Here’s How to Pay $0 Taxes on $100k Retirement Income
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- เผยแพร่เมื่อ 19 พ.ค. 2024
- Cheat Sheet: rootfinancialpartners.com/imp...
As a financial advisor, I've often heard the phrase, "If it sounds too good to be true, it probably is." However, in the case of creating tax-free income in retirement, this adage doesn't necessarily hold up. In today’s video, I share a real-life case study of our clients, John and Jane, who we helped generate $100,000 of tax-free income in retirement.
A Common Misconception: Many think that funneling all their savings into Roth IRAs during their working years is the key to tax-free income in retirement. While Roth IRAs can be a valuable tool, they're not always the best strategy for everyone, especially for those nearing retirement age.
John and Jane Doe came to us with a solid retirement plan, including $500,000 in a joint investment account, $650,000 in traditional IRAs, and $150,000 in Roth IRAs. They also had reliable Social Security benefits, with John receiving $3,200 per month and Jane receiving $2,000 per month, totaling $62,400 annually.
Our challenge was to help them maximize their income while minimizing their tax liability. Here's how we did it:
Utilizing Social Security and Dividends: We started by leveraging their Social Security benefits and dividends from their investment account. By strategically combining these income sources, we were able to generate $72,400 annually, tax-free.
Strategic IRA Distributions: We carefully calculated IRA distributions to ensure they remained within a tax-efficient range. By withdrawing $11,600 from their IRA, we brought their total tax-free income to $84,000.
Optimizing Brokerage Account Withdrawals: To reach the desired $100,000 tax-free income, we withdrew $16,000 from their brokerage account. Importantly, half of this withdrawal represented a return of principal and was not subject to taxation, while the other half was non-taxable long-term gains.
John and Jane achieved their goal of $100,000 in tax-free income without incurring any federal tax liability. Even though they had a substantial portfolio and reliable Social Security benefits, careful planning allowed them to minimize their taxes effectively.
We also emphasized the importance of long-term tax planning, encouraging John and Jane to consider strategies such as tax gain harvesting and Roth conversions. These approaches can further optimize their tax situation and reduce their lifetime tax liability.
Creating tax-free income in retirement is indeed possible with careful planning and strategic decision-making. By understanding the nuances of tax law and optimizing income sources, retirees can enjoy a comfortable retirement without the burden of excessive taxes.
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⏱Timestamps:⏱
0:00 - 100k in wages pre-retirement
3:41 - Tax bracket choices in retirement
7:09 - Dividends
8:57 - IRA
11:44 - Brokerage accounts
14:34 - Minimize lifetime tax liability
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I'm a CPA who specializes in taxes. What's impressive to me is not that you have the software, but you understand in detail how the tax laws work to optimize their tax situation. Not many financial advisors could do that.
maybe you could explain why a regular ira withdrawal is taxed at LTCGs rates instead of marginal rates. tax deferred ira withdrawals are always treated as regular income for the whole amount even if it was in individual stocks is the general understanding.
@@Random-ld6wg watch again around 7:30. The dividends did not come from an IRA but from a taxable investment account outside of an IRA in which $250k post tax dollars were invested.
@mpat146 is there any specific software you would recommend for a similar analysis to the video? I suppose it could be done just using turbo tax for a experimental dummy return?
@@Random-ld6wg I didn't follow that reasoning either.
@@Random-ld6wg When the income exceeded the standard deduction, the "excess" was categorized as coming from qualified dividends, which are LTCGs.
This is the most cheerful and uplifting talk on taxes ever!
Pretty brilliant. This is the type of service that financial planner should offer to clients, but which few do. Kudos to you.
Great video. For those of us fortunate to get a pension at retirement, we will have to pay taxes. I've been converting pre-tax dollars for years to minimize taxes at retirement. It's been hard work but I'm proud to be a Roth millionaire.
Did you convert after retirement when the tax bracket was brought down?
Congratulations!
@@wlee3400 See that is what I don't get about Roth's. If you aren't in a lower income bracket when you retire then why are you saving for retirement?? I did regular IRA's to get the tax break when I filed taxes. When I start drawing out of my IRA, I'll be in a much lower tax bracket.
Great video.
