Retirement Answers

Jacob: 00:02

Tax gain harvesting and utilizing that 0% long term capital gain rate is going to be beneficial for you throughout your retirement because you can pay lower taxes on that particular type of income than you can on any other type of income. Welcome to Retirement Answers, a podcast built to answer your most pressing retirement questions. If you're someone who's either thinking about retirement or already in retirement, well, you're in the right place. Hey there, my name is Jacob Duke, and each week I'll be walking through different tips and strategies to help you succeed in retirement. So let's go ahead and get started with today's show.

Jacob: 00:45

Hey, friends. Welcome back to another episode of Retirement Answers. Thank you for being here, and if you are a frequent listener, thank you so much for your support and tuning in each week. And if you're a new listener, well, welcome to the show. This is a place where we get to talk about retirement, all the different tips and strategies that can help you retire more successfully.

Jacob: 01:03

So thank you for being here, and I hope you enjoy today's show. So today we are talking about the zero percent tax rate on capital gains and how you can accomplish this within your retirement plan. Now, whenever we think about retirement, what we often think of is three kind of primary things that we need in order to have the most filling or the most successful retirement. Number one is that we want more income. Number two is we wanna pay less taxes.

Jacob: 01:28

And number three, we wanna enjoy that money by spending our time on the things or with the people that we love. So today I wanted to tell you about how you can achieve a zero percent tax rate, which means more income, and then you're gonna pay less taxes. And ultimately because of that, you're gonna have more money to go enjoy your time and spend it with people that you love. So those three things which lead to an ideal retirement are things that we can accomplish with the 0% tax rate strategy on your capital gains. Sometimes this is called tax gain harvesting.

Jacob: 01:55

So today I want to tell you about this and how we can accomplish it. I'm going to walk through a couple of different scenarios kind of to explain what this looks like, but then also the end, I'm going to share some different thoughts around why this matters to you and how you can use this in your specific retirement plan. So the other day I was reading an article about this idea of a 0% tax rate on capital gains and just gave me a thought, hey, why not share this with your podcast listeners? That way they can go and use this in their own plans. So I wanted to create an episode for this because many people simply just don't know about this strategy or realize that it's even possible to have a 0% tax rate.

Jacob: 02:29

And mostly because we don't have taxable brokerage accounts. A lot of times, most people have saved all of their retirement assets or their wealth into 401ks, IRAs, Roth accounts, and very few people have a taxable brokerage account with substantial assets in it. So first of all, you should know that we are talking capital gains on your investment income or your investment gains. This is taxed differently than normal income. So we have to understand that your income you earn from your job or distributions you pull from your IRA or your four zero one ks, those are gonna be taxed as normal income.

Jacob: 03:00

But anytime you have money in a brokerage account or just an investment account, you can have a capital gains rate applied to the gains or the losses perhaps that are in that account. Now, also, this capital gains rate applies to whenever you sell your house one day. Now remember, there are some different rules for when you sell your house and whether or not the long term capital gain rate can apply. Remember that you have to live in your house for two out of the last five years in order for that long term capital gain rate to apply on a home sell. Now that we know that normal income is taxed differently from investment income, let's look at the twenty twenty three capital gains brackets, for single filers, but then also married filing jointly.

Jacob: 03:39

So as a single person in 2023, if your income is less than $44,625 your taxable income is less than that amount, you have a 0% capital gains rate on your long term capital gains. If you earn more than that up to 492,000, so that's 44,600 all the way up to 492,000, you are in the 15% capital gains bracket. And if you earn more than 492,000 as a single person in 2023, then your capital gains tax rate is 20%. So we have three kind of levels to the long term capital gains rate brackets. So you got 0%, 15% or 20%.

Jacob: 04:17

Now most Americans are gonna fall in that 15% range because the the income level for that are pretty wide, 44,000 all the way to 492,000 for a single person. And then now let's go through the married filing jointly brackets. So, for married filing jointly, the 0% tax rate is all the way up to $89,250 of your taxable income. And then your 15% rate for married filing jointly is $89,002.50 all the way up to 553,000. Anything above 553,000, you'd be taxed at a 20% capital gains rate.

Jacob: 04:51

So that's the income level that you have to be at either single or married filing jointly in order to be in those different tax brackets. Now, what does that mean? And what are we talking about today? Well, if you are single and you have income less than 44,000 and you also realize capital gains at a long term rate, that means that you pay a 0% capital gains rate on all of those long term gains. Now there are some nuances we're going get into in just a little bit in terms of income stacking and how this actually plays out mathematically.

