Retirement Answers

Jacob: 00:00

Is it really possible to have a $126,000 of tax free income in 2025? The answer is yes. And I'm about to tell you exactly how that works. It has to do with something called tax gain harvesting. Maybe you've heard of this before, but we're about to go into this in detail so that you can use these different tax opportunities to your advantages when you're thinking about how to distribute money out of your portfolio in retirement or for that matter, any other time throughout life.

Jacob: 00:26

Hi. My name is Jacob Duke. I'm the host here of the Retirement Answers podcast. I'm glad you're with us. I also own a retirement planning firm called River Tree Wealth, where we help people just like you retire successfully and stay successfully retired.

Jacob: 00:39

So today, let's talk about tax gain harvesting. Now, what is this exactly? Well, in its simplest form, it's the strategic selling of appreciated assets in a taxable account type to take advantage of a lower tax rate. So the key here is it has to be a taxable account type, which is a brokerage account. You cannot do this in a Roth IRA or a traditional IRA or a four zero one k or anything like that, because those are retirement accounts and those are what's called tax sheltered, meaning you can trade as much as you would like within those accounts, and you're not going to incur any additional taxes or create any gains or losses.

Jacob: 01:13

You only create an income tax on those account types whenever you distribute money out. So a brokerage account is a taxable account type because it is taxed on an annual basis. If you have dividends or interest or realized capital gains by selling a particular holding in your account, taxes on those different things are going to be paid every single year. So that's why it's called taxable. So there's no front end benefit of like a deduction, there's no back end, you know, tax free income, although we're gonna see here in just a moment, you could have some tax free income on the back end by selling strategically in your brokerage account.

Jacob: 01:46

That's So the first thing to know is that you have to use the right account type to do this correctly. Now, second thing is, is you've got to understand how capital gains work. So you have a long term and you've got short term gains. A long term gain is whenever you hold an investment for longer than one year. So three sixty five days, you got to hold it for longer than that to reach long term status.

Jacob: 02:07

If you sell your investment before that, you will have a short term status, and the short term capital gain rate is going to be the normal income tax rate. So there's no benefit to selling something before one year from a tax standpoint. And this goes for real estate, it goes for stocks, it goes for anything that you are buying as an investment that you do not hold longer than one year, you are going to pay a normal income tax rate on that particular gain if there is one. Now on the opposite side of that is a long term capital gain rate. Okay, so if you hold your investment for longer than one year, you qualify for a beneficial tax rate.

Jacob: 02:41

So it's a long term capital gain, and there are three different tax rates that that could be taxed at. The first one is 0%. The second one is a 15%, and the third one is a 20%. And in 2025, let's just assume that you're married filing jointly, the 0% bracket tops out at $96,700 of taxable income. So if you have less than that, any capital gains that you realize that are long term, those would be paying a 0% rate up to that $96,700 amount in 2025.

Jacob: 03:13

Now, the 15% bracket, which is where most people fall who are earning an income and have capital gains in a brokerage account or real estate gains or something like that, that's where most people are gonna fall, but that is from 96,700 until $600,000 of taxable income. So you can see that bracket is very wide, and that again encapsulates most people in America. Now, the final bracket is above 600,000, that's 20%. So if you're really high income, you could be paying 20% probably plus a net investment income tax of 3.8. But I won't get into that because that gets kind of confusing and probably doesn't apply to most people.

Jacob: 03:47

So we're going to focus on here today is the 0% long term capital gain rate bracket. So again, 96,000, I'm just gonna round down, it's 96,700, but I'm gonna round down for the sake of this conversation, call it $96,000 If you have capital gains, in addition to any other income that is less than that $96,000 amount, any of your long term gains would be taxed at a 0% rate. That's a huge thing, right? So most of us think of a Roth IRA as a tax free account in retirement, meaning you can take money out after we're 59.5 and the account has been open for five years. We can take money from that and not pay any tax on those dollars.

Jacob: 04:21

Now I know you can take money out of Roth IRA at any point because you can take your contributions out regardless of how old you are or how long the account has been open. You can take your contributions at any point, no issue, that's not penalized, not taxed. But once you get above your contribution amount into your gains that you've made in your Roth, that has to follow that five year rule and the age rule. So this is an interesting little tax advantage for people who have a brokerage account, because essentially your brokerage account can turn into a Roth IRA if you structure your different distributions and sales within your account properly. So it's something to think about here.

Jacob: 04:55

So we're gonna walk through an example here in just a moment. And just as a side note, this is kind of the opposite of tax loss harvesting, which many of you have probably heard of before. Tax loss harvesting is more commonly talked about than tax gain harvesting, although I would say that tax gain harvesting is far more beneficial than tax loss harvesting, but whenever you're tax loss harvesting, you're intentionally selling something that's gone down in value to either offset other gains that you might have somewhere else in your portfolio or maybe through a real estate transaction that you have gains, but also too, you can just offset a maximum per year of $3,000 of losses against your normal income. So it's capped at $3 a year, but it is helpful at least in some capacity. So tax loss harvesting is intentionally selling something for a loss.

Jacob: 05:37

Tax gain harvesting is trying to sell it for a gain so that you could be at that 0% capital gain rate bracket. So let's walk through an example really fast together. How can you get a $126,000 of completely tax free capital gains in 2025, and you could call that income, whatever it might be. Well, here's how. So again, $96,000, that's the top of the 0% bracket.

Jacob: 05:58

We have to make a few assumptions here though. We've got to assume that you have no other income. So you're not earning an income, let's say you're retired. You're also not taking money out of an IRA. You don't have any social security.

Jacob: 06:08

You don't have anything. No pensions. Like, nothing is coming in at all. Your income is $0. So 96,000 is the top of the 0% rate.

