I am trying to set up Regular (taxable) account which would generate similar qualified dividends (QD) and taxable interest as my real Taxable account. My Taxable account has 5% Money Market (MM) funds and 95% stocks. I started with default Real ROR -1% for MM and 2% for stocks.
1. In order for that portfolio to generate similar QD I had to set "Growth Taxes Annually as QD" at 30% which seems very high. Only 70% of growth is taxed as long term capital gains. Is this what others encounter?
2. In order to generate similar interest I had to bump Real ROR to 1%. Is there another way to do that? Real ROR of 1% is probably true for current year: 4% interest, 3% inflation = 1% real ROR. I am aware that this might not last.
I would like to have some confidence that I can set interest, QD and calculate taxes correctly for the current year, before I look at the modeled results.
Any comments?
Thanks you!
I would probably call the MM as Cash, so that all of its return gets taxed as interest. If you really believe it will lose 1%/year to inflation, that's a heavy price to pay for flexibility.
For stocks, the reason that so much of your return ends up being taxed is you have set a very low return. Inflation this year has been roughly 3% and you set your stock returns at 2% above that. A total stock index fund might have dividends of 1.6%, with 1.2% being qualified. In your low return model, that means that 1.2/(3+2)=0.24 (24%) of your stock returns end up as qualified dividends and (1.6-1.2)/(3+2)=0.08 of your stock returns are non-qualified dividends.
Historical stock returns have been 6.7% above inflation, had you used that, then your qualified dividends would have been 1.2/(3+6.7)=12.4%, but it would also show that you will become really wealthy.
I like to examine the Historical Analysis and set my guesses for portfolio returns so I get somewhere between the 20th and 30th percentile (so 70-80% of historical returns would have been better). I do this in part because the highest 25-30% of historical returns all happened when stocks were just coming off terrible downturns, so that doesn't sound like us, so I'm not shooting much lower than average if I were to exclude those great starting years. I am currently using 5.2% real returns, 2.5% inflation. With those return assumptions, my actual stock holdings in taxable works out to 16.2% taxed as qualified dividends and 3.8% taxed as ordinary income.
