As you enter retirement, you face new challenges in managing your money, including understanding taxes on investment gains and making smart investment choices.
This guide gives you the key knowledge and practical strategies to lower your tax burden, get the most out of your returns, and make sure your retirement savings last.
You’ll learn how to make the most of your hard-earned cash and enjoy the financially secure retirement you’ve worked so hard to achieve.
Understanding Capital Gains Tax
As you start your retirement, it’s very important to understand how capital gains taxes work and how they could impact your finances.
Capital gains are the profits you earn when you sell assets that have increased in value, like stocks, bonds, mutual funds, or real estate. To figure out your capital gain, just subtract what you originally paid for the asset (known as the cost basis) from the final sale price.
Unlike steady income like wages, Social Security benefits, and pension payments, capital gains are taxed differently. Let’s look at some of those differences.
What are capital gains and how are they taxed?
Profits earned when an asset is sold for more than its original purchase price are known as capital gains.
For example, let’s say you invested $5,000 in shares of a mutual fund years ago. Recently, you sold those shares for $7,500, earning a capital gain of $2,500.
The tax rates on capital gains vary based on your taxable income and if the gain is short-term or long-term.
It’s important to understand that capital gains have unique tax treatment compared to your other retirement income sources.
While you may be used to paying taxes on your wages, Social Security benefits, or pension payments at a steady rate, capital gains taxation can be trickier.
The tax rate you’ll pay depends on two key things: your income bracket for tax purposes and how long you owned the asset before selling it.
Short-term vs long-term capital gains tax treatment
The IRS makes a clear difference between short-term and long-term capital gains, and this difference can greatly impact your tax bill.
Short-term capital gains are profits on assets held one year or less. These gains are taxed as ordinary income, with rates ranging from 10% to 37%, depending on your income bracket.
In other words, if you buy a stock and sell it for a profit within a year, you’ll pay taxes on that gain at the same rate as your other income.
On the other hand, long-term capital gains refer to profits on assets owned longer than one year. These gains benefit from lower tax rates, which are typically less than the rates for ordinary income.
Most retirees face a 15% rate on their long-term gains, but there are a couple exceptions to remember. If your taxable income falls below $41,675 (for single filers) or $83,350 (for married couples filing jointly), you may qualify for a 0% rate on your long-term gains.
And if your income goes above $459,750 (single) or $517,200 (married), your long-term capital gains rate increases to 20%.
To put it simply, holding onto an asset for more than a year before selling can make a big difference in how much you’ll owe in taxes.
Long-term capital gains are like a reward for your patience, offering you a tax discount for holding your investments over a longer period.
On the other hand, short-term capital gains are taxed in the same manner as your regular earnings, which means you’ll likely owe more in taxes if you sell an asset quickly after purchasing it.
How capital gains affect retirees’ taxes and income
As a retiree, your income likely comes from various sources like Social Security, pensions, retirement account withdrawals, and investment earnings. While having multiple income streams is great, it’s important to be aware of how realizing substantial capital gains could impact your finances overall.
One potential result is your capital gains could push your income above certain levels, causing part of your Social Security benefits to become taxable. This can surprise many retirees who think their Social Security income is always tax-free.
Also, realizing significant capital gains can increase your modified adjusted gross income (MAGI), potentially raising your Medicare premium costs.
Let’s look at a hypothetical situation.
Suppose you’re a single retiree with $30,000 in taxable income from a mix of Social Security payouts and retirement fund withdrawals.
If you realize $20,000 in long-term capital gains from selling stocks, your taxable income would jump to $50,000.
This sudden increase could have a ripple effect, triggering taxes on your Social Security benefits and pushing you into a higher Medicare premium bracket.
The key takeaway here is that before you start selling assets and realizing capital gains, carefully consider the broader impact on your taxes and income in retirement.
Working with financial and tax professionals can help you come up with a strategic approach to managing your capital gains, minimizing your tax liability, and preserving your hard-earned retirement income.