Jacob: 06:17

Now your standard deduction, we're gonna use the married filing jointly situation today. So that's the 96,000. If you're single, it's $48,350. Again, if you want a copy of these important numbers for 2025, shoot me an email because I'll happily share it with you. It's a valuable tool for all the stuff that you're gonna do in 2025.

Jacob: 06:34

Shoot me an email, I'll drop it to you, and then it's yours for free. So no strings attached. But the standard deduction for married, filing jointly in 2025 is $30,000 for singles, it is 15. If If you're above 65, you get an additional amount there as well. But we're gonna assume today that this couple is not above 65, and they again, they have no other income.

Jacob: 06:54

So 96,000 plus 30,000. That's what they can do here. So that equals $1.26. Right? So $30,000 is the standard deduction plus the room they have in the bracket, which is 96, and that's based on, again, taxable income there.

Jacob: 07:06

So a $126,000 is how much they can realize in long term capital gains within their brokerage account and pay no tax on all $126,000. So So let's just put together like a hypothetical really fast. Let's say you've got $500,000 in your brokerage account, and $250,000 of that 500 is what you put into your investments in the account originally. So it's doubled in value. So 100% growth rate over however long it's been, it's been over a year so that we qualify for the long term gains.

Jacob: 07:33

So 50% of your $500,000, that is how much is actually capital gains in your account. So if you need to generate capital gains of $126,000 at the 0% capital gain rate like we just talked about, if you're trying to do that, you need to sell double of $1.26, which would be 252,000. You need to sell that much in order to create $126,000 of gains in this hypothetical portfolio that would be completely tax free. So you've got 500, you need to sell 252,000 of that in order to fill up that full 0% long term capital gain bracket, and that would essentially create $252,000 of money in your bank account and no tax to be paid. Again, of that 252,000 we just sold within your account, 126 is actually the capital gain amount, the other 126 is not taxable ever, that's your principal.

Jacob: 08:23

But the key here is you have to sell that much in order to fill up that 126. Now, Jacob, what if I don't need all 126? Or what if I don't need all $252,000 that I just sold to my brokerage account? What do I do with that money? Well, a couple things.

Jacob: 08:35

You can use, obviously, a portion of that to live on this year in retirement. Also, you could just take the rest and have it sit in cash until next year when you might need it. You could also take that leftover and reinvest it back into your brokerage account in this exact same stock or exact same mutual fund or whatever you had that you liked, you can invest it right back in it and there's no wash sale rule. So interesting here on wash sale rules, that only applies to losses, it does not apply to gains because you're not cheating the system in any capacity. You're not, you know, bending the rules in any way, you're just using the rules to your advantage.

Jacob: 09:06

You are intentionally selling something that's gone up in value to pay your tax of 0% rate on that particular amount that's gone up in value, and that's what the tax code says that you can do. Tax loss harvesting has a wash sale rule on it so that you don't sell something for a $50,000 loss immediately go buy it back and then try to make money on that again immediately. So there's a thirty day waiting period there whenever you sell something for a loss, you can't reinvest in it for thirty days of the same or a like fund or similar company. So that's something that's a little bit different about tax gain harvesting compared to tax loss harvesting. Any leftover money that you just sold, you can take that money and then reinvest it back into the same thing the next day and have no issues from the tax standpoint.

Jacob: 09:48

And what this is really doing is resetting your cost basis so that your future gains are not gonna be as great, as opposed to just leaving it like it is and not making any tactical or strategic decisions around this. You would have continuing gains going up in value over time so that your tax bill in the future will continue to grow and grow. So this is a, I don't know, a very powerful tool in my opinion for retirees, especially for those of you who have a brokerage account and you are in what I call your gap years, right? And let's say you are 60 when you retire and you aren't going turn on Social Security until 67, you've got maybe an IRA, maybe some Roth, but you also have this brokerage account. You can use this brokerage account to your advantage to create tax free income.

Jacob: 10:30

Let's say you need to pull $50,000 out of an IRA, but you need $80,000 to live on that year, and you've got some gains in your brokerage account. Well, you can use $30,000 of gains in your brokerage account, add on to your $50,000 of normal income. Your normal income will be taxed however that would be taxed normally, you take out your standard deduction, run it through the tax brackets, but your $30,000 of gains, since your taxable income would be less than $96,000 in this scenario, that 30,000 of gains in your brokerage account you're using to create income for yourself, that is not going to be taxable at all. So essentially, again, your brokerage account just turned into a Roth IRA. And what I found is most people don't know how this works or even understand that this is an opportunity for them.

Jacob: 11:10

So I wanted to share that with you today just so you know, hey, there's more opportunities around tax planning than just Roth conversions for you to look at and evaluate and plan for on an annual basis. And again, if this is something you want help with or you're like, hey, Jacob, this is a lot of info. I'm not sure if I want to figure this out, then head over to my website or schedule a call here with me. You know, I'd be happy to talk with you, share more about what it looks like to work with me and my firm and kind of our process and what we do and how we serve our clients. If you wanna learn more about that, I'd be happy to tell you.

Jacob: 11:37

Other than that, if you're enjoying the show, please give it a rating and review there on Apple Podcasts or Spotify. You won't believe how much it helps other people find the show and benefit from these same tips and strategies. Alright, thanks for tuning in. We'll talk to you again next week. Hey, it's Jacob again, and I wanted to extend a quick offer to you.

Jacob: 11:57

If you have a question and you would like to have it answered here on the show, please email me at jacob@retirementanswers.net. And I'd love to answer that question for you right here on the show. Also, I wanted to remind you that nothing discussed in today's episode is meant to be financial, legal, or tax advice. Retirement Answers is for educational purposes only. Thanks for tuning into this week's episode.

Jacob: 12:18

I look forward to talking with you again next week.