Buying Treasury bills - great choice for cash reserves

[corn18]

Correct. All other income fills up the bracket first. So, if you have $80,800 of ordinary income after the standard deduction, you are out of space for 0% LTCG. For me, I have my pension of $49k and dividends from my taxable account. Let's say that is $60k total. Subtract the standard deduction for MFJ of $25,900 and that is $34,100 of income. Subtract that from $80,800 and I have $46,700 of room for 0% LTCG.

If I decide to do Roth conversions (or just withdraw from) my 401k, that impacts how much I have left for LTCG. Let's say I decide to do $30k of Roth conversions. That leaves $16,700 for LTCG.

Now let's say I get a late 1099 and my non qualified dividends were actually $15k. The dividends would push me over if I executed my plan. Roth conversions would fill up the 0% LTCG bracket faster, but would still be in the 12% tax bracket. So the Roth conversions would be taxed @ 12% and the LTCG that put me over the $80,800 would be taxed @ 15%. But only the amount of LTCG that puts me over $80,800.

SO think of it as filling a bucket and the last thing to go in is LTCG and qualified dividends.

This is a good article on how it works:

https://www.kitces.com/blog/understa...p-up-in-basis/

[disneysteve]

Correct. All other income fills up the bracket first. So, if you have $80,800 of ordinary income after the standard deduction, you are out of space for 0% LTCG. For me, I have my pension of $49k and dividends from my taxable account. Let's say that is $60k total. Subtract the standard deduction for MFJ of $25,900 and that is $34,100 of income. Subtract that from $80,800 and I have $46,700 of room for 0% LTCG.

Thanks! Great info that will come in handy soon. Not this year but next year.

[LivingAlmostLarge]

Correct. All other income fills up the bracket first. So, if you have $80,800 of ordinary income after the standard deduction, you are out of space for 0% LTCG. For me, I have my pension of $49k and dividends from my taxable account. Let's say that is $60k total. Subtract the standard deduction for MFJ of $25,900 and that is $34,100 of income. Subtract that from $80,800 and I have $46,700 of room for 0% LTCG.

If I decide to do Roth conversions (or just withdraw from) my 401k, that impacts how much I have left for LTCG. Let's say I decide to do $30k of Roth conversions. That leaves $16,700 for LTCG.

Now let's say I get a late 1099 and my non qualified dividends were actually $15k. The dividends would push me over if I executed my plan. Roth conversions would fill up the 0% LTCG bracket faster, but would still be in the 12% tax bracket. So the Roth conversions would be taxed @ 12% and the LTCG that put me over the $80,800 would be taxed @ 15%. But only the amount of LTCG that puts me over $80,800.

SO think of it as filling a bucket and the last thing to go in is LTCG and qualified dividends.

This is a good article on how it works:

https://www.kitces.com/blog/understa...p-up-in-basis/

Thank you. But it's so hard with capital gain distributions (unable to determine) and dividends if you own ETF/MF to properly guess how much you can really convert and still have 0% LTCG or 15% LTCG.

There is a guy on Bogelheads who is retiring super early and not doing roth conversions. Instead he's doing SEPP72 but you are close enough that it likely won't matter. He's doing it because everything is in 401k,457 but almost nothing in taxable accounts which makes it difficult but not impossible to FIRE. he's retiring at 44, but the plan for retirement and 72SEPP is solid with the new rule change. His bigger problem is actually having enough in the portfolio to retire.

[corn18]

Thank you. But it's so hard with capital gain distributions (unable to determine) and dividends if you own ETF/MF to properly guess how much you can really convert and still have 0% LTCG or 15% LTCG.

There is a guy on Bogelheads who is retiring super early and not doing roth conversions. Instead he's doing SEPP72 but you are close enough that it likely won't matter. He's doing it because everything is in 401k,457 but almost nothing in taxable accounts which makes it difficult but not impossible to FIRE. he's retiring at 44, but the plan for retirement and 72SEPP is solid with the new rule change. His bigger problem is actually having enough in the portfolio to retire.

That's the trick with Roth conversions and LTCG. If you're off by a little, it ain't so bad. Just pay 15% on the LTCG.

[disneysteve]

Thank you. But it's so hard with capital gain distributions (unable to determine) and dividends if you own ETF/MF to properly guess how much you can really convert and still have 0% LTCG or 15% LTCG.

This is always our problem. We own a couple of active mutual funds from when we were young and stupid and hadn't discovered index funds yet. Some years they pay out a relatively small year-end distribution. Some years (like 2021) we get hammered. I think they paid out around 20K last year. Those are at the top of my list of things to start selling off in retirement when we can hopefully take advantage of that 0% LTCG rate. I've held onto them all these years because I didn't want to deal with the taxes.

