The end of 2016 marks the completion of 4 full years of choosing leisure over labor.

It’s been a fun ride so far… we’ve seen a large swathe of the world, birthed a baby, and experienced 5 or 6 minutes of fame.

But how effective have these 4 years been in terms of implementing our tax minimization strategies? Are Roth IRA Conversions and Capital Gain Harvesting just fantasies we keep while working, or do they actually produce results in the real world?

Let’s do a financial check-up and see how we are doing.

Spoiler alert: In the years 2013 – 2016, we will have an effective income tax burden of minus $5. (Yes, the IRS paid us $5 last year.)

By itself a zero tax burden isn’t that impressive… I hear a Presidential candidate once claimed 47% of all Americans do the same, so this just makes us average.

But in all other metrics, our results are way off the charts.

Roth IRA Conversions

A Roth IRA conversion allows us to move $ from our Traditional IRA to a Roth IRA. This is a taxable event, but each year we only convert an amount such that we still have a 0% tax rate.

To date we have converted $23,811.26 completely tax free.

2012: $12,028
2013: $5,744
2014: $0
2015: $6,039.26 (potential to recharacterize a portion)
Total: $23,811.26

Roth IRA Contributions

Because we’ve accidentally earned some income these past few years, we’ve also been able to make normal Roth IRA contributions. With the blogging income, I’m also able to contribute to a solo 401k. Winnie’s book income has the same potential, depending on how we do our 2017 taxes. (Without blog or book income, I would have just increased the size of our Roth IRA conversions.)

In total, we have been able to contribute $59,846 to Roth accounts.

2012: $0
2013: $1,846
2014: $29,000
2015: $29,000
Total: $59,846

The beauty of these Roth accounts is that we’ve paid exactly zero taxes on any of these dollars, and now they will grow tax free forever.

Case in point:

While our contributions and conversions total only $83,657.26, the actual value of these Roth accounts has grown to $96,521.36. This was easy to figure out, because the value of our Roth accounts 4 years ago was exactly $0.

By the time we reach traditional retirement age, we will potentially have $500k in tax free dollars waiting for us in these Roth accounts, even without another contribution or conversion (assuming 7% annual growth, blah blah blah.)

Capital Gain Harvesting

Since the stock market has been generally headed northward these past 4 years, we have no shortage of capital gains to harvest. Without going into great detail, this basically means to sell a stock that has increased in value and then buy it back with increased basis. This is a taxable event, but with a tax rate of 0% it works out.

If you want a real world example of harvesting a capital gain, I’ve written a template based on the trades I executed in December 2016. Fill out this form and I’ll email it to you.



These past 4 years, I’ve harvested $143,459 in capital gains.

2012: $44,197
2013: $46,725
2014: $23,737
2015: $28,800
Total: $143,459

If I had done this while working, we would have been taxed 15% or more on this gain. Instead, we get to keep that $21,519+ (and future growth thereof) for our own use. This increase in basis is now tax-free forever, and even increases our ability to harvest a capital loss in the future if that is beneficial at the time.

Any future growth would still be subject to taxation if/when we sell, but we can always harvest more gains next year.

Summary

As every manager forced to read the works of Peter Drucker knows,”What gets measured gets done” and “What gets measured gets improved.”

I don’t know about improved, but in terms of tax minimization we definitely got it done.

In 4 years, we were able to harvest capital gains of $143,459, convert $23,811.26 of our Traditional IRA to a Roth IRA, and add $59,846 to Roth accounts.

This was all done completely tax free, and all of these dollars will be tax free forever.

Well what do you know! This stuff works!

Have you had success with Roth Conversions and Capital Gain Harvesting?


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