By planning ahead, you can handle the complexities of capital gains taxes with confidence and keep more of your money working for you in retirement.
Harvesting Investment Losses to Offset Gains
You’ve likely noticed that the value of investments in your portfolio changes over time, sometimes rising and other times falling.
While it’s never fun to see the value of your hard-earned investments decline, these “losing” positions actually present a hidden opportunity. By strategically selling or “harvesting” these losses, you can generate tax savings that may outweigh the sting of realizing a loss on paper.
This process is known as tax-loss harvesting, and it’s a valuable tool that many savvy investors use to minimize their tax liability and keep more of their investment returns working for them in retirement.
Intrigued?
Let’s explore what tax-loss harvesting involves, how you can put it into practice as part of your overall retirement tax strategy, and some key considerations to be aware of so you can use this technique effectively to maximize your after-tax investment returns.
I’ve seen firsthand how tax-loss harvesting can add meaningful value for retirees looking to stretch their savings and minimize Uncle Sam’s bite.
With a bit of proactive planning and a willingness to be opportunistic, you too can cultivate a bumper crop of tax savings.
What is tax-loss harvesting?
In plain English, tax-loss harvesting simply means selling investments in your taxable brokerage accounts that have fallen in value below your original purchase price in order to deliberately realize a capital loss.
As an illustration, consider you bought 100 shares of Stock XYZ for $50 per share a year ago, investing $5,000 total. Unfortunately, the stock price has since dropped to $40 per share, making your current position worth only $4,000.
If you made the difficult decision to sell all 100 shares at today’s lower price of $40 per share, you would realize a capital loss of $1,000 ($5,000 original investment – $4,000 current value).
Here’s where the tax-saving magic of harvesting comes into play.
The realized deficit from offloading Stock XYZ can be leveraged to counterbalance capital gains you accrue from profitably selling other investments, which would otherwise incur capital gains taxes.
To illustrate, let’s revisit our previous example where later in the same tax year, you also sold Stock ABC for a total capital gain of $3,000.
By applying the $1,000 loss from the Stock XYZ transaction, you can reduce your net taxable capital gain from $3,000 down to $2,000.
See how this works? Capital losses are netted against capital gains dollar for dollar, effectively shrinking the total amount of investment profits exposed to capital gains taxes in a given year.
By strategically harvesting investment losses throughout the year, you’re essentially cultivating a garden of realized capital losses that you can use to offset your realized capital gains and lower your tax liability.
It’s like picking the ripe fruit (capital gains) from your investment orchard while also pruning away the dead branches (capital losses) to promote a healthier harvest come tax time.
But what if you realized more capital losses throughout the year than you have gains to offset?
Great news – you can still put those excess losses to work for you.
If your capital losses exceed your capital gains, the IRS allows you to deduct up to $3,000 of those net losses from your ordinary income for the year. For a married couple filing separately, this limit is $1,500 per spouse.
So even if you don’t have substantial capital gains to offset, harvesting losses can still potentially lower your overall tax bill by reducing your taxable income.
But wait, there’s more!
Any unused capital losses that exceed the $3,000 annual deduction limit can be carried forward to future tax years indefinitely.
This means you have a ready reservoir of harvested losses to apply against future gains and income for potentially many years to come.
Think of it like canning the excess bounty from your investment garden to enjoy in the future.
The potential tax savings from loss harvesting can be significant, especially for retirees in higher tax brackets. By reducing your net investment gains, you can minimize your capital gains tax liability, which can be as high as 20% for high-income earners.
Plus, if you’re able to deduct harvested losses against your ordinary income, you can reduce your taxable income and potentially even drop into a lower marginal tax bracket, multiplying your tax savings.
And by carrying forward unused losses to offset future gains and income, you can enjoy the fruits of your harvesting labors for years to come.
How to implement a tax-loss harvesting strategy
Now that we’ve covered the basics of what tax-loss harvesting is and how it works, let’s dig into the nitty-gritty of how to actually implement this strategy in your own retirement portfolio.