Jacob: 05:18

But remember, if you're married finally jointly, if you earn less than 89,000 of taxable income, that means that your capital gains, would be at 0% rate. Now, whenever we think about your total income, your adjusted gross income, if we factor in your standard deduction, that means that if you're a single person with your standard deduction, that means you have $58,000 of income in terms of the room that you have to have a 0% rate. And if you're married filing jointly, it's a 116,000 whenever you include that standard deduction. So your taxable income needs to be below 89,250 as married filing jointly. Or if you're including that standard deduction, your adjusted gross income can be up to 116 and we're going to call it 117 just for round numbers.

Jacob: 06:00

Okay. So in order to kind of understand this, let's go ahead and look at a simple example, and then I'm going do a more complicated example right after this one. So let's say that you have no income this year and you're married filing jointly, you're 64, you're retired, and you're not taking Social Security yet. That means since you have no income this year in 2023, you can realize up to $117,000 of capital gains without paying any taxes on those gains. So let's say that in this example, you have a $200,000 brokerage account and 117,000 of that 200,000 is long term capital gains.

Jacob: 06:36

I mean, you could sell the full account and you just created $200,000 of income for you and your spouse, and you're gonna pay no taxes on that money. Now, remember, this is only possible because you have no other taxable income. You don't have Social Security, you don't have IRA distributions, and you're no longer working. Therefore, your only income source is from your taxable investment account and you sold the whole account, which was $200,000 of that $201,117 was gains. Therefore, you pay a 0% capital gains rate on a $117,000 that you previously did not have before you invested your money, which is a huge deal.

Jacob: 07:12

You used to achieve a 0% capital gains rate on a lot of money. Now that's a really simple example, but let's say that the same couple, 64 retired married, no Social Security yet, instead of $0 of income, they also have $50,000 of income that they're pulling out of their IRAs and they're not taking social security yet. So they're pulling $50,000 out of their IRAs, which is now taxable income. But let's assume that they still are going to sell $200,000 out of their brokerage account like we just talked about. And again, 117,000 of that is capital gains.

Jacob: 07:44

Now because of this additional $50,000 that is coming in from their IRAs, we know and we can see now that we're gonna be above that 0% capital gains rate bracket of 117,000 because we've got 117,000 of capital gains that we created. But then also we have another $50,000 of normal income, which is a total of $167,000 of adjusted gross income for the year. Now whenever we subtract out the standard deduction of 27,700 for married filing jointly here in 2023, their taxable income now becomes 139,300. So now we can see that 139,000 is more than 89,250, which remember that was the top of the 0% bracket for long term capital gains. So does that mean that all of our capital gains are now going to be taxed at 15%?

Jacob: 08:34

Well, not exactly because it's important to understand that the tax rate for the capital gains and kind of the tax brackets in general are just like normal income brackets, meaning that they are not a cliff. They're more of a progressive tax bracket like our normal income rates. So how do we actually do the math on this to figure out what is taxable, what is not taxable? Because we have normal income, we also have capital gains and kind of the way that the stacking rules work. So the standard deduction actually subtracts out of the normal income before it subtracts out of your capital gains.

Jacob: 09:04

So for example, we've got $50,000 of normal income whenever we take the standard deduction for this married couple, which in 2023 is 27,700. Whenever we take that out of the 50,000, we're left with 22,300. So now that we know how much normal income is actually gonna be applied to our taxable income in a whole, we can say $89,002.50 minuteus the 22,300, which is your normal income. That leaves us with 66,950 of capital gains that will be taxed at a 0% rate. And then on top of that, we have another 50,000 of capital gains that would now be taxed at the 15% rate.

Jacob: 09:42

So we see that not all 117,000 is actually going to be taxed at 15%. Only the portion that falls into that 15% bracket above the 89,250 I mentioned earlier. So this is how the capital gain system works for the 0%, 1520% brackets. So whenever your income is low enough, that means that you can realize capital gains at a 0% tax rate and not pay any taxes on those gains. So here are two major takeaways for you.

Jacob: 10:11

Number one, it's that every American, regardless of their net worth, has a chance to achieve this 0% capital gains rate because it's income based. It's not based on your wealth. It's not based on anything else. It's based on how much money you were actually earning that year. So in the lower income years, you might want to think about how you can use the 0% long term capital gain rate to your advantage and use that opportunity to realize gains, ultimately stepping up your basis and paying less tax on those gains.