[rennigade]

Thank you. But it's so hard with capital gain distributions (unable to determine) and dividends if you own ETF/MF to properly guess how much you can really convert and still have 0% LTCG or 15% LTCG.

There is a guy on Bogelheads who is retiring super early and not doing roth conversions. Instead he's doing SEPP72 but you are close enough that it likely won't matter. He's doing it because everything is in 401k,457 but almost nothing in taxable accounts which makes it difficult but not impossible to FIRE. he's retiring at 44, but the plan for retirement and 72SEPP is solid with the new rule change. His bigger problem is actually having enough in the portfolio to retire.

What's the new 72sepp rule?

[LivingAlmostLarge]

https://www.kitces.com/blog/rule-72t-sepp-calculate-payments-rmd-avoid-penalty-tax-early-ira-withdrawals-notice-2022-6/?utm_campaign=coschedule&utm_source=facebook_page&utm_medium=Kitces.com&utm_content=Strategies%20For%20Maximizing%20%28Or%20Minimizing%29%20Rule%2072%28t%29%20Early%20Distribution%20Payments%20Using%20IRS%20Notice%202022-6&fbclid=IwAR0MMRZLZfbFyhPUEa0RMbqzlQFWT7-a0xRYJy-YWpnRlhPRgRF-iz-4FOE

read that.

[james.hendrickson]

Nice find Living:

Posted the first three paragraphs of the article for those too lazy to navigate away:

EXECUTIVE SUMMARY

Sometimes there are situations where individuals need access to funds in their tax-deferred retirement accounts sooner than the rules say they can. In fact, except for a narrow range of ‘emergency’ situations, the only way most individuals can access these funds without incurring a 10% early withdrawal penalty tax is by setting up a “Series of Substantially Equal Payments”, otherwise known as 72(t) payments.

Until recently, however, the interest rates used to calculate the amounts of 72(t) payments have been so low that the payments themselves often weren’t enough to meet the needs of individuals who wanted to access their retirement funds. But, with the recent release of IRS Notice 2022-6, the potential amount of 72(t) payments many individuals can make has been substantially increased. Which means that 72(t) payments might now be a more realistic option for individuals who need early access to their retirement funds!

For those who wish to receive 72(t) payments, there are several rules which must be considered. First, those receiving 72(t) payments must take recurring annual distributions for either 5 years or until reaching age 59 ½ – whichever is longer. Second, taxpayers must use one of three methods established by the IRS to calculate their 72(t) payments: RMD, amortization, or annuitization. Regardless of which method is used to calculate payment, the price for altering or canceling a 72(t) payment is steep, usually resulting in a 10% penalty tax on all distributions previously taken – plus interest!

Source: Kitces.com

[rennigade]

So there is now a way to avoid the 10% penalty it appears by taking equal distributions for 5 years and making sure you're past 59.5.

[MoneyMike]

Treasury bills are one way to accomplish savings goals, and the effort is certainly better than most Americans make. However, I think this is THE definitive moment for I-Bonds. Now that the rate is almost 10% (which is already higher than the long-term S&P annual return), and since the risk is virtually zero, I-Bonds are arguably the SAFEST place to put money and watch it grow right now.

[james.hendrickson]

Treasury bills are one way to accomplish savings goals, and the effort is certainly better than most Americans make. However, I think this is THE definitive moment for I-Bonds. Now that the rate is almost 10% (which is already higher than the long-term S&P annual return), and since the risk is virtually zero, I-Bonds are arguably the SAFEST place to put money and watch it grow right now.

Correct. I bonds currently have a nearly 10 percent interest rate. Per Treasurydirect:

[disneysteve]

Treasury bills are one way to accomplish savings goals, and the effort is certainly better than most Americans make. However, I think this is THE definitive moment for I-Bonds. Now that the rate is almost 10% (which is already higher than the long-term S&P annual return), and since the risk is virtually zero, I-Bonds are arguably the SAFEST place to put money and watch it grow right now.

Agreed. Unfortunately you can only buy 10K/person/year. And I wouldn’t say they’re the safest as t-bills are just as safe. But you can’t beat the rate.

[Nutria]

I wouldn't say they're the safest as t-bills are just as safe.

I Bonds not as safe as Treasury Bonds? Please explain.

[james.hendrickson]

I Bonds not as safe as Treasury Bonds? Please explain.

Aren't all treasury products backed by the full faith and credit of the US government? Their risk of government default (which is very, very low) should be comparable.

[disneysteve]

I Bonds not as safe as Treasury Bonds? Please explain.

They are equally safe. That’s what I said above. The post I was responding to said I bonds were safest.