The first step is to review your taxable investment accounts, such as your brokerage account, to identify any positions that are currently trading at a price below what you originally paid. These unrealized losses are ripe for the picking whenever you’re ready to harvest them.
I recommend working closely with a trusted financial advisor who can help you analyze your entire portfolio to determine which specific investments offer the most promising loss-harvesting opportunities based on factors like the magnitude of the unrealized loss and the role that investment plays in your overall financial plan.
Once you’ve zeroed in on the investments you want to sell to capture a loss, it’s critical that you sidestep a common pitfall that could jeopardize your loss harvesting: violating the wash sale rule.
This IRS rule prohibits claiming a tax deduction for a security sold at a loss if you purchase the same or a “substantially identical” security within a 61-day window – 30 days before or 30 days after the sale date.
Triggering a wash sale would negate the loss deduction for the current tax year, effectively spoiling your harvested loss. But don’t worry – there are a couple of easy ways to avoid this.
One option is to simply wait at least 31 days before buying back the same investment you sold. This way, you steer clear of the wash sale window entirely and preserve your harvested loss. Just remember that you’ll be out of the market for that period, so you could miss out on any positive price moves in the interim.
Alternatively, you can immediately reinvest the proceeds from selling the original position into a similar but not “substantially identical” investment, maintaining comparable exposure to that area of the market. To illustrate, suppose you sold 100 shares of an S&P 500 index fund to harvest a loss. You could instantly redeploy that cash into an index fund tracking the total US stock market, capturing a similar investment profile without running afoul of the wash sale rule.
Many experienced investors also choose to incorporate tax-loss harvesting as a regular part of their periodic portfolio rebalancing process.
As you review your portfolio’s asset allocation and sell overweighted investments to bring your holdings back in line with your target mix, you can scout for losing positions to harvest for tax purposes.
This way, you’re accomplishing two important portfolio management tasks at once – keeping your investments aligned with your goals and risk tolerance while also proactively capturing losses to defray the tax hit from rebalancing.
It’s a win-win!
Caveats and considerations with tax-loss harvesting
While tax-loss harvesting can be a powerful tool for minimizing taxes on your investment income in retirement, it’s not a cure-all. There are a few important caveats and considerations to keep in mind before deploying this strategy.
First and foremost, tax-loss harvesting only applies to investments held in taxable accounts like a regular brokerage account. It doesn’t work for tax-advantaged retirement accounts such as 401(k)s, traditional IRAs, or Roth IRAs since those accounts grow tax-deferred or tax-free anyway.
So as you’re scouring your portfolio for loss-harvesting candidates, focus your energy on your taxable holdings.
You should also carefully weigh the potential transaction costs from selling investments to harvest losses against the ultimate tax savings.
If you’re paying high commissions or fees to exit a position, those costs can quickly eat away at the tax benefit and even potentially exceed it.
Make sure the juice is worth the squeeze, so to speak.
Many online brokers now offer commission-free trades, but it’s still wise to be mindful of any expenses you might incur to harvest losses.
An important consideration is the overall effect on your investment strategy.
It’s rarely advisable to sell an investment solely for the tax break if it’s still serving an important purpose in your portfolio and remains aligned with your long-term goals.
Be careful not to let the tax tail wag the investment dog, as the saying goes.
Harvesting a loss might feel good in the short term as you anticipate a lower tax bill, but if you compromise your portfolio’s diversification or stray from your target asset allocation in the process, you could be doing more harm than good.
Always view tax strategy as a component of your overall investment approach rather than the sole driver.
It’s also worth noting that tax-loss harvesting opportunities may be more plentiful during market downturns or periods of volatility when more investments are likely to be “underwater” – trading below your purchase price.
During a prolonged bull market when most asset prices are steadily rising, you might find slim pickings on the tax-loss harvesting front.
But that doesn’t mean you should force the issue and sell investments at inopportune times just to capture losses. Stay disciplined and focus on harvesting when it makes sense for your specific situation.