Jacob: 10:40

Number two, it's not very often that you have the opportunity to even pay a 0% tax rate on a large sum of money. In fact, the only way to come is using your standard deduction or itemized deductions for that matter. Other than that, everything else at the lowest rate is going to be taxed at 10%. So capital gains are an advantage in the fact that you at least have an opportunity to have a 0% capital gains rate. So it would be wise of us to consider this in how we plan for retirement.

Jacob: 11:06

And this goes back to the importance, in my opinion, of having a taxable investment account that you're saving into throughout your career. Therefore, you have what I call income diversification or tax diversification. Once you get to retirement to pull from different sources, you can pull from IRAs, Roth IRAs, then the taxable investment account, ultimately lowering your overall tax bill. So how can we use this to our advantage in retirement? Well, it's a thing called tax gain harvesting.

Jacob: 11:31

We can be selective on which years we want to realize capital gains in your investment accounts ultimately to say, hey, let's use this right now to realize a gain. And then we can pay 0% capital gains rate because our income is low this particular year. In fact, you can do it next level planning and say, because I don't have any other income sources, I'm not going to pull money from my IRA. I'm not yet turning on my social security. I don't have any taxable income.

Jacob: 11:55

I'm gonna actually realize a bunch of my gains right now this year. That way I can use these brackets to my advantage. And now I've got income created for myself this year, and I've got income created for myself next year, and I don't have to pay taxes for two whole years, if that would be helpful. Right. So you can kind of use this to your advantage in all different ways.

Jacob: 12:15

But tax gain harvesting and utilizing that 0% long term capital gain rate is going to be beneficial for you throughout your retirement because you can pay lower taxes on that particular type of income than you can on any other type of income. So that's the major takeaway from this. Make sure you're, yes, using your four zero one ks's, your IRA's, getting the matches in those different accounts, Also funding Roth IRA's for tax free income, but don't leave out that taxable brokerage account because it can be tax free money if you strategize correctly. So diversify those savings, make sure you're building out your tax diversification throughout your career, or whenever you're early on in retirement, you can use different accounts to accomplish this as well. So that whenever you get to retirement one day, you have the optionality and the flexibility to make the wisest tax decisions for you and your family.

Jacob: 13:03

So I hope this has been really helpful for you to understand how you can achieve a 0% capital gains rate on your investments in your brokerage account. Let's go ahead and jump into this week's listener question. All right. This week's listener question says, if you do a Roth conversion from an IRA, does that satisfy your required minimum distribution for the year? Or are those two things separate or how does that work?

Jacob: 13:25

So this is a really good question because whenever folks get to RMD age, a lot of times, and I see this often where they don't actually need all of that RMD amount to them as income for the year. And so like, well, why do I have to take this money if I don't need it? And so they would rather have that money invested in their Roth IRA to grow more tax free. So that brings up the idea of maybe doing a Roth conversion instead of a full RMD. And to answer the question, no, you cannot use a Roth conversion to satisfy your RMD for the year.

Jacob: 13:54

You must always take your RMD before doing any conversions whenever you are required to do those minimum distributions. That's because the first dollars out of an IRA for the year that you have to do RMD always has to be RMD dollars. They cannot be rolled over or converted. So, just know that whenever you're doing that, it's a great idea, but the IRS just simply doesn't allow it. But once you have satisfied your RMD, then any dollars on top of that or after that, that you want to convert, you can go ahead and do that.

Jacob: 14:21

And even if your RMD is not needed in terms of income for the year, take that money. Yes, you've got to pay the income tax on it, but then you can go reinvest that if you'd like in your taxable brokerage account and let it keep growing there. So you have options, just know that your RMDs cannot be satisfied with a Roth conversion. So thank you so much for that question. Really good one.

Jacob: 14:39

And I feel like that's beneficial for a lot of people who are of RMD age. So once again, thank you so much for tuning in to this week's episode of Retirement Answers. I really appreciate you being here. If you found it helpful, go ahead and give it a rating and review on the app that you're listening through, and then also share with a friend so they can follow along. Thanks so much, and I look forward to talking with you again really soon.

Jacob: 15:00

Hey, it's Jacob again, and I wanted to extend a quick offer to you. If you have a question and you would like to have it answered here on the show, please email me at jacobretirementanswers dot net. And I'd love to answer that question for you right here on the show. Also, 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.

Jacob: 15:23

Thanks for tuning into this week's episode. I look forward to talking with you again next week.