Tax discussion, strategies and questions

[mongo]

No, convert your traditional IRA funds to a Roth IRA. In a conversion you'll pay ordinary taxes on the amount converted, but you'll have zero capital gains from that point on with the Roth converted funds. If you leave funds in a traditional IRA, you continue to differ taxes until you tap the month, but you wind up paying your marginal income tax rate on the capital gains. So if you're in a high tax bracket, say 35% is your marginal tax on ordinary income, you are also incurring a 35% tax rate on your capital gains. But Roth pushes your capital tax rate down to 0%. Even just converting your traditional IRA to a taxable brokerage account you'll likely pay 15% or 20% capital gains in stead of facing 35% tax rate on the traditional IRA.

Roth conversions are pretty important for any aggressive growth investor. I'm looking for 30% or more annual return on my Tesla shares. In about two decades, when I hit 72 and am required to start taking significant distributions from my IRA, I will have enormous gains on the Tesla shares. Moreover, the total value of my Tesla position could be so large that these required minimum distributions lock me into the highest ordinary tax brackets for the rest of my life and must be paid by my estate. If on the other hand, I convert these shares to a Roth account, I avoid any capital gains on these shares post Roth conversion. Moreover, my heirs can inherit the Roth accounts without paying taxes on them.

A traditional IRA really works out as a tax advantage, if you truly intend to be in a substantially lower tax bracket in retirement and if you are such a conservative investor that your capital gains fail to keep up with inflation. Most Tesla investors will find that a Roth conversion is a much better tax strategy. Oh, yeah, you can always give your traditional IRA to charity and avoid all the deferred taxes. So there is some portion of my traditional IRA that I will never convert, but will simply hold for charitable giving. This avoids the taxes paid on a Roth conversion, but I think it should be an intentional choice to give your wealth away and not just a corner you get backed into later on in life.

Just to add to this regarding the effective tax rate at conversion vs retirement. The traditional IRA rollover stack o top of your existing income, so one gets hit with the worst tax bracket(s). If this is higher than the brackets in retirement, then one is better off not rolling over. When calculating, remember that the tax brackets and (standard) deduction reset each year. A staged rollover (is this a thing?) would be beneficial, especially at the brackets with big jumps.
When doing the calculation, also keep in mind that a lower tax payment is not necessarily better. Quick example: $1,000 in an IRA, roll over at 24%, pay $240, and have $760 in a Roth. Stock grows 10x, now you have $7,600 tax free.
Versus, leave is in the traditional, x10 to $10,000. Even if it still taxed at 24%, you pay $2,400 in tax, but still get $7,600 post tax.
For married jointly in 2021 the standard deduction is 25,100, so over 20 years of retirement that is half a million tax free. Then ~$200k at 10%, $600k at 12%, $900k @ 22%, ~$1.6 million at 24%, then the jump to 32%..
On the other hand, if one will be pulling big bucks out at once in retirement, and such would hit the higher brackets then versus rolling over now (meaning growth of the account above the brackets), that's a good reason to rollover.

 

[jhm]

A staged conversion can be tricky if you already have too much Tesla in an IRA. Suppose you and your spouse are both 60 years old, have $2M in Tesla stock, and want to do annual conversions over the next 12 years (when you hit 72 and RMD). Let's also assume that over the next 12 years Tesla grows at 30% per year on average. So if you want to pull out a constant amount each year to stay in the lowest possible tax bracket, you need to convert $626,908 each year. This alone puts you and your spouse (filling jointly) just about the top tax bracket (starts at $628,301), paying 37% plus state taxes on any additional ordinary income you may have. At the bottom of this bracket, your tax bill (ignoring everything else) is about $169k federal. Additionally, this puts all you other long-term capital gains into the 20% bracket, rather than just 15%. So if you happen to have some Tesla in your taxable brokerage account, you're locked into paying the high taxes on any of your realized gains. So I don't think the staged approach really helps much in this case, and if Tesla actually appreciates faster, you're really toast for taxes.

On the other hand, if you convert the whole amount in the first year, you pay about $676,500 upfront (plus any other taxes). You could maybe look at borrowing money needed for your tax bill, perhaps borrowing against your taxable portfolio or equity in your home. This enables you to keep the $2M of Tesla in your Roth, where you will never pay anymore taxes for it. Suppose you can use a margin loan at 6%. To pay off the 676,500 in upfront taxes on your Roth conversion, you have an annual payment of $80,700.