Tax-loss harvesting is a valuable tool in the savvy retiree’s tax-planning toolbox, but it’s not a set-it-and-forget-it strategy.
By regularly reviewing your taxable portfolio through a tax-aware lens, however, you can identify and capitalize on loss-harvesting opportunities as they arise and potentially reap meaningful tax savings.
The key is to be proactive, opportunistic, and strategic in your approach while always keeping your overall investment plan at the forefront.
With a bountiful harvest of realized losses, you can enjoy more of the fruits of your investment labors and stretch your retirement savings even further.
Gifting Appreciated Assets to Minimize Gains
Now that you have reached your golden years, decades of careful investment and portfolio growth have likely yielded a valuable source of financial security. Now, as you enter this new phase of life, you have the opportunity to share that abundance with the people and causes you care about most, all while minimizing your capital gains tax burden.
By strategically gifting appreciated assets like stocks, real estate, or privately held business interests, you can support your loved ones and favorite charities while also keeping more of your hard-earned investment gains for yourself.
Let’s explore three tax-smart ways to gift your most appreciated assets and make a meaningful impact on the world around you.
Gifting investments to family members in lower tax brackets
One of the most effective ways to minimize capital gains tax on your appreciated investments is to gift them to family members who are in lower tax brackets than you are. This strategy is especially powerful if you have adult children or grandchildren who are just starting out in their careers and could benefit from a financial boost.
Here’s how it works: When you gift an appreciated asset like stock to a family member, they take on your original cost basis and holding period.
This means that if they later sell the investment, any gain will be taxed at their own capital gains rate, which may be lower than yours.
For example, if your grandchild falls into the 0% long-term capital gains tax bracket (which applies to single filers earning below $41,675 or married couples filing jointly making under $83,350 in 2022), they could potentially sell the gifted stock and pay no tax on the gain.
Let’s say you bought shares of a blue-chip stock for $10,000 several decades ago, and those shares are now worth $50,000.
If you were to sell the stock yourself, you’d owe capital gains tax on the $40,000 profit.
But if you gift the shares to your granddaughter who falls under the zero tax bracket for long-term capital gains, she could sell the stock without paying any taxes and use the proceeds to pay for college, buy her first home, or invest in her own retirement savings.
It’s important to be mindful of gift tax rules when transferring appreciated assets to family members.
As of 2022, you can gift up to $16,000 per year to any individual ($32,000 if you’re married and splitting gifts with your spouse) without triggering gift tax reporting requirements.
If you go over this annual exclusion amount, you’ll need to file a gift tax return and the excess will count against your lifetime gift and estate tax exemption.
But even with these limits in mind, gifting appreciated investments to family members in lower tax brackets can be a powerful way to share your wealth while reducing what you owe in capital gains taxes. By passing along the tax obligation to someone who may pay a lower rate (or no tax at all), you can help your loved ones build their own financial futures while also preserving more of your investment gains for your own retirement needs.
Donating highly appreciated investments to charity
A tax-smart way to share your investment bounty is to donate highly appreciated assets directly to charity.
By giving stocks, real estate, or other investments that have grown significantly in value over time, you can avoid paying taxes on the capital gains while also getting a valuable charitable deduction.
It’s a mutually beneficial approach that allows you to support the causes you care about while also reducing your own tax burden.
Here’s an example:
Let’s say you purchased shares of a technology stock for $5,000 ten years ago. Now, after a decade those shares are valued at $25,000.
If you sold the stock now, you would owe taxes on the $20,000 capital gain.
However, if you donate the shares directly to a qualified charity, you can avoid the tax liability on the appreciation.
Plus, you can claim a charitable deduction for the full fair market value of the stock at the time of the donation ($25,000 in this case).
This is a much more tax-efficient way to give than selling the appreciated asset, paying the capital gains tax, and then donating the after-tax proceeds.
By donating the asset directly, you’re essentially giving the taxable gain to the charity, which doesn’t have to pay taxes on the appreciation when it sells the asset.
