Retirement Answers

Jacob: 00:00

This one account can change everything about retirement. And no, it's not a Roth IRA. We're going to talk about it today here on the show. Thank you for tuning into this week's episode of Retirement Answers. My name is Jacob Duke.

Jacob: 00:11

I am the host here. As always, I'm a certified financial planner and the owner of a retirement planning firm where we help people just like you plan smarter so you can retire better. So what is this account? What is the thing that actually allows you to have freedom in retirement? It's not a Roth IRA, it's not a traditional IRA, it's not a four zero one ks or anything like that.

Jacob: 00:30

It is a normal taxable brokerage account. And we're gonna talk about why that is. I'm gonna give you a few different instances or scenarios that this account gives you and gives you some freedom around to actually make the most of your hard earned money and actually help it go even farther. So to get started, I want to actually break down what a taxable brokerage account is and how it actually works. So we know about traditional four zero one ks's or Roth four zero one ks's and IRAs, you know, they're either taxed on the front end whenever you put the money into it like a Roth account, or they're taxed on the back end whenever you take the money out like a traditional four zero one ks, which you get a deduction on the front end for that.

Jacob: 01:03

This brokerage account is neither of those things. What you're doing whenever you have money that goes into a taxable brokerage account is you have after tax dollars that you've earned, and you've paid income taxes on that go into this account. So there's no deductions whenever you put the money in. So technically, it's like Roth money whenever you put it in, there's no tax deduction on the front end. But along the way, the account is not tax sheltered like a Roth IRA or a traditional IRA, meaning every year you're going to pay taxes on this particular account type, whether you have dividends or interest or capital gains that have been realized, you're gonna pay income taxes on that every single year, you're gonna get a $10.99 every single year to show you how much tax you have to pay and what taxes are being paid for.

Jacob: 01:43

And so that's one difference is that it's not tax sheltered, and then on the back end, whenever you take money out of this account, you don't pay income taxes because you are taking money out. So really the thing you gotta pay attention to is the taxes along the way whenever you have dividends, interest or capital gains, that's really the difference on that. So that's how a brokerage account works fundamentally. Now, I want to talk about what I love about this account is really the flexibility that creates. So I like to call it your flexible retirement account.

Jacob: 02:11

It's something that in my personal opinion, it's my favorite account type because the opportunities that come with it, you can use it for anything you want, at any age you want, there's no restrictions on when you can access the money or ages or timeframes, it is your money, all you have to do is pay taxes on the gains that you might realize to sell and then access and use that cash, or you have to pay taxes on the dividends and interests along the way. But the reason that I love this account the most is because of a few different things. Let's walk through a couple scenarios here to maybe explain this. Let's say you retire at, I don't know, 53 instead of after 59.5. Well, in that scenario, you have very limited opportunities to take money from your accounts without penalty.

Jacob: 02:50

So if you think about like your four zero one ks in this scenario, if you retire before 55 at age 53, you can't use the rule of 55 out of your four zero one ks. So there would be taxes and penalties to take money out early there as well. So what does that leave you? Well, the only option is to have some sort of after tax dollars to live on and pay minimal taxes and no penalties on in these different periods of time before you get to 59 and a 0.5. So that's the first thing is it allows you to retire earlier if you want to.

Jacob: 03:19

So if you don't have a brokerage account built up and you haven't saved into it over time, and your only source of funds is in a traditional four zero one ks or an IRA or even even Roth for that matter, you might be in a tough spot because you don't have the opportunity to pull or access funds without additional taxes or penalties. So that's the first thing, it allows you to retire earlier than you otherwise thought you could. The second thing is you can actually turn this account into a Roth IRA if you use it strategically, and here's what I'm talking about. I've done previous episodes and conversations on what's called tax gain harvesting, which is in my opinion, way more powerful of the two things when it comes to tax gain harvesting versus tax loss harvesting. But gain harvesting is really where the magic happens.

Jacob: 03:59

And what is this? I'll summarize it really quickly. It's where you intentionally sell something in your brokerage account that has gone up in value, hopefully at that 0% long term capital gain bracket. So you have to have held that investment for at least one year and your income cannot be above a certain amount of money to where you'll be pushed into the 15% long term capital gain bracket. And here in 2025, that capital gain bracket at the 0% level is about $96,000 of taxable income if you're married filing jointly, and then about half of that if you're single.

Jacob: 04:29

But that means that you can actually add your standard deduction on top of this. So if you're married filing jointly, again, 96,000 plus $30,000 as a standard deduction here in 2025, that means about $126,000 is about how much room you have as taxable income before any capital gains would be taxed at 15% or more, if they are long term. So if we think about this gains harvesting, this is whenever you're intentionally selling something that's gone up in value, hopefully at that 0% rate. What you can do here is let's say you do retire early, going back to the scenario of you retiring at 53 or any really anytime, and you don't have any other income, maybe you're not working anymore, maybe you don't have social security yet, you don't have a pension. So there's really no source of fixed income coming in, but you do have this brokerage account and it has made money over time, let's say it's worth $500,000 and it's grown from 250.