So basically if you stage the conversions you're paying about $169k per year in taxes (minimum) for 12 years, but if you finance the Roth conversion at 6% you only pay $80.7k for the next 12 year, you keep all your Tesla shares, and you have no ordinary income from the IRA after the conversion year. Specifically, if you can keep your ordinary income below $502k, your LT cap gains rate is 15%. But what is really wild is if you can keep your ordinary income below $80k (jointly filling), your LT cap gains rate drops to 0%.

So basically, since you have wiped out all of your deferred ordinary income in your IRA in one year, you have durably dropped yourself into a much lower tax bracket (both ordinary and cap gains) for the rest of your life. This also illustrates why Democrats are considering putting limits on how much one can Roth convert each year. They want to slow the pace of conversion so that you are forced to pay higher taxes on your IRA and other investments for a longer time.

BTW, I chose the hypothetical of $2M Tesla IRA because that puts a couple right at the point where they are virtually stuck in the highest tax brackets unless they do a really big upfront conversion. If a couple's IRA is even larger, the taxes liability gets much worse. The smaller the IRA at the start of retirement and the more conservative the investment returns, the less a quick Roth conversion matters. That is, if you can remain in a lower tax bracket pulling up to 10% per year from your IRA, then it could be fine to just to stay put. Consulting with a tax advisor can sort this out.

 

[adiggs]

A staged conversion can be tricky if you already have too much Tesla in an IRA. Suppose you and your spouse are both 60 years old, have $2M in Tesla stock, and want to do annual conversions over the next 12 years (when you hit 72 and RMD). Let's also assume that over the next 12 years Tesla grows at 30% per year on average. So if you want to pull out a constant amount each year to stay in the lowest possible tax bracket, you need to convert $626,908 each year. This alone puts you and your spouse (filling jointly) just about the top tax bracket (starts at $628,301), paying 37% plus state taxes on any additional ordinary income you may have. At the bottom of this bracket, your tax bill (ignoring everything else) is about $169k federal. Additionally, this puts all you other long-term capital gains into the 20% bracket, rather than just 15%. So if you happen to have some Tesla in your taxable brokerage account, you're locked into paying the high taxes on any of your realized gains. So I don't think the staged approach really helps much in this case, and if Tesla actually appreciates faster, you're really toast for taxes.

On the other hand, if you convert the whole amount in the first year, you pay about $676,500 upfront (plus any other taxes). You could maybe look at borrowing money needed for your tax bill, perhaps borrowing against your taxable portfolio or equity in your home. This enables you to keep the $2M of Tesla in your Roth, where you will never pay anymore taxes for it. Suppose you can use a margin loan at 6%. To pay off the 676,500 in upfront taxes on your Roth conversion, you have an annual payment of $80,700.

So basically if you stage the conversions you're paying about $169k per year in taxes (minimum) for 12 years, but if you finance the Roth conversion at 6% you only pay $80.7k for the next 12 year, you keep all your Tesla shares, and you have no ordinary income from the IRA after the conversion year. Specifically, if you can keep your ordinary income below $502k, your LT cap gains rate is 15%. But what is really wild is if you can keep your ordinary income below $80k (jointly filling), your LT cap gains rate drops to 0%.

So basically, since you have wiped out all of your deferred ordinary income in your IRA in one year, you have durably dropped yourself into a much lower tax bracket (both ordinary and cap gains) for the rest of your life. This also illustrates why Democrats are considering putting limits on how much one can Roth convert each year. They want to slow the pace of conversion so that you are forced to pay higher taxes on your IRA and other investments for a longer time.

BTW, I chose the hypothetical of $2M Tesla IRA because that puts a couple right at the point where they are virtually stuck in the highest tax brackets unless they do a really big upfront conversion. If a couple's IRA is even larger, the taxes liability gets much worse. The smaller the IRA at the start of retirement and the more conservative the investment returns, the less a quick Roth conversion matters. That is, if you can remain in a lower tax bracket pulling up to 10% per year from your IRA, then it could be fine to just to stay put. Consulting with a tax advisor can sort this out.

Well heckfire. This makes a ton of sense and has me thinking that I need to learn more about Roth conversions.

Gold quality information, except gold isn't as valuable.