This means more of your donation goes directly to supporting the charity’s mission, rather than being taken by the IRS.
You can donate all sorts of appreciated assets to charity, not just publicly traded stocks. Other options include real estate, privately held business interests, cryptocurrency, and even artwork or collectibles.
As long as you’ve possessed the asset for over twelve months, you can sidestep taxes on investment gains and claim a tax deduction equal to the asset’s current market worth.
Just be sure to work with a qualified appraiser to determine the value of any non-publicly traded assets and keep good records of your donations for tax purposes.
While donating appreciated assets to charity can provide significant tax benefits, it’s crucial to recognize that there are limitations on the amount you can deduct in a given year.
These limits are based on factors such as your adjusted gross income (AGI) and the category of asset being donated, and they can be subject to change with updates to the tax laws.
For instance, a retired individual who donates a substantial amount of appreciated stock to a charitable organization would need to work closely with their tax advisor to calculate their allowable deduction for the current year, based on their AGI and the specific rules for deducting publicly traded securities.
If the deduction exceeds the current year’s limit, the excess could potentially be carried forward and claimed on future tax returns.
Despite these limitations, donating highly appreciated investments to charity remains one of the most tax-efficient ways to support the noble causes that resonate with your values.
By avoiding tax on the increased asset value and claiming a valuable deduction, you can maximize the impact of your charitable giving while minimizing your own tax burden.
It’s a powerful way to align your financial planning with your personal values and leave a lasting legacy of generosity.
Using a donor-advised fund to bunch charitable gifts
If you want to take your charitable giving strategy to the next level, consider using a donor-advised fund (DAF) to bunch several years’ worth of donations into a single tax year. This can help you maximize your itemized deductions and potentially qualify for a higher tax bracket in the year of the gift, all while creating a ready reserve of charitable dollars that you can distribute to your favorite nonprofits over time.
The process is straightforward: With a DAF, you make a large, upfront contribution of cash or appreciated assets to the fund, which is sponsored by a public charity.
You’ll receive an immediate tax deduction for the full amount of your contribution in the year you make the gift. Then, over time, you can recommend grants from your DAF to the charities you want to support.
The sponsoring organization handles all the administrative tasks, including vetting the charities and processing the grants.
The beauty of a DAF is that it allows you to separate the timing of your charitable deduction from the actual distribution of the funds to charity.
This can be especially useful for retirees who are taking the standard deduction most years and don’t have enough itemized deductions to exceed the threshold.
By bunching several years’ worth of charitable contributions into a single year using a DAF, you may be able to itemize your deductions that year and secure a larger tax break.
Let’s say you typically donate $10,000 per year to charity. If you’re taking the standard deduction, you won’t get any additional tax benefit from those gifts.
But if you contribute $50,000 (representing five years’ worth of your typical annual giving) to a DAF in a single year, you could then claim itemized deductions and enjoy a much larger tax break.
Then, over the next five years, you can direct funds from your DAF to your favorite charities, effectively spreading out the impact of your giving without having to come up with new donation dollars each year.
An advantage of using a DAF is that the assets you contribute can be invested and grow tax-free over time, potentially increasing the amount of money available for future grants. This can be a great way to amplify the reach of your charitable contributions while also securing a valuable tax deduction for the tax year when you make the contribution.
Many financial institutions and community foundations offer DAFs with low minimum contribution requirements and easy online tools for recommending grants.
And because DAFs are considered public charities, they can accept a wide variety of appreciated assets, including stocks, real estate, and even privately held business interests.
This makes them a flexible and tax-efficient vehicle for bunching your charitable gifts and supporting the initiatives that matter to you.
It’s important to consider your overall financial picture and charitable giving goals when deciding whether a DAF is right for you.
But for many retirees, using a DAF to bunch donations and maximize itemized deductions can be a smart way to stretch their charitable dollars further while also securing valuable tax savings.
It’s like having your own personal charitable giving endowment, enabling you to support the organizations and causes that matter most to you, all while minimizing your tax burden and preserving more of your well-deserved investment profits.
