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One of the best parts about being retired is the ability to control where you take your income from and manage the taxes you pay on it. During your working years, your paycheck is taxed as ordinary income, and there's little you can do about it. However, in retirement, ideally, you will have multiple investment accounts with different tax characteristics. In this blog post, we'll show you how you can pay yourself over $100,000 annually without paying any income taxes. Surprisingly, this strategy does not include a Roth IRA.
Upon retirement, you may have various accounts, including:
Each of these accounts has different tax implications. For instance, distributions from a Roth IRA are tax-free, whereas distributions from a Traditional IRA are taxed as ordinary income. On the other hand, gains from a taxable brokerage account are taxed as long-term or short-term capital gains.
To illustrate this strategy, let's consider an example with clients, Jamie and Sam. Here's a breakdown of their financial situation:
Their goal is to live on $102,000 annually in retirement, equating to $8,500 per month. They are already retired and receive Social Security benefits of $2,200 per month for Jamie and $2,500 per month for Sam.
First, let's calculate their base income:
Total Income Floor: $66,400 annually.
To meet their $102,000 annual goal, they need an additional $35,600 from their portfolio.
For every dollar withdrawn from the taxable brokerage account:
Assuming they withdraw the entire $35,600 from the taxable brokerage account, half ($17,800) would be considered long-term capital gains.
Using tax planning software, we can see their tax implications:
Their total reported income would be around $84,200, which includes half of the Social Security benefits as part of their provisional income. Given their standard deduction and the nature of long-term capital gains, they would owe $0 in income taxes.
As a married couple, Jamie and Sam can have an adjusted gross income (AGI) of up to $94,000 without paying taxes on long-term capital gains. This leaves room for additional tax strategies:
While the taxable brokerage account provides flexibility, it will eventually deplete. Therefore, Jamie and Sam need to consider the long-term tax implications of their retirement withdrawals. This includes:
Being retired offers the unique advantage of managing your income sources to optimize tax efficiency. Jamie and Sam’s example demonstrates how strategic withdrawals from various accounts can result in significant tax savings. By carefully planning their withdrawals and utilizing tax-efficient strategies, they can enjoy a comfortable retirement income without paying unnecessary taxes.
Key Takeaways:
By understanding and applying these strategies, you can maximize your retirement income and minimize your tax burden, ensuring a financially secure and enjoyable retirement.
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