link to an out of date form and will send it to you if you send me your email address in a Private Message. 


  17. 5 hours ago, Megan White said:


    I'm a 5th year teacher and just now getting a handle on the 403b lifestyle. After listening to the podcast, I'm so upset my district does not offer Vanguard. If you had to pick the "next best thing" which would you choose between VALIC, Metlife, Lincoln Investments, VOYA Financial, or AXA. My district endorses VALIC, but they all seem like salesmen to me and seem to not have my best interest in mind.


    Thanks so much in advance!

    None of those 5 vendors are a slam dunk like Vanguard, Fidelity and Security Benefit (only their NEA Direct Invest) would be. However, if you are teaching in NJ, Lincoln Investment has an excellent low-cost 403b and 457 plan that you could use. It's also available in a few districts in NY and near Chicago.

    VALIC, and VOYA Financial may offer mutual fund based 403b(7) plans in addition to their very expensive annuity based 403b plans. You would have to talk to each of them and study their admin fees as well as the expense ratios of their mutual funds. Please do not let them sign you up to an annuity 403b!!

    Lincoln Investment does offer a mutual fund based 403b(7) plan that they call their Retirement Solutions Premier. It has a Management/Wrap fee of 1.25% but does offer many low-cost Vanguard Investor class funds. So this is far from ideal, and getting Vanguard or Fidelity added to the vendor list would be the way to go and worth the effort!   

    Many states have a very low-cost state-run 457 plan that is available to school district employees. Teachers can contribute to both a 403b and a 457 plan (a maximum of 19k to each). What state are you teaching in? Does your district have a 457 vendor list? It’s possible that a state 457 plan would be all you need until later in your career?

  18. 3 hours ago, EdLaFave said:

    I've been studying how to minimize or eliminate taxation in retirement. To more deeply understand what I'm teaching myself, I've done a write up that could be used to teach others. For anybody willing to dig into a wall of text, I invite you to correct any inaccuracies you find and to add additional helpful information.

    In reality, many of the terms I use throughout this text have fairly complex definitions. I wanted to keep things simple and so I'm using these terms in a fairly limited scope:

    • Roth Conversion = Money moved from a Traditional account to a Roth account.
    • Capital Gain = Profit generated by selling shares in a Taxable Account.
    • Ordinary Income = Unqualified Dividends in a Taxable Account + Roth Conversions.
    • Qualified Income = Qualified Dividends in a Taxable Account + (long term) Capital Gains from a sale in a Taxable Account...generally given preferential tax rates.
    • Deductions = A deduction made to Ordinary Income before calculating taxes. The most common is the $24,000 Standard Deduction for married couples.
    • Taxable Income = Ordinary Income - Deductions + Qualified Income.
    • Progressive Taxation = The concept that taxation is broken into brackets where your first dollars are taxed at the lowest rate, the next Y dollars are taxed at a higher rate, the next Z dollars at taxed at an even higher rate, and so on.

    0% Tax on Qualified Income
    You've probably been told that Qualified Income is taxed at 15%, but that's an oversimplification. The tax rate applied to Qualified Income isn't flat, it's progressive in nature. Qualified Income in the $0-$77,200 bracket is taxed at 0%, Qualified Income in the $77,201-$479,000 bracket is taxed at 15%, and additional Qualified Income is taxed at 20%. However, your Deductions and Ordinary Income play a role in determining which brackets your Qualified Income falls in and I think this is best explained through a few examples:

    Example #1 --- 15% Bracket

    • Standard Deduction = $24,000
    • Ordinary Income = $101,200
    • Qualified Income = $50,000

    When you subtract the Standard Deduction from the Ordinary Income you're left with $77,200. That amount will fill up the entire 0% bracket, which means all $50,000 of Qualified Income will spill over into the 15% tax bracket. As a result the Qualified Income will generate a $7,500 tax bill.

    Example #2 --- 0% Bracket

    • Standard Deduction = $24,000
    • Ordinary Income = $25,000
    • Qualified Income = $76,200

    When you subtract the Standard Deduction from the Ordinary Income you're left with $1,000. That amount partially fills up the 0% bracket, which leaves us with $76,200 of space in the 0% bracket. As luck would have it the Qualified Income is exactly $76,200, which will will fill up the entire 0% bracket. As a result the Qualified Income will generate a $0 tax bill.

    Example #3 --- 0% and 15% Bracket

    • Standard Deduction = $24,000
    • Ordinary Income = $25,000
    • Qualified Income = $77,200

    This example is identical to the previous except there's an extra $1,000 of Qualified Income. Since the 0% bracket was already full, that $1,000 will spill over into the 15% bracket. As a result the Qualified Income will generate a $150 tax bill.