Gifting appreciated assets, whether to family members, charities, or through a donor-advised fund, offers an excellent opportunity to share your financial blessings while also reducing your tax obligations on investment gains.
By strategically planning the timing and recipients of these gifts, you can amplify the positive effects of your generosity while also preserving a greater portion of your investment proceeds to support your retirement needs.
As you map out your golden years, consider leveraging these tax-savvy gifting strategies to leave a lasting legacy aligned with the people and organizations that reflect your values and priorities.
Other Tax-Smart Investing Strategies in Retirement
As you enter your golden years, it’s crucial to explore a range of tax-smart investing strategies to keep your savings secure. By practicing techniques like buy-and-hold investing, strategic asset location, favoring tax-efficient investments, and seeking professional advice on tax-efficient withdrawal strategies, you can minimize your tax burden and ensure your retirement savings last as long as possible.
Think of your retirement portfolio as a bountiful orchard. With careful cultivation and strategic planning, you can maximize your harvest while minimizing how much fruit the taxman can pluck.
Let’s explore some of the most effective tax-smart investing strategies for retirees.
Practicing buy-and-hold investing
One of the most powerful ways to reduce your tax bill in retirement is to practice buy-and-hold investing.
This means acquiring investments with the goal of retaining them long-term, typically for an extended period exceeding twelve months.
Why is this approach so advantageous? Because the monetary gains you realize upon selling long-held investments are subject to significantly lower tax rates compared to short-term profits or ordinary income.
For most retirees, profits from investments held long-term attract a 15% tax rate.
But here’s the really exciting part: if you fall into the 10-12% ordinary income tax bracket, you can reap the rewards of your long-standing investments tax-free!
That’s right, you can sell appreciated investments owned for longer than twelve months and owe absolutely nothing in taxes on the profits.
It’s like getting a free pass to savor the sweet fruits of your investing efforts.
To make the most of this tax-saving strategy, consider deferring the sale of your most highly appreciated assets for as long as possible.
By allowing these investments to continue growing tax-deferred, you can potentially accumulate even more wealth over time.
And should you manage to pass these assets along to your heirs, they’ll receive a step-up in cost basis to the value at the time of your death, effectively wiping out any taxable gains.
Let’s say you acquired equity shares in a prominent corporation for $10,000 a decade ago, and those shares now hold a value of $50,000.
If you’re in the lowest tax bracket and you sell the stock after owning it for an extended period, you’d owe zero dollars in capital gains taxes on the $40,000 gain.
However, if you sold the stock shortly after buying it, you’d owe 12% in taxes on the profit, or $4,800.
By practicing patience and holding your investments for the long run, you can significantly reduce your tax bill and maximize the returns from your diligent efforts.
Being strategic about asset location
Where you hold your investments can be just as important as what you invest in when it comes to minimizing taxes in retirement.
That’s where strategic asset location comes in.
The key is to place your investments in the most tax-efficient accounts based on their unique characteristics.
It’s generally best to hold tax-inefficient investments like bonds, REITs (real estate investment trusts), and actively managed stock funds in tax-advantaged accounts such as IRAs or 401(k)s.
Why? Because the interest, dividends, and capital gains generated by these investments can grow tax-deferred or even tax-free in the case of Roth accounts.
This allows your money to compound more quickly without the drag of annual taxes.
On the flip side, tax-efficient investments like broad-based stock index funds and municipal bonds are often better suited for taxable brokerage accounts.
These investments tend to generate fewer taxable distributions each year, which means a lower tax bill for you. In fact, municipal bond interest is exempt from federal taxes and may also be exempt from state taxes if you live in the issuing state.
By carefully allocating your investments across different account types based on their tax treatment, you can create a more tax-efficient portfolio that keeps more money working for you instead of Uncle Sam.
Implementing an effective asset location strategy can enable a retiree with $1 million to save approximately $2,500 per year in taxes. That’s a significant chunk of change that can be reinvested and compounded over time to help your retirement savings last even longer.