Jacob: 05:20

So half of the account balance is actual growth that's taking place. Well, guess what? You can sell up to that $126,000 of capital gains as if you're married filing jointly or half of that if you're a single filer at that 0% tax rate. So what you can do is create tax free income for yourself in retirement. Now, here's the thing.

Jacob: 05:39

Let's say that you don't need a $126,000 of capital gains, which in order to do that based on this kind of scenario that I've outlined just a moment ago, where you have $500,000 in the account, and $250,000 of that is the principal. So the growth is also two fifty. In order to realize $126,000 of capital gains, which means you can actually sell what is it $258,000, which is two times the amount of 126. So if you sold $258,000 of your 500, again, half of that amount in this basic scenario, that equals the 126 that we can hit as the maximum threshold of 0%. And so now you have actually 250 plus thousand dollars of cash sitting in your brokerage account.

Jacob: 06:21

But let's say you don't need that much to live on. Let's say you only need a $100,000. Well, what this does is, is you can take a $100,000 and set that aside for the year, and then the remaining 150 plus thousand dollars, you can do a couple things, you can set that aside for future years income, or you can reinvest that money right away. So a lot of people have this question, Jacob, can I sell something for a gain, pay taxes on it, and then actually buy it back the next day? And the answer is yes.

Jacob: 06:45

And the reason that this question comes up is because of the wash sale rule, which only applies to tax loss harvesting. Whenever you sell something intentionally for a loss in hopes of deducting that against some other gain or against your income. So you can't buy back the same security you just sold for a loss within a thirty day window, so you have to wait beyond that window in order to buy it back without creating a wash sale issue. But that again, only applies to tax loss harvesting, not tax gain harvesting. So Jacob, why would I sell $250,000 of my account whenever I have 500,000, I really don't need that much money.

Jacob: 07:19

Well, what you can do is again, if you only need a $100,000 out of this $2.50 you've created, what you can do is take the other $1.50, reinvest that money and it stays invested. Okay, so all you did there was you stepped up your basis to this new level so that you don't pay taxes in the future. And so this is kind of like a next level thing that I'm kind of open up and sharing with you today because most people don't understand how taxing and harvesting works or that it's even an option. So if you're someone who is retiring before, I guess, you know, social security, or maybe you don't have a pension that's starting just yet, and you do have this brokerage account available to you, you think about tax gain harvesting because it's a powerful opportunity for anyone that has gains in a brokerage account and can use those strategically. So I guess the tip here is this, if you don't have a brokerage account, I would start one immediately, because again, it creates flexibility, number one of income before you get to 59.5 and even beyond 59.5 for more traditional retirement.

Jacob: 08:15

But the second thing is, is there's tax gain harvesting opportunities, assuming your income is low enough to where you can take advantage of that. Now, this ties directly into the next thing, which is the ability to take money completely tax free from a brokerage account by selling it, doing this taxing and harvesting strategy, and then creating cash to be able to pay taxes on future Roth conversions. So let's break this down. Let's say, you know, you wanna do a Roth conversion of a $100,000 this year. Okay, you have zero other income, no earned, no social security, no pensions, nothing like you're retired, and you wanna do a $100,000 Roth conversion this year.

Jacob: 08:51

Okay, but you know you're gonna have to pay income taxes on that money whenever you do it. Now, you have heard and learned that paying the income taxes from an other and outside source rather than withholding it from the conversion itself is the most optimal way to do a Roth conversion. So instead of withholding, let's say an effective rate of tax rate of 20%, instead of withholding $20,000 out of your $100,000 conversion, want you to come up with that $20,000 from a different source, typically being after tax money in a brokerage account or cash at the bank. So what you would do there instead of having 80,000 going to your Roth by withholding 20, what you could do is you could have the full $100,000 go into your Roth IRA, okay? And then you could actually realize gains up to 26,000 because remember, we're paying tax on $100,000 if we're married filing jointly, then we can actually have a $26,000 more of taxable income room where we can realize gains up to $26,000 and pay no tax on those gains, and then we created the cash to pay the taxes with on the Roth conversion.

Jacob: 09:52

So what you've done here is you've optimized your Roth conversion, and you're using gains from your brokerage account at a 0% tax rate to pay those taxes with. That is unbelievable, in my opinion, like that's high level planning, that's high level thinking to be able to do a Roth conversion optimally. Now let's take this a step further. Let's say we go back to the example I just mentioned a moment ago, where you sold $250,000 within your brokerage account of 500. And so what you've done there is you filled up that 0% long term capital gain bracket, so no taxes on the gains that are there, and you only need to spend a $100,000 this year to live on, which means you got a $150,000 left over.