    Example #4 --- It's a Trap

    • Standard Deduction = $24,000
    • Ordinary Income = $0
    • Qualified Income = $101,200

    You're probably tempted to apply the Standard Deduction to the Qualified Income, which would be reduced to $77,200. That would allow you to fill up the entire 0% bracket and get away tax-free. As you may have guessed by now, the Standard Deduction can only be used to reduce Ordinary Income. That means the Qualified Income will fill up the 0% bracket and $24,000 will spill over into the 15% bracket. As a result the Qualified Income will generate a $3,600 tax bill.
    Key Points

    The main points you should walk away with are:

    • You want to have enough Ordinary Income to fully utilize your Deductions.
    • Beyond that, minimizing your Ordinary Income will maximize the tax-free portion of your Qualified Income.
    • The Capital Gains component of Qualified Income is based on profit, which you means you can withdraw quite a bit of money from a Taxable Account without generating an equal amount of Qualified Income. For example, if your shares are worth twice as much as you bought them for, then you'd be able to withdraw $60,000 from a Taxable Account and only generate $30,000 of Qualified Income.
    • The progressive tax brackets associated with Qualified Income are more complicated than they may seem. You can't see that the 0% bracket has a $77,200 limit, generate $77,200 of Qualified Income, and expect that you won't generate a tax bill. You have to account for your Deductions, Qualified Income, Ordinary Income, and how Dividends are often split between the two

    0% Tax on Ordinary Income
    Our previous discussion regarding minimizing (or eliminating) taxation on Qualified Income alluded to the fact that it's also possible to minimize (or eliminate) taxation on Ordinary Income as well. This is possible if your Ordinary Income is less than or equal to your Deductions (Tax Credits play a role too, but we'll save that for later).

    Example #1 --- Ideal Case

    • Standard Deduction = $24,000
    • Ordinary Income = $24,000

    When you subtract the Standard Deduction from the Ordinary Income, you're left with $0. As a result the Ordinary Income will not generate a tax bill.

    Example #2 --- Exceeding the Standard Deduction

    • Standard Deduction = $24,000
    • Ordinary Income = $43,050

    When you subtract the Standard Deduction from the Ordinary Income, you're left with $19,050 which fills up the 10% bracket. As a result the Ordinary Income will generate a $1,905 tax bill.

    Example #3 --- Wasting the Standard Deduction

    • Standard Deduction = $24,000
    • Ordinary Income = $5,000

    When you subtract the Standard Deduction from the Ordinary Income, you're left with a negative number. As a result the Ordinary Income will not generate a tax bill, but you've left $19,000 of Deductions unused. As far as I know, there is no other way to make use of it, so it just goes to waste.

    Summary of 0% Taxation
    We've learned that taxes are assessed on both Ordinary Income as well as Qualified Income. Furthermore, we've learned that it's possible to receive a 0% tax rate on both Ordinary Income and Qualified Income. Usually our income during our working years is high enough that it spills beyond the 0% tax brackets. However, during retirement we have the ability to limit our income to the 0% tax brackets!

    Consider the three types of accounts you're likely to have in retirement:

    • A Roth IRA allows money to grow tax free each year and money can be withdrawn tax-free whenever you choose. Since this account is beyond the reach of the IRS, we'll want to focus on extracting as much tax-free money from the other accounts before we begin to deplete this account.
    • A Traditional IRA allows money to grow tax-free, but withdrawals are treated as Ordinary Income and therefore may generate a tax bill. Additionally, when you're old enough, you'll be forced to take a Required Minimum Distribution (RMD) every year. The fact that you can't control the size of an RMD means that it may force you into higher tax brackets for both Ordinary Income as well Qualified Income.
    • A Taxable Account generates dividends every year, which are split between Qualified Income and Ordinary Income depending on how the mutual fund is managed. Additionally, withdrawals generate Qualified Income based on the Capital Gains tied to the shares you sold in the account.

    Using all of this knowledge allows us to develop a basic game plan to eliminate taxation in retirement:

