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Death, Taxes and Early Retirement:

How I Developed an Unhealthy Obsession

With Federal Income Tax

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Buy when there’s blood in the streets, even if the blood is your own.

  • Nathan Rothschild

My idea, look for stocks with:

  1. A strong linear trend pre-covid
  2. A hard crash after Covid

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My mistakes:

  • Selling too soon
  • Believing “experts” about an impending crash
  • Buying individual stocks is risky

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CAPITAL GAINS ARE TAXED DIFFERENTLY!?

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W2 Income

100 K

$8,629

$0

Capital Gains

100 K

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US Federal Income Tax

  • Graduated (progressive) tax
  • Different family arrangements -> different taxes
  • Capital gains are taxed less than income

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Do I really have to pay federal income tax?

“... nothing is certain except death and taxes.”

  • Benjamin Franklin

No! (possibly never again)

Interesting side effect:

Early Retirement!

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Do I really have to pay income tax?

Excess Spending

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US Federal Income Tax

Gross Income (GI)

Found on W2

Adjustments (A)

Reduce AGI

Adjusted Gross Income (AGI)

AGI = GI - A

Deductions (D)

Reduces taxable income

Taxable Income (T)

T = AGI - D

Calculated Tax (CA)

CA = bracket(T)

Tax Credits (TC)

Counts as taxes already paid

Sometimes refundable!

Tax Paid (TP)

TP = CA - TC

Adjustments

  • Health Insurance Premiums?
  • Contributions to qualified (traditional) retirement accounts
  • Health Savings Account
  • Student loan payment interest

​

Deductions

  • Standard deduction (12, 19, 25K)
  • Giving to qualified charities
  • Mortgage interest payments
  • Child Care
  • State property/sales tax

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Tax Credits

  • Child Tax Credit
  • School expenses (sometimes)
  • ...

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Tax Evasion: The Legal Way

The Strategy:

  • Minimize yearly living expenses (YLE) with budgeting
  • Target tax free AGI
  • Invest in taxable accounts with remainder
  • Realize capital gains in free bracket each year
  • Retire when assets > n * yearly expenses
  • Roth IRA conversion ladder after retirement
  • Avoid alternative minimum tax (AMT, income >73k, 114k)

​

The Players:

  • Traditional TSP/401k
    • Lower AGI
  • Traditional IRA
    • Lower AGI
  • Roth IRA
    • Free assets from taxation
    • Piggy bank
  • Taxable brokerage account
    • Realize capital gains tax rates
    • Alternative income

​

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Tax Evasion: The Legal Way

104,800

24,800

61,425 (two kids)

Tax Free Income (61k)

Tax Free Capital Gains (43 k)

The Assumptions

Household

  • Married, family of 4
  • Kids age 1, 3
  • No savings, no investments
  • Yearly expenses: 34 k

Income

  • 75K income (0.5% raise each year)

Investments

  • Constant (2021) dollars
    • Market returns 4.5 %

Regulations

  • Tax code doesn’t change for families with income < 100k

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Other Learnings

Key Points

  • Budgeting is key
  • Tax planning can make a big difference
  • Taxable brokerage accounts have huge advantages
  • You don't need to be 59½ to access retirement accounts!
    • Roth IRA basis can be withdrawn anytime
    • Roth conversions move traditional to IRA, can be withdrawn in 5 years

Other Learnings

  • Debt obliterates long-term wealth
  • The vast majority of financial planners are swindlers
    • High fees
    • Conflicts of interest

Recommended Reading

  • Your Money or Your Life
  • Millionaire Teacher
  • The Simple Path to Wealth
  • Investing 101
  • The Bogleheads' Guide to Investing
  • Choose FI (also a podcast)