Jacob: 10:28

So what you can do in this scenario is you can actually save the leftover cash, the additional 150, you can set that aside for Roth conversion taxes in the subsequent, I don't know, two, three, four or five years. And so by doing this, you're creating cash in a tax free way that you otherwise didn't have. And now you've set aside money to pay taxes with on your Roth conversions that you expect to have here in the coming years. So again, that's another way that this brokerage account gives you flexibility, it gives you options when it comes to planning your taxes in retirement, planning out your income in retirement. And then the fourth thing this account actually gives you the opportunity to do is if you're charitable, if you like to give, what you can do is you can take appreciated stock holdings and donate that to a donor advised fund, and then also pair that with a Roth conversion, so that at least a portion of the amount you're converting to Roth can be, you know, not taxed, depending on your other income sources, because there are percentage limits in terms of how much you donate to a donor advised fund, how much that can actually be offset against your income.

Jacob: 11:31

So you guys look at the rules on that. I've done an episode there on donor advised fund and you know, whether it's a 60% or a 30% deduction against income. And so there are limitations in this donor advised fund strategy and kind of bunching your gifts into one account in one particular year to help offset Roth conversions. But it is a huge opportunity that you otherwise wouldn't have if you don't have a brokerage account built up. And then finally, just year to year, whenever you have the benefit of long term capital gain rates or qualified dividends, you're immediately lowering your tax burden every single year because those tax rates are always going to be cheaper than your normal income tax rates.

Jacob: 12:10

And so it's important to pay attention to your brokerage account in terms of how the money is invested within the account. I talk about asset location all the time. I know you can't always do this exactly right, but if you could hold high growth assets like equities and stock within your brokerage account, what that does is, is that allows you to grow this money at a higher rate, and then you want you hold that investment for at least one year, you are able and eligible to have a long term capital gain rate, which again is cheaper than normal income taxes. And all along the way, those dividends normally are going to be what's called qualified, which means they would be taxed at a more favorable rate than either a non qualified dividend or interest. Now, you compare this type of asset location strategy with in the brokerage account compared to holding like bonds or fixed income or cash, what you're doing is, is you're saying I'm gonna make more money over the long run, and I'm gonna pay less taxes on that growth because of the strategy of actually holding high growth stuff here that's taxed in a more favorable way.

Jacob: 13:08

So these ideas and strategies, in my opinion, are kind of like scratching the surface on what's possible here with just a normal taxable brokerage account. I think that every good plan has one included in it. It gives you flexibility and opportunities, and at a minimum, what it does is it allows you to do income stacking in retirement. What I mean by that is, is you can just if you have money in a traditional IRA, a Roth IRA, and then this brokerage account, you can stack your income from each of those different sources in such a way that you can pay the least amount of taxes every single year as you possibly can. Obviously, you've got to factor in, you know, your total long term plan and picture and say, it might be more opportune to actually pay taxes or take more money out of my traditional IRA right now compared to do this stacking, you know, strategy by taking a little bit from Roth and a little bit from brokerage.

Jacob: 13:56

But the key here is not whether or not you should or shouldn't, the key is the opportunity or the option to have this available to you. And that's why I always overemphasize how important this taxable brokerage account can be to someone's ability to save taxes in retirement. If you don't have one, your hands are somewhat tied if everything is in this tax deferred account, because everything is going to be taxed as normal income upon distribution. You kind of can't do much with that. If you have this brokerage account, maybe have a Roth, you have flexibility, you have optionality, and this brokerage account gives you that.

Jacob: 14:25

So here's my encouragement to you. Number one, make sure your investment account is actually invested correctly, and invested in such a way that you can get the most out of it. And typically, means not holding a ton of cash outside of what you know, you need to have in the short term there. Additionally, if you are not saving to one right now, if you're not building one up, I would say really consider doing it. Because again, this thing gives you so many opportunities to lower your future tax bill.

Jacob: 14:52

Yes, you have to put money in there after tax. But if you are maxed out on your four zero one ks, and you're just saving money to a bank account, I would encourage you to stop saving to the bank account and start saving to a brokerage and investing it there so that you can get that long term capital gain clock started sooner, And then you can have opportunities as you approach retirement. So I hope this helps you get a good understanding of maybe some of the opportunities and potential of this taxable brokerage account, why it's really important to any, you know, successful retirement plan. Not saying you can't be successful without it, but the flexibility that it creates is something that most people wish they had if they didn't, and most people are really glad that they have if they do. So thanks for tuning into this week's episode.

Jacob: 15:32

If you found it helpful, be sure to share it with a friend who might could benefit from it as well. If you have a question that you'd like to have answered here on an upcoming Friday q and a, there's a link down below where you can submit that and I would appreciate you doing that because then I have questions to answer. And I love answering listener questions. Thanks so much, and we will talk to you again next week. Hey, it's Jacob again, and I wanted to remind you that nothing discussed in today's episode is meant to be financial, legal or tax advice.

Jacob: 15:59

Retirement Answers is for educational purposes only. Thanks for tuning into this week's episode. I look forward to talking with you again next week.