    • The Dividends from your Taxable Account will consume part of your Deductions, but the remaining portion of the Deductions should be used to move as much money as possible from your Traditional IRA to your Roth IRA (Roth Conversion), without having to pay any tax.
      • Reducing the balance of your Traditional IRA minimizes a significant source of future taxation.
      • You'll want to take advantage of this right away. In future years, your Deductions may be partially or entirely consumed when you're "forced" to draw on other forms of Ordinary Income (Social Security, RMDs, etc), which would severely impact (or eliminate) your ability to perform tax-free Roth Conversions.
    • Always sell enough from your Taxable Account to fill up the 0% bracket associated with Qualified Income.
      • Given that nearly all of your Ordinary Income is being used to perform tax-free Roth Conversions, you'll likely have to sell a portion of your Taxable account just to pay the bills.
      • However, when you sell enough from your Taxable Account to fill up the 0% bracket, you'll likely have far more money than you actually need for living expenses. In that case, you'd immediately invest the excess money in a similar mutual fund. This is referred to as "Tax Gain Harvesting" because at no tax cost to you, you're effectively reducing the amount of Capital Gains in your Taxable Account. This will be useful later on if you're ever forced to exceed the 0% tax bracket because you'll be able to sell shares that have minimal (possibly no) capital gains.
      • I don't want to get into the details, but you'll need to familiarize yourself with something called "Specific Identification" when selling shares from your Taxable Account.

    Now we have a rough understanding of how the tax code works and how we can utilize that knowledge to avoid taxation in retirement, let's try to gain a more concrete understanding through the example of a hypothetical married couple. Suppose our couple's annual living expenses are $60,000 and suppose they have a Taxable Account, Traditional IRA, and Roth IRA.

    Throughout the year their Taxable Account generated $15,000 of Dividends, which is divided into $13,000 of Qualified Dividends and $2,000 of Unqualified Dividends. As of this moment, our couple's tax situation is as follows:

    • Ordinary Income = $2,000
    • Qualified Income = $13,000

    As we've already learned, the Standard Deduction allows for $24,000 of tax-free Ordinary Income per year. Our couple understands that their $2,000 of Unqualified Dividends count towards that limit and they decide to convert $22,000 from their Traditional IRA to their Roth IRA. After doing that, our couple's tax situation is as follows:

    • Ordinary Income = $24,000 (2k + 22k)
    • Qualified Income = $13,000
    • Standard Deduction = $24,000
    • Taxable Income = $13,000

    It's fantastic that our couple was able to convert $22,000 to their Roth IRA without paying taxes, but how will they cover their $60,000 yearly expenses? They've only received $15,000, so they'll have to turn to their Taxable Account to cover the $45,000 shortfall. Let's simplify the math by assuming everything they own in their Taxable Account is worth 2x as much as they paid for it. Therefore, when they withdraw $45,000 from their Taxable Account it'll generate $22,500 of Capital Gains. As of this moment, our couple's tax situation is as follows:

    • Ordinary Income = $24,000 (2k + 22k)
    • Qualified Income = $35,500 (13k + 22.5k)
    • Standard Deduction = $24,000
    • Taxable Income = $35,500

    If our couple were to stop right now, they wouldn't owe any tax at all. Their Ordinary Income wouldn't be taxed because it is less than or equal to the Standard Deduction and their Qualified Income wouldn't be taxed because their Taxable Income is less than or equal to the $77,200 limit of the 0% tax bracket for Qualified Income. However, our couple wants to prepare for future tax years that may require them to increase spending and potentially push them beyond the 0% tax brackets that they're currently enjoying. They know that in those circumstances they could always utilize their Roth IRA for tax-free income, but they'd like to give themselves another option because utilizing the Roth account should be a last resort.

    With this in mind, our couple decides to make use of the remaining room in the 0% tax bracket by Tax Gain Harvesting. Currently their Taxable Income is $35,500, which means they can realize another $41,700 of Capital Gains and still remain below the $77,200 limit of the 0% bracket. Therefore, our couple decides to sell $83,400 from their Taxable Account and immediately reinvest that money in a similar fund. As of this moment, our couple's tax situation is as follows:

    • Ordinary Income = $24,000
    • Qualified Income = $77,200 (13k + 22.5k + 41.7k)
    • Standard Deduction = $24,000
    • Taxable Income = $77,200

     As you can probably calculate on your own, our couple will not owe a single penny in taxes despite $167,400 worth of transactions throughout the year:

    • $24,000 was converted from a Traditional IRA to a Roth IRA
    • $15,000 of dividends from the Taxable Account was used to pay the bills.
    • $45,000 was withdrawn from the Taxable Account to pay the bills.
    • $83,400 was exchanged within the Taxable Account to eliminate capital gains tied to the Taxable Account.


    I think you've got it figured out--nice job! I've used the 0% cap gains rate and Tax Gain Harvesting to do rebalancing out of some "legacy" funds in our taxable account. Because we have pensions, social security and RMDs, we're in the 12% income tax bracket, 6% effective rate.

  19. I wonder if leaving copies of one or more of the NY Times 403b articles in the Teacher's "Lounge" might snag some interest? You know, where teachers pass some time during their non-teaching periods? Maybe chatting or drinking coffee? I retired 27 years ago so I'm out of touch. 

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