As I’ve said before, I prefer the ones where you demonstrate something in your software instead of just speaking all the numbers or concepts.
Life lesson for those of us younger folks: put money in different buckets to give your financial advisor more options when it comes time for you to retire.
I agree. Having a huge taxable account gives you more flexibility in optimizing your tax strategy. There is a lot I would have done differently if I just had access to information. That is why these videos from Root Financial is so educational and informative.
Yes! Many people have all their retirement held in pretax accounts that can’t be touched (penalty free) prior to age 59.5. This locks many people into extra working years that otherwise could’ve retired earlier if they created different accounts that create flexibility.
@SS-qr5qk That's becase they were telling us a different story- When I started my career it was all about TSAs and Pre-Tax plans were the way. Consider that it was not until 1998 that Roths were even available. Overall, there was less planning for taxes IMO.
Keep money the hell out of the 401k and IRA bucket they will tax you to death when you retire or your spouse dies. They are a tax trap for the IRS.
@@charliehargrave7458 But you don’t get taxed on it initially. So say you’re making 250k working. You’re in a high tax bracket. In retirement, you may be in the $80k tax bracket.
The best of all your videos that I’ve watched. It was shorter and to the point, and dealt with the complexities of retirement income 🏆
Perfect timing, now I know why we owed 0 in taxes. A major tax software company was unable to explain this to me. Our taxable income was about half of what was shown in your video. Our situation was almost identical to your sample couple. Definitely will be moving some funds to a Roth over the next 6 years minimizing the tax bite.
Fantastic video. All facts and education with a great example. No fluff or BS trying to sell nonsense. Thank you!
Thank you for sharing, James! Being an accountant, I understand explaining tax concepts to the general public is not easy. Great job!
Best video I've seen on this. Exactly what I'm laying the foundations for. Cheers!
I had no idea... This is really eye opening. Thanks for the info.
James, super awesome video and very clearly presented. thank you for doing this.
James, thank you for this phenomenal walkthrough of the taxability thresholds of SS and other unearned income. You've made it extremely clear starting from the ground up. I'm a "basic" volunteer tax preparer and a long-time investor nearing retirement. Very well done.
This helps me in my retirement strategy thanks so much for your advice!😊
This is exactly the information I have been looking for. Was going to sit down and figure this all out but you showed super clearly how this works.
You gave me a better view on how to strategically minimize taxes. Thanks, James.
Very informative and easy to follow in deciphering this maze. thank u.
He said the clients took $11,600 from their IRA. At their ages (65) they do have that option to take out or not. Once they reach age 73 they will have Required Minimum Distributions and the amount could be more than enough to put them in a taxable position. I have clients with $Millions in their IRA/401k. They always have a tax bill and the RMD gets larger each passing year.
Good problem to have!
If you have a Roth, then RMD can be avoided I think, but not in 401k
"Even if it wasn't" --> "Even if it weren't"
Great presentation on tax saving in retirement. I have been retired for 6 years, but have not tapped my IRA. My wife is fully retiring next month, and we wil begin taking IRA and brokerage acct. distributions. YOU ROCK!!!
It would be nice to have these examples done for a single person. Why is every example always done for married couples?
Because everyone hates us cranky grumpy old singletons. 🙃
The math isn't much different because you likely have half the social security, half the standard deduction, and probably half the withdrawals/dividends/cap gains but it won't matter that much. Just enter everything into your favorite tax software and you will see what you owe pretty easily. You can play around with the numbers in the software to see how different moves impact taxes.
It's harder for a single person to live on a comfortable income while paying zero tax. Even with an income of $70,000, achieving the zero-tax goal would be difficult. The tax code should be changed to treat singles and married couples more equally.
@@gordo3582 That is what I wanted to hear. Tax software knows how old we are right? It seems like a silly question but I had no idea we qualified for more deduction after 65. I don't figure anything, the software does it for me.
Excellent explanation and case study
Phenomenal break down!
Woah! This was a much more in-depth and advanced video than I was expecting! That is some really cool software!
My mind has been blown 🤯 that’s awesome
🎯 Key Takeaways for quick navigation:
00:00 *💼 Explaining the idea of paying zero tax on retirement income*
- Explains that video is not about putting all money into a Roth IRA.
