Living off of Long term gains for tax free income

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edguev66
Posts: 10
Joined: Mon Oct 02, 2017 5:40 am

Living off of Long term gains for tax free income

Post by edguev66 »

Hello Folks,

I had the idea to start withdrawing my TSP balance aggressively for a few years and using the funds to invest in growth stocks. I plan on remaining in the 12% tax bracket while withdrawing and after 4 years (after having drained the TSP) selling the growth stock for any additional money I need. With my pension and SS (if it still exist) I already have enough to live comfortably, any withdrawals would be for traveling, unexpected costs, buying a car etc. This way I'm paying the taxes up front and then paying basically zero taxes until death. So, I know tax brackets may change and long term gains may start being taxed etc. I do plan on making sure my income is low enough to stay in the 0% capital gains bracket and based on my expected income less than 50% of my SS will be taxed leaving me in a very low tax stance. Is this a good long term strat or am I missing something ?

Thanks
Ed

PS I already have a nice sum in a Vanguard account that already has a good long term capital gain I can harvest for the first few years after TSP is dry.

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bloobs
Posts: 1632
Joined: Tue May 21, 2019 8:00 pm

Re: Living off of Long term gains for tax free income

Post by bloobs »

edguev66 wrote: Wed May 24, 2023 3:50 am Hello Folks,

I had the idea to start withdrawing my TSP balance aggressively for a few years and using the funds to invest in growth stocks. I plan on remaining in the 12% tax bracket while withdrawing and after 4 years (after having drained the TSP) selling the growth stock for any additional money I need. With my pension and SS (if it still exist) I already have enough to live comfortably, any withdrawals would be for traveling, unexpected costs, buying a car etc. This way I'm paying the taxes up front and then paying basically zero taxes until death. So, I know tax brackets may change and long term gains may start being taxed etc. I do plan on making sure my income is low enough to stay in the 0% capital gains bracket and based on my expected income less than 50% of my SS will be taxed leaving me in a very low tax stance. Is this a good long term strat or am I missing something ?

Thanks
Ed

PS I already have a nice sum in a Vanguard account that already has a good long term capital gain I can harvest for the first few years after TSP is dry.
My thoughts:
It seems like you're applying the Trad vs. Roth IRA approach to taxes, pay it all up front and never have to pay it again, which may work but strongly suggest you use a spreadsheet to qualify then numerically quantify this plan and its assumptions, which are:

1. The income taxes you pay for withdrawing your entire TSP balance at the start (which could be massive depending on your balance) do not ever exceed your net sum returns from private brokerage investments, and that....
2. All your future stock sales are long term and its amounts fall below the 0% capital gains rate threshold yearly.

The biggest unknown here is that there's no guarantee your growth stocks will do just as well or better than if you kept them in the TSP. The danger of investing through a brokerage is that the temptation to take on unmanaged risk is there--which can lead to disaster. Definitely don't want to be shorting stocks.

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Scarfinger
Posts: 811
Joined: Mon Jan 30, 2012 12:00 am

Re: Living off of Long term gains for tax free income

Post by Scarfinger »

I don't understand the whole of the question.

It kind of sounds like you are trying to do a rollover strategy from a IRA/401k tax deferred account into maybe a ROTH account. This would be the only way to guarantee that you would pay no taxes on any gains from the Roth account. You could invest the new ROTH money in only growth stocks/ETF's if you wanted to.

I believe currently long term tax rate on stocks is 15%. And that is assuming that your growth stocks grow.

But to me it would not make any sense to take money out of a tax advantaged account like an IRA/401K or Roth and invest in a taxable account.

They TSP already has some growth stocks in them. I don't understand your logic to invest in only growth stocks.

I think your overall strategy is flawed but I may not understand the complete strategy.
I am just an average Joe. I have no clue to what the market will do.
TimboSlice wrote: "People really need to stop overthinking this."
Paul Merriman 2 fund strat: (age - 25) x2.5 = TDF + balance into S fund or variation of

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evilanne
Posts: 2067
Joined: Thu May 14, 2015 6:52 pm

Re: Living off of Long term gains for tax free income

Post by evilanne »

edguev66
It makes sense if you can control your income to be under the threshold for your filing status & bracket (41.7K Single & $83K for Married https://www.nerdwallet.com/article/taxe ... -tax-rates ) if you miscalculate, it will put you into the 15% capital gains rate, which is still better than the 22% tax rate. Social Security can be tricky with both pension & tsp withdrawals, you would have to keep your total income below $34K Single or $44K Married or you jump up to maximum 85% of the SS being taxable https://www.ssa.gov/benefits/retirement ... yhf4eb9d17&&#!
I know people do use this strategy successfully. There are several different moving parts so you need to be careful to stay within those parameters.

Happy Trails!

edguev66
Posts: 10
Joined: Mon Oct 02, 2017 5:40 am

Re: Living off of Long term gains for tax free income

Post by edguev66 »

Thanks everyone for the feedback. Based on my calcs I can safety stay below the income cap for the 0% long term capital gains tax but unfortunately the social security income threshold is way too low to avoid being taxed there. This all should put me in a very low effective tax stance. Since all my stocks will be held 10 plus years, I think the chances are pretty good that I will indeed have a fair amount of growth to harvest later.

Thanks again,
Ed

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