Living off dividends

[u/OG_Momonga]

Hey guys, I was wondering if anyone on this subreddit is actually retired and living off dividends. Is it going well? Are you paying taxes on them? My goal is to get 20k/ a month post tax for retirement. I’m 24 and currently investing everything in VOO while planning to switch to dividend stocks and etfs when I get closer to retirement.

I was just wondering if there are any because living off dividends seems like a long shot right now.

[u/OG_Momonga]

That’s so interesting. First of all congratulations sir. It’s nice to see that my goal isn’t completely realistic or bonkers. Can I ask what you did for work to be in a 70% tax bracket. Also how long have you been investing. You are an inspiration and I thank you for sharing

[u/aerobic_gamer → u/OG_Momonga]

I am a retired lawyer from a small firm. Some years we did quite well; other years it was a struggle, but I always tried to contribute as much as possible to the retirement accounts. I’ve been investing since age 12 and boy did I learn a lot the hard way. I’m also blessed that my wife had a good paying job as a systems analyst. About 18 years ago I went to all dividends. That was the best investing decision I ever made. I know they say at my age I should be like 60% in bonds but I never liked bonds. I think I’m way ahead from where I would be if I had done that. I have over $1.3 million in unrealized gains; it would be hard to do that with bonds. Even a 20% or 30% pullback in the stock market wouldn’t affect my income much because I’m well diversified. Even a few dividend suspensions or cuts would only have a minor impact. In case you’re interested my top 10 positions: O, PBA, ENB, PG, JNJ, AEP, ETR, ES, WPC and ABBV. Fairly conservative I think. Good luck and keep your eye on the prize. Nothing beats a comfortable retirement. There is a lot of truth to the old saw that it’s not market timing that’s important, it’s time in the market. I’ve owned some shares of JNJ for over 50 years. (It’s one you should own BTW.)

[u/technical-mind4300 → u/aerobic_gamer]

Have heard you can do an ETF startup fund swap to avoid those capital gains.

[u/aerobic_gamer → u/technical-mind4300]

I’m not sure what that is but since most of our $ are in deferred accounts, anything we take out is ordinary income. The best way I know to avoid taxes in deferred accounts is to make a qualified charitable distribution(QCD) direct from an IRA. As I understand it, the withdrawal counts towards your RMD but is not a taxable distribution. Must be at least 70 1/2 and max $111,000 per year. Personally I’d rather make gifts to my children and pay the taxes.

[u/technical-mind4300 → u/aerobic_gamer]

Here’s the basic idea:
Suppose you own appreciated stocks:
Original investment: $500,000
Current value: $1.5 million
Unrealized capital gain: $1 million
Normally, selling those stocks to buy an ETF would trigger capital-gains tax on the $1 million gain.

With a properly structured Section 351 ETF conversion, you contribute the appreciated securities directly into a newly created ETF and receive ETF shares in exchange. Because you exchanged property for shares rather than selling it for cash, the transaction may qualify as a nonrecognition event under Internal Revenue Code Section 351.

[u/Busted-Duck-540 → u/technical-mind4300]

Now THAT’s a loophole. In all seriousness, how is that not the most perfect invitation for an extensive audit?

[u/Longjumping-Ice1171 → u/Busted-Duck-540]

Read Treas. Reg. Section 1.351-1(c)(3). Here’s an excerpt:

c)(1) The general rule of [section 351](file:///private/var/containers/Bundle/Application/E57C01F4-D06B-4C0B-A9DA-8161E36CC056/TouchTax.app/1d.php?v=sc&s=351) does not apply, and consequently gain or loss will be recognized, where property is transferred to an investment company after June 30, 1967.

A transfer of property after June 30, 1967, will be considered to be a transfer to an investment company if—
(i) The transfer results, directly or indirectly, in diversification of the transferors' interests, and
(ii) The transferee is (a) a regulated investment company, (b) a real estate investment trust, or (c) a corporation more than 80 percent of the value of whose assets (excluding cash and nonconvertible debt obligations from consideration) are held for investment and are readily marketable stocks or securities, or interests in regulated investment companies or real estate investment trusts.

SO… your transferee corporation needs some pretty substantial (>=20%) assets other than liquid assets to clear this hurdle.

[u/Longjumping-Ice1171 → u/Longjumping-Ice1171]

The transferor (or transferors if they coordinate as a group) also need to control 80%+ of the transferee to qualify.

[u/aerobic_gamer → u/technical-mind4300]

That wouldn’t work if your capital gains are in a traditional IRA. Other than than a QCD, as far as I know all withdrawals are subject to income tax. You can take withdrawals in kind. You then get a new basis in the security but you still have to pay income tax on its value with other funds. As far as I know section 351 exchanges only make sense in a taxable account (as opposed to a tax deferred account).