- Pledges to walk through an actual client case study to explain creating a significant tax-free income.
01:10 *📊 Assessing tax implications in working years*
- Case study of 'John and Jane', hypothetically earning $100,000 in wages, to assess tax implications.
- Breaks down the standard deduction for tax year 2024.
02:38 *🧾 Calculating total tax*
- Shows how the marginal tax brackets work, calculating the total federal tax they would pay.
- Mentions FICA taxes or payroll taxes as an add-on cost.
03:48 *👴🏼 Introducing the retirement scenario*
- Introduces the retirement scenario with John and Jane each receiving social security benefits.
04:57 *💭 Creating the tax-free retirement income*
- Explains how to create $100,000 of tax-free income in retirement for the client.
- Introduces the tax plan software they use for tax liability projection.
06:49 *💰 Incorporating dividends into taxable income*
- Adds dividends from the client's taxable account into the taxable income.
- Explains why Social Security is still tax free.
09:28 *👛 Adding IRA withdrawals for income*
- Adds specific IRA distributions to the income and shows how it affects the tax.
- Tactical tax planning is conducted to see how much more income they can generate before paying taxes.
12:07 *💵 Selling assets from the brokerage account*
- Demonstrates the process of selling assets from the brokerage account to generate income.
- Explains how the tax liability is calculated from the gain.
13:59 *🎯 Emphasizing the goal for minimizing lifetime tax liability*
- Emphasizes the goal is not to pay zero tax in a single year but to minimize lifetime tax liability.
- Suggests taking full advantage of tax gain harvesting.
- Recommends considering a Roth conversion strategy to minimize future tax liabilities.
15:50 *🚫 Reviewing Common Tax Mistakes in Retirement*
- The video ends by pointing out the common tax mistakes by retirees.
- The video suggests watching another video to learn about those mistakes.
- Invites viewers to visit the website to know more about Root Financial's services.
Made with HARPA AI
Great analysis and illustrations.
Thanks James for a great explanation of how you can get money out at retirement without paying any taxes by taking the money from various types of investments! I do understand that just because you can doesn't mean it's the right thing to do because of possible future taxes.
James, thanks for the extremely enlightening example. I would be interested in seeing an equivalent analysis for a similarly situated early retiree including the ACA subsidy impacts and potential state income tax. How much would California’s income tax affect the example for this couple? Does it shift the gains harvesting strategy if they plan to relocate from CA?
Great advice on how to keep more of your own money that you have earned. Thank you.
I did not watch this, but wanted to say, because i just learned it, that if your income is all from capital gains, and nothing else, it is not taxed.
It’s exciting- I’m planning on retiring next year, so I’m trying to educate myself. But it makes my head spin. I need to watch the social security video, to understand how the taxable portion is calculated.
Great clear video. That is very helpful. For this example, what would be the total amount above $100,000 that they could take out before paying any taxes?
Great job. Thank you. Is this software program you are using available to me?
He did kind of gloss over the fact that the dividends in the example are all qualified vs. ordinary, so it made it look like he was saying the IRA distribution was taxed as capital gains, but it is actually the qualified dividends. I had to go back and re-watch that part to figure that out...
Yes, I’m still confused about the $11,600 he took out of IRA. My understanding is that IRA withdrawals are treated the same as “regular income” (like wages) for tax purposes.
How can IRA withdrawal/distribution be treated as long term capital gains? That’s wrong…
@@lavonnewhelchel7506 He certainly didn't clarify that there must be "stacking" laws within the IRS rules that permits the additional LongTerm gains to be considered last, and therefore not be included within the marginal income. Because in reality the IRA and Brokerage withdrawals would absolutely put the taxable income much higher then what his model is showing.
@@lavonnewhelchel7506yes, it is still treated as “regular” income, but it doesn’t exceed the threshold amount to become taxable, so it is in essence, free from tax until the amount becomes large enough to push past the line.
Starting at 9:54 he does in fact say the IRA is ordinary income. Requires multiple viewings to completely understand
James, is the goal to minimize taxes or maximize wealth during retirement? The strategy may be the same, but not necessarily, and my goal would be to maximize wealth. Considerations of having pre-tax or after-tax funds at the end of life is also important for inheritance. Thanks for the great video!