 

[mongo]

A staged conversion can be tricky if you already have too much Tesla in an IRA. Suppose you and your spouse are both 60 years old, have $2M in Tesla stock, and want to do annual conversions over the next 12 years (when you hit 72 and RMD). Let's also assume that over the next 12 years Tesla grows at 30% per year on average. So if you want to pull out a constant amount each year to stay in the lowest possible tax bracket, you need to convert $626,908 each year. This alone puts you and your spouse (filling jointly) just about the top tax bracket (starts at $628,301), paying 37% plus state taxes on any additional ordinary income you may have. At the bottom of this bracket, your tax bill (ignoring everything else) is about $169k federal. Additionally, this puts all you other long-term capital gains into the 20% bracket, rather than just 15%. So if you happen to have some Tesla in your taxable brokerage account, you're locked into paying the high taxes on any of your realized gains. So I don't think the staged approach really helps much in this case, and if Tesla actually appreciates faster, you're really toast for taxes.

On the other hand, if you convert the whole amount in the first year, you pay about $676,500 upfront (plus any other taxes). You could maybe look at borrowing money needed for your tax bill, perhaps borrowing against your taxable portfolio or equity in your home. This enables you to keep the $2M of Tesla in your Roth, where you will never pay anymore taxes for it. Suppose you can use a margin loan at 6%. To pay off the 676,500 in upfront taxes on your Roth conversion, you have an annual payment of $80,700.

So basically if you stage the conversions you're paying about $169k per year in taxes (minimum) for 12 years, but if you finance the Roth conversion at 6% you only pay $80.7k for the next 12 year, you keep all your Tesla shares, and you have no ordinary income from the IRA after the conversion year. Specifically, if you can keep your ordinary income below $502k, your LT cap gains rate is 15%. But what is really wild is if you can keep your ordinary income below $80k (jointly filling), your LT cap gains rate drops to 0%.

So basically, since you have wiped out all of your deferred ordinary income in your IRA in one year, you have durably dropped yourself into a much lower tax bracket (both ordinary and cap gains) for the rest of your life. This also illustrates why Democrats are considering putting limits on how much one can Roth convert each year. They want to slow the pace of conversion so that you are forced to pay higher taxes on your IRA and other investments for a longer time.

BTW, I chose the hypothetical of $2M Tesla IRA because that puts a couple right at the point where they are virtually stuck in the highest tax brackets unless they do a really big upfront conversion. If a couple's IRA is even larger, the taxes liability gets much worse. The smaller the IRA at the start of retirement and the more conservative the investment returns, the less a quick Roth conversion matters. That is, if you can remain in a lower tax bracket pulling up to 10% per year from your IRA, then it could be fine to just to stay put. Consulting with a tax advisor can sort this out.

Interesting point on Tesla growth rate. In that event, the $676k in external funds, if in TSLA, would generate $200k a year (pretax of course).
I was thinking of a scenario with a much lower value for the Roth rollovers.

If distributions are going to put someone in the max bracket (as is the rollover), and they have minimal taxable accounts for capital gains concerns, wouldn't they be better off in a traditional IRA to utilize the standard and lower tax brackets each year (thus lowering their effective tax rate)?

 

[jhm]

Interesting point on Tesla growth rate. In that event, the $676k in external funds, if in TSLA, would generate $200k a year (pretax of course).
I was thinking of a scenario with a much lower value for the Roth rollovers.

If distributions are going to put someone in the max bracket (as is the rollover), and they have minimal taxable accounts for capital gains concerns, wouldn't they be better off in a traditional IRA to utilize the standard and lower tax brackets each year (thus lowering their effective tax rate)?

I would suggest playing around with a spreadsheet to game it out. If someone has limited exposure to taxable capital gains, that would weaken the case for a big Roth conversion. Also if the IRA smaller, the case for Roth conversion can be weaker.

But all that said, Tesla has the potential tor really take off. There is the potential for jumping into an unexpected high wealth tax scenario. For example, suppose you have just $300k Tesla in an IRA and Ark's price target is on the money. So in 2025 you've got $1M. Furthermore suppose Tesla keeps growing 40% per year. So if you take no deductions, in 2027 you're looking at $2M in your IRA. Let's say you start taking 5% distributions. Fine, now in 2029 your little IRA is now $3.65M. You get the point. Tesla can outgrow your tax strategy.

Even if you don't need more income to live on, you might want to consider limiting how big you allow your IRA to grow, and Roth conversions are one of the best choice for taking distributions larger than your income needs. As strange as is sounds, you probably don't want to sit back and watch your IRA double.