Favoring inherently tax-efficient investments
Favor inherently tax-efficient investments. These are investments that generate relatively low levels of taxable income due to their structure or strategy.
One prime example is passively managed equity index funds and exchange-traded funds (ETFs). These investments aim to track the performance of a particular market index, like the S&P 500, by holding a diverse basket of stocks.
Because index funds simply mirror the holdings of the index, they tend to have much lower turnover than actively managed funds that rely on frequent buying and selling. Lower turnover translates into fewer taxable capital gain distributions passed along to shareholders each year.
According to a study by Vanguard, over the 15-year period ending in 2021, the average actively managed stock fund had a 63% higher tax cost than the average index fund. This means index fund investors kept significantly more of their returns on an after-tax basis.
Municipal bonds represent another tax-efficient investment opportunity, particularly for those in higher income tax brackets. Interest earned from these bonds is exempt from federal income taxation.
Additionally, if you reside within the state that issued the municipal bonds, you may avoid paying state income tax on that interest income as well.
As an illustration, California residents investing in California municipal bond funds can earn interest free from both federal and state income taxes.
This strategy offers a potent means of generating tax-free income during retirement, especially valuable if you live in a high-tax state.
By tilting your portfolio toward investments that are naturally tax-efficient, you can retain more of your wealth compounding for your benefit rather than being eroded by taxes each year.
Getting professional advice on tax-efficient retirement withdrawal strategies
Even with a tax-efficient investment mix, how you actually tap your retirement accounts can have a big impact on your tax bill. That’s why it’s so valuable to work with a seasoned financial expert who can guide you in developing a tax-smart withdrawal strategy tailored to your unique situation.
The conventional wisdom is to withdraw from your taxable accounts first, then your tax-sheltered accounts like traditional IRAs and 401(k)s, and finally your Roth accounts.
The idea is to allow your tax-advantaged accounts to keep growing without taxes for the maximum duration.
But depending on your specific circumstances, including your age, income needs, and legacy goals, a different order may make more sense.
A retiree who expects to be in a higher tax bracket later in retirement may want to accelerate withdrawals from tax-deferred accounts earlier on while their tax rate is lower. Or someone with significant appreciated assets in a taxable account may want to prioritize selling those investments to take advantage of the inherited asset value adjustment upon death.
There’s no one-size-fits-all approach, which is why personalized advice is so crucial.
A skilled financial advisor can run projections to determine the optimal sequencing of withdrawals across your various accounts to minimize your tax liability over the course of your retirement.
They can also help you navigate complex rules like required minimum distributions and coordinate your withdrawals with other income sources like Social Security or a pension.
It’s also wise to loop in a tax professional who can provide valuable guidance on tax-loss harvesting opportunities, charitable giving strategies, and other techniques to lower your tax bill.
For example, tax-loss harvesting strategies allow deducting up to $3,000 in excess losses against taxable income each year, which can add up to significant savings over time.
Together, your financial advisor and tax professional can help you create a comprehensive retirement income plan that maximizes your after-tax income and ensures your nest egg lasts as long as you need it.
By practicing patience, being strategic about where you allocate your assets, prioritizing investments with favorable tax implications, and enlisting the help of skilled professionals, you can enjoy a more fruitful retirement with less of your hard-earned money going to taxes.
It’s all about being proactive and making smart choices with your investments and withdrawal strategy.
With the right approach, you can keep more of your earnings and enjoy the retirement lifestyle you’ve always dreamed of.
Final Remarks
Understanding taxes on investment gains, making up losses, giving away assets that have grown in value, and using other smart investing moves helps cut taxes when you retire.
Look at your investments now with a focus on paying less tax. Keep investments long-term, put assets strategically in different accounts, and give highly valued shares to charity.
Work with a financial advisor and tax pro to make a retirement income plan just for you that saves on taxes.
Take action today to take control of your financial future and enjoy a more secure retirement.