Hi James! I've been listening to your podcast on retirement for the past four years. I retired two years ago at age 62. This episode was especially interesting because I don't really understand how to reduce to my tax liability in retirement. I currently receive survivor Social Security benefits and have since turning 62. I plan to switch over to my own Social Security benefit at age 70, and it should be higher than what I am currently receiving. I currently live off of pension and Social Security and investment income for a total retirement income. I filed with an H&R Block tax specialist (cost $385 - $450) the past few years and itemized my deductions because for these years it was more beneficial than taking the single standardized deduction. Going forward, I wonder if you'd recommend I work with an accountant that can help me realize more tax advantages? I had no idea I could actually pay $0 in federal taxes in retirement. Thank you so much of your content. I have found it to be solid information on investing in retirement and now how to save on taxes in retirement. Retirement is absolutely THE BEST!!
Scale of preference is something that applies everywhere.. thanks for this video.. in conclusion, diving in isn’t ideal for investment uplifting
Great video. Would like to see max they could take out without being taxed. Then where to invest this extra. Would like to see a program that can optimize the withdrawals from different buckets, potentially reinvest extra taken out, with all the distribution requirement constraints.
Terrific video. Are capital gains included in provisional income?
Wow. Eye opener... Watching the other video now....
Great video, obviously the larger challenge is do you minimize taxes now or are would you be better off doing Roth conversions? Also, would you mind telling us what tax software you use?
Pretty amazing. Here in the UK they are fast abolishing Capital Gains Tax allowance. This new tax year 24-25 it has gone down from £6000 to £3000. As for the state pension ("social security"), when I finally get mine in a few years it won't be enough to pay my wine bill (it's about $1000 a month).
Great video! I thought it would be another whole life insurance pitch/scam 😂
This is a really informative video. One reality from the proposed model is that as the client sells stock from the brokerage account, the dividends portion of their income will reduce each year, requiring them to sell a greater portion of their brokerage portfolio each year to cover the difference. This will somewhat “snowball” and will shift the tax liability above zero in maybe a year or two (I’m guessing and have not forecasted this out). So, although this is great information and super positive for the client in year one, it is not a “forever no tax” model for the client. Hopefully viewers of the video realize this and don’t assume that they’ve just found the magic, no tax formula. That noted, if my assumptions are not correct, i’m open to listening to logical course correction.
Great video!
Been working for 28 years. I recently started to learn about investing in a taxable account. I was so pissed with my 401k. Can't wait to Cash it out and take control of my money.
This is great. Wondering if you could do one for a single person. Maybe contrast if they were retiring early like 55 vs. 65 just interest and those in FIRE.
Hi James, Another solid video, however I do have a critical question. From your example you were bringing in additional income that was obvious capital gains. However these capital gains are indeed income which resulted in larger portions of taxable social security benefits.
So how can you assume that the IRS is looking at the Capital Gains as the portion that should be considered last when looking at what is taxable??? Does the IRS consider a "stacking" approach to determine what should be considered as Marginal Income vs simply considering Long Term Gains as equally taxable as other income???
I enjoy your videos a lot. Am planning to retire at the end of 2024 and am doing a LOT of research. This one was very helpful. Is there a way that us "normal people" can get access to a tool like you used in this video that just lets us play "what if" with our various potential income streams? It would be worth paying for!
Is it possible to move only some over to a Roth where you would still be, say for example, a 12% tax bracket, versus a 22% bracket for the year. I am asking for myself. Thanks!
You can move any amount, there is no limit.
@@user-tn8xx6vt3p
@@user-tn8xx6vt3p yes
Paying taxes is not a bad thing #1. But interesting how you stacked their income. Nice job.
Great explanation James, Thanks! Is it possible to purchase the tax projection software used in this video?
I've been trying to get at what software he uses for a year. No one has given me an answer. Let me know if you ever find out.
In these modern times, every video is promoting a sale of some kind. “Where’s the beef!”
most people I know are still living paycheck to paycheck both before and after retiring.
this is the result of living in a small town without good paying government or factory jobs.