 

[ammulder]

For example, suppose you have just $300k Tesla in an IRA and Ark's price target is on the money. So in 2025 you've got $1M. Furthermore suppose Tesla keeps growing 40% per year. So if you take no deductions, in 2027 you're looking at $2M in your IRA. Let's say you start taking 5% distributions. Fine, now in 2029 your little IRA is now $3.65M

But big picture, this (300k->3.6M by 2029) means Tesla is a $10 Trillion company. I think that’s already best possible case, and you can’t forecast 40% annual growth beyond that. It’s not so many more years before that math leads to Tesla being bigger than all the rest of the market combined.

Its all well and good to plan for growth, but to accept a $600k tax bill today (as I believe a previous post suggested) because you forecast constant massive stock appreciation seems like a big jump to me. I expect this is into the realm of “individual circumstances” and “tax advisor” as I think you’ve said.

 

[jhm]

But big picture, this (300k->3.6M by 2029) means Tesla is a $10 Trillion company. I think that’s already best possible case, and you can’t forecast 40% annual growth beyond that. It’s not so many more years before that math leads to Tesla being bigger than all the rest of the market combined.

Its all well and good to plan for growth, but to accept a $600k tax bill today (as I believe a previous post suggested) because you forecast constant massive stock appreciation seems like a big jump to me. I expect this is into the realm of “individual circumstances” and “tax advisor” as I think you’ve said.

These are all just scenarios. When your trying to figure out your tax strategy, it's good to consider some worse case scenarios!

My wife and I will probably leave some money in our IRA for charity. No point in paying the cost of Roth conversion if you're just going to give it away. So in this worst case scenario where Tesla gobbles up the market cap of the universe, some charity will benefit from that!

A perfectly valid tax strategy is just to leave all your investments in an IRA. Take distributions based on what you need and what the RMD requires. Give to charity any excess distribution and whatever remains. This keeps your tax bill limited to whatever you choose to live on, and in your lifetime the remainder serves as a reserve against the risk of running out of retirement income. Even RMDs in excess of what you live on can be substracted from your taxable income because they are given to charity. If you like this sort of approach, you might also consider a charitable remainder trust.

 

[abasile]

As currently proposed, the "Build Back Better Act" would also prohibit the use of IRA funds for investments requiring accredited investor status, and require the divestment of such investments in existing IRAs. This would be a problem for those who've used IRAs to invest in private companies. In the Tesla investor community, there are individuals who've used IRA funds to gain exposure to SpaceX.

See Democrat Tax Proposals For Retirement Accounts Will Affect More Than The Wealthy

This would be bad for middle class people who've endeavored to diversify their IRAs beyond the usual stocks and bonds. Accredited investor status is a relatively low bar. If you're middle aged with a successful career and you've consistently contributed to retirement plans, it's not unexpected that you might have > $1m in investments (especially if you bought TSLA). Forcing such people to arbitrarily liquidate IRA investments is bad policy!

 

[UncaNed]

Would I have to sell all TSLA and not buy back in for 31 days in BOTH my taxed AND my Roth accounts to make the WASH liability go away? Or could I sell all my TSLA shares and options in only my personal account while leaving my Roth account as-is for that 31 days?

 

[mongo]

Would I have to sell all TSLA and not buy back in for 31 days in BOTH my taxed AND my Roth accounts to make the WASH liability go away? Or could I sell all my TSLA shares and options in only my personal account while leaving my Roth account as-is for that 31 days?

Is your situation that you sold some TSLA at a loss in your taxed account and also bought TSLA in your Roth within 30 days of the sale; and now you want to sell and claim the loss?

 

[UncaNed]

Is your situation that you sold some TSLA at a loss in your taxed account and also bought TSLA in your Roth within 30 days of the sale; and now you want to sell and claim the loss?

I haven't done this yet; I'm considering selling some losing LEAPS in my personal account at a loss so I can buy shares or perhaps later-expiring LEAPS instead.

If I do, it will be longer than 30 days since I will have bought anything in my Roth.

 

[mongo]

I haven't done this yet; I'm considering selling some losing LEAPS in my personal account at a loss so I can buy shares or perhaps later-expiring LEAPS instead.

If I do, it will be longer than 30 days since I will have bought anything in my Roth.

As long as you do not buy substantially identical items within 30 days either side in any account, you should be good.
There was a discussion a while back in the main forum and the consensus was that largely dissimilar strikes/ expirations are considered non equivalent, but do your own due diligence.
If the new were equivilent, the wash would adjust the basis of your new position, so it becomes a deferred loss.
WARNING!, if you sell for a loss in the taxable and purchase within 30 in a retirement plan, you lose the loss permanently.