My social security, after 25 years in the navy, and military pension come to just $36,000 a year.
where did the rich people in your example work?
This is great information! I wonder how military retirement and federal retirement would play into this.
Your retirement pay is taxed as ordinary income which will increase the amount that is taxed of your SS up tp 85% of it. So anything above the standard deduction of that gets taxed as regular income
I haven't watched the video yet, but I will hazard to say that for a couple the way to pay zero taxes is to structure their income so it is a mix of social security, qualified dividends and long term cap gains. The only trick is to have your social security low enough that 85% of it is less than the standard deduction. The only issue is state tax since lots of stated do tax qualified dividends and long term cap gains. That is often offset by the state not taxing social security though.
Wow, very impressive.
Outstanding! I’m interested to know how interest income comes into play.
@KelvinBerlinscammer!
How will this work for someone receiving a pension, and with funds in a 401K as well as a Roth IRA? Have you made a video covering this scenario?
Rather than using your proprietary software, is it possible to use the actual completed federal IRS tax form(s) that were used in your example?
Just wow!!
I can’t seem to find the Social Security tax video that he mentioned at 6:36. Would help clarify lots of details.
Nice example but the one thing you can't control is your dividend and long term capital gain. The market can ruin your long term planning. Companies like Intel can cut their dividend so your yearly dividend amount is unpredictable. And I wouldn't want to take capital gain in a down year like 2020 and 2022 where my portfolio is down 30 to 40%. Likewise in an up year with NVDA and META this year, my capital gain is way over the tax limit. So, it's impossible to plan for $0 tax each and every year.
How do you figure the cost basis if you invest monthly for 20 yrs into a taxable or IRA account? Figuring out your regular divs, qualified, long term and short term gains seems challenging unless you use some magic software.
The smart play is to get as much of your savings into anything ROTH. PAY the government now and take your contribution and any earnings taxes already paid and no MRD! Thus is clear. You will pay taxes either now or later! Period! He mentions the MRD comong up later for these 2.❤
This all sounds good however notice that your ordinary income can easily go over the threshhold so that you won't get any LTCG taxed at 0%.
I swapped from a zero rate to the 1.30. Is it worth swapping out of the .90 to go back into the the 1.20 rate if that happens to be it ? I am not thinking I will be keeping them for 30 years , more like 10 at most. thanks
One thing not quite right: All international stock funds will have at least part of their dividends be non-Qualified, whereas the video assumed they were 100% Qualified. In that situation you will pay a bit of foreign tax (withheld from the dividend) and get a dollar for dollar Foreign Tax Credit. All this does not materially alter the useful and true message of the video.
Where can we find software like the one used in this video? It seems like navigating Intuit to do something similar would be painful. Any suggestions?
I am currently in my 50s and This is no time to taper retirement savings. I want to max out my retirement contributions and I also have another $120k in a savings account that i want to invest in a non-retirement account. Where would you invest this as of now?
i’ve been in NVDA for four years, anytime it drops 15% my coach advised I buy more. Buy when others panic to sell. I’m cashing up some blue chip stock at a cheaper price.
They did above.
I wonder if TurboTax would have also come out with $0.00 in federal taxes? Would it have been smart enough to take the $17,580 taxable income and apply it to qualified income / long term capital gains instead of ordinary income?
In the description it say “get access to the software I use in this video”. Is that a part of the retirement academy or is there another way to get access to this software? Thank you and I appreciate your videos!
Sorry I just took that down! That was a mistake on my end. Retirement planning academy provides lifetime access to Right Capital. This software in this video only comes with advisor access.
I use this software for running my own calculations. Software is called Holistaplan. Great tax forecasting tool. I’m not working in the sector
I thought money pull from the ira is taxed at ordinary income?
Exactly! This guy treats it as long term capital gain….which is a lie
I don’t see how IRA distribution is taxed in this example.
My software taxes it as income! Ergo taxes due on April 15.
In Canada, even your social security is taxed at 12% we get ripped off
Since I retired 12 years ago I have not had to pay any tax at all and make $90,000+ (on average per year) and won't pay any taxes for at least another 5 years. I have Capital Loses I have to write off from years of investing I am still using. i have made $77,000 already in 2024 in 3 months time.
Am I right to say the large RMDs will make this strategy unusable?
James, you seem like a smart guy. Why do you keep spelling "principal" wrong?
I don't understand. It looks like you are treating each income stream separately in your software.
Great video! I'm just a bit lost at why withdrawls from a brokerage account are taxable? Unless there was a sale of equities at a gain??? I know you are in business to make money but, any recommendstio s on tax software to calculate taxes, ie Roth Conversion possibilities prior to the next tax year?
he said "we would sell $16k from our brokerage account". and his example was a $500k brokerage account where $250k was gains (to make it simple). so of that $16k, $8k was capital gains.
try the 14 day free trial of "New Retirement" for Roth conversion planning. It's $120/year to subscribe.
NewRetirement offers an excellent online tool for calculating exactly how to maximize withdrawals with the most favorable tax outcomes. I think it cost $29 a year or something like that.
I would like to pay for a meeting but says you won't accept meetings without considering employing you guys long term. Unfortunate... i am hands on with my own money and just looking to learn abd create a clearer vision.
My Social Security benefit is on disability because I'm too young and I am disabled. Does the same apply if my provisional income is less than $32,000 and my SS benefit is based on disability?
What is the difference between taxable brokerage vs IRA pretax account?
Something you said doesn't make sense. You say that IRA distributions are taxed at the long term capital gains tax rate. However, I've always heard that IRA distributions are counted as income and are therefore taxed at income tax rates. Can someone explain what I'm missing?
Most Americans find it hard to retire comfortably amid economy downtrend. Some have close to nothing going into retirement, my question is, will you pay off mortgage as a near-retiree, or spread money for cashflow, to afford lifestyle after retirement?
I wouldn’t consider money I put to buy stock as an income, only profit after I sell a stock is income not a base I bought stock with. So James can you clarify that these people really had 100K of income and didn’t use a saving as part of this calculation?
Investing in Roth IRA can be a good choice. I have been managing my portfolio myself, When I withdraw from my Roth IRA in retirement, I won’t have to pay tax on it, which will help me keep more of my hard-earned money.
I agree with you, especially for near retiree and does who knows nothing next to finance it is the best thing to do speaking from experience.
Could your background BE and more bland?? John and Jane saved on taxes, but at what advisor fee amount? Definitely some good points to consider and for me, add to my qualified dividend producers in my taxable accounts!
Nobody works for free!❤️
I am not sure how the $11,600 withdrawal from ira is ltcg rather than ordinary income. Am I missing something here? If that’s true, it should be great news. James, please clarify since many address same question. Thanks.
How about a video like this for married filing separate?
Little bit of word play here. $8k from the the broker account is, as stated, not taxed because that's a return of principle. Withdrawing money from a savings, checking account isn't really "income". But I get the point.
How much will they pay for the taxable SS portion?
Since everything but SocSec and IRA is qualified, couldn't they have taken more from the IRA so it plus the SocSec would fill the standard deduction? With 18K in cap gains and 17K taxable income it sure seems like there was room to get more out of the tax deferred IRA, especially if it wasn't needed for spending and was converted to the Roth.
It was just a scenario
I am confused, why their income was taxed as long term capital gain, not ordinary income?
Why is the $11,600 from IRA taxed as long term capital gain? I thought IRA distributions are taxed as ordinary income.
So what would they owe on 20,280 of taxable social security given that their provisional income was too high?
So many of James' videos basically boil down to "Step 1: Be full Social Security benefit age, have enough of a benefit that most Americans could live comfortably off of. Okay, on to step 2..." I know it's not incorrect, and this is one real example that isn't meant to apply to everyone. But a lot of these success stories sound like the "problem" is pretty much solved by the time we start.
"Clients Billy and Stephanie have $8k per month in tax free benefits." Okay, so, we're done. That's enough for a great life without additional strategy.
I wonder how long the can gets kicked before the remainder of their portfolio can no longer dodge the tax bullet.
Our 401K is from Wal-Mart so it includes WM stock. How do they differentiate what is what when you rollover or take a distribution from your 401K?
If you do a rollover of the Walmart 401k into an IRA with another institution, you can then move the money into any IRA investment fund that the new institution offers.