 

[bigsmooth125]

Has anyone considered moving to and taking up residence in Puerto Rico to avoid cap gains taxes? If so, what are your thoughts.

 

[kcveins]

Has anyone considered moving to and taking up residence in Puerto Rico to avoid cap gains taxes? If so, what are your thoughts.

No I haven't.

Good article outlining why not...

6 Reasons the Puerto Rico Tax Incentives Aren’t all They’re Cracked up to be – US Tax Services

Lots of offshore gurus are pushing Puerto Rico these days. As usual, the picture isn’t quite as rosy once you dig below the surface.

ustax.bz

 

[bigsmooth125]

No I haven't.

Good article outlining why not...

6 Reasons the Puerto Rico Tax Incentives Aren’t all They’re Cracked up to be – US Tax Services

Lots of offshore gurus are pushing Puerto Rico these days. As usual, the picture isn’t quite as rosy once you dig below the surface.

ustax.bz

Thanks for the article. Here's another one: Move To Puerto Rico, Slash Your Taxes To Zero? Not Exactly. If you're willing to reside in PR for ten years, you can avoid all cap gains taxes on the sale of stocks purchased before the move and sold after that ten year period.

 

[bkp_duke]

Thanks for the article. Here's another one: Move To Puerto Rico, Slash Your Taxes To Zero? Not Exactly. If you're willing to reside in PR for ten years, you can avoid all cap gains taxes on the sale of stocks purchased before the move and sold after that ten year period.

You guys ever been to PR? I'm not sure I could live there for a year, much less 10.

 

[Jetpad]

I'm mostly all in Tesla in my after tax brokerage account and in my IRA account. I just realized that if you are holding Tesla stock for the long term (like 10+ years), the IRA account has a gotcha that I hadn't thought about. Your gains will be taxed at the 15%-20% long term capital gains rate in the regular account but in the IRA, it'll be at the much higher federal income tax rate. Of course this is for the US and your state taxes will also treat them differently too.

 

[UncaNed]

I'm mostly all in Tesla in my after tax brokerage account and in my IRA account. I just realized that if you are holding Tesla stock for the long term (like 10+ years), the IRA account has a gotcha that I hadn't thought about. Your gains will be taxed at the 15%-20% long term capital gains rate in the regular account but in the IRA, it'll be at the much higher federal income tax rate. Of course this is for the US and your state taxes will also treat them differently too.

Convert it to a Roth IRA ASAP so you pay the tax based on it's current value, but all future earnings are totally untaxed! This is the best tax advice I was ever given!! ...unless we are not talking about the same thing...

Not an advice.

Edit-

I've thought about that but it seems like if you have $100,000 IRA and convert it with an example of a 33% tax rate and then invest the resulting $66,000 in a Roth, you'll have a 1/3 less (but tax free) at the end instead of paying that 1/3 in taxes at the end. Seems like you end up with about the same amount of money.

Ah! That sounds logical. I hope others smarter than myself will chime in on this... I'd like to compare Traditional IRA vs. Roth, but also compare for buy and HODL shares type- investors vs. those with simple LEAPS and the smart kids doing the wheel thingy...

OT: The big difference is that a Roth isn't subject to RMD's. So you could end up being forced to take large distributions from a traditional IRA that you don't want.

Edit - I searched for an appropriate US tax-related thread, but was not smart enough to find one - WHAT TO DO?
Otherwise, sorry if this is OT, I will not make any more posts on this... but I think it is useful and relevant for us US folks.

 

[mongo]

I'm mostly all in Tesla in my after tax brokerage account and in my IRA account. I just realized that if you are holding Tesla stock for the long term (like 10+ years), the IRA account has a gotcha that I hadn't thought about. Your gains will be taxed at the 15%-20% long term capital gains rate in the regular account but in the IRA, it'll be at the much higher federal income tax rate. Of course this is for the US and your state taxes will also treat them differently too.

Yeah, but that's 10-20% tax on the post-tax investment (edit: earnings taxed twice). IRA withdrawls are only taxed once.
Roth IRA is post-tax investment, and not taxed again.

 

[thx1139]

I'm mostly all in Tesla in my after tax brokerage account and in my IRA account. I just realized that if you are holding Tesla stock for the long term (like 10+ years), the IRA account has a gotcha that I hadn't thought about. Your gains will be taxed at the 15%-20% long term capital gains rate in the regular account but in the IRA, it'll be at the much higher federal income tax rate. Of course this is for the US and your state taxes will also treat them differently too.

Raises hand. I know how you feel.