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Retirement Tax Planning: What It Is (Actually) + Why It Matters · Retirement Answers

• 0:00
  Jacob: When you hear the words tax planning, you're probably already thinking about Roth conversions. And this is no fault of your own because Roth conversions are a hot topic for retirees due to people like me talking about them and the benefits of them. But I want to push back on this a little bit because tax planning is about so much more than Roth conversions alone. So in today's episode, I'm going to break down the six primary components of tax planning for retirees so that you have a true understanding of what really goes into building a real tax plan. But before we jump in, if I have not met you yet, my name is Jacob Duke.
• 0:31
  I'm a certified financial planner and the owner of River Tree Wealth, where we specialize in helping people just like you plan smarter so you can retire better. So why do I think this is such an important topic to talk about? Well, because I have multiple conversations every single day and most of the time they start with Jacob, I'm retired or I'm thinking about retirement. And I listened to all of your content about tax planning. And I think that I need to be doing Roth conversions.
• 0:55
  Can you help me do that? And this question is a great one, but it tells me a few things right off the bat. It first tells me that they're paying attention and they can see the long term issues or effects of having really large tax deferred accounts, but it also tells me that there's something missing. There's something missing in their idea of what tax planning is, and maybe some of the things that could be beneficial in their situation that are not being discussed or talked about because tax planning is about so much more than just Roth conversion. So let's just go ahead and dive into some of the other parts of tax planning that you need to be looking at and evaluating for your situation beyond Roth conversions.
• 1:27
  The first thing that comes to mind for me is gonna be your brokerage account and using it effectively. Whenever you have a brokerage account, you've put in after tax money into the account, that's called your basis. So if you have a $100,000, you invested that over time in your investment account, Guess what? You have a $100,000 basis in that account. The growth on that $100,000, that is going to be taxable perhaps in a couple different ways.
• 1:47
  You could have dividends, which would create taxes for you on an annualized basis. You can have interest that's also going create taxes for you annually. Then you might have capital gains, whether they're short term or long term, but a capital gain is whenever you sell an investment within that account, and you have a gain that's happened. So a $100,000 now worth a $110,000. Well, if you sold all of the investments that make up that 110, you now have $10,000 of capital gains, regardless of it's short term or long term, that you will have to pay taxes on.
• 2:16
  Now, can keep holding that $110,000 in the account and never sell it, but again, you'll likely have some sort of interest or dividends that are flowing into that account every year because of your investments. And those will be taxed on an annual basis because you're gonna get a $10.99 from your custodian saying that your investments produced income, therefore you will pay taxes on that. So that's a brokerage account. Now, what most people don't think about from a tax planning perspective, I've talked about this many different times, there's really two things that you can take advantage of here with this style of account, this brokerage account, is you could do what's called tax loss harvesting, and this may be the more popular of the two things. Basically, what you do here is you intentionally sell something that's gone down in value within your account, so you sell it at a loss in order to do one of two things.
• 2:59
  You could either offset other gains you have somewhere else in your portfolio, or you can use up to $3,000 of those losses on annual basis to offset against your normal income. So if you realize $9,000 of capital losses within your brokerage account, and you don't have any other gains to offset against that, you can take $3,000 this year and apply that to your normal income. So now you have $6,000 of losses to carry forward into future years, and in the next couple of years, you can use 3,000 again and 3,000 again, to use all of your $9,000 of losses to offset against your normal income. Now, tax loss harvesting is helpful, right? Because you get that immediate deduction in this particular tax year, that's an immediate tax saving.
• 3:41
  So tax loss harvesting is beneficial, absolutely. But what I would argue is perhaps more beneficial from a tax standpoint is what's called tax gain harvesting. This is whenever you intentionally do the opposite of tax loss harvesting and you try to sell something that's gone up in value in order to realize those gains at a 0% long term capital gain rate. Jacob, what do you mean 0%? How is that possible?
• 4:03
  I thought that I would pay taxes whenever I sell something that's gone up in value. And the answer is, is you will, but here's the thing, the tax rate can actually be 0% on a long term capital gain and a long term capital gain for those of you who don't know, is simply whenever you hold an investment for longer than one year. So when it comes to long term capital gains, if you meet that one year minimum holding period, you have three different tax rates you could be taxed at. It's either zero, fifteen or 20%. Now I'm not gonna dive into the full taxing and harvesting idea here because I've done episodes on that.
• 4:33
  I'll have that link down in the description below, or you can just scroll and kind of find which episode it was here a few months back and just go see where that is and just go learn more about taxing and harvesting because it's one of my favorite things to do with my clients because it is so powerful. So within this brokerage account, have two opportunities tax gain harvesting and tax loss harvesting. So remember those and keep those in the back of our minds. The next thing you have to think about whenever you are doing a full tax plan is your IRA taxation. Now this could be like a traditional IRA or it can be your tax deferred four zero one ks or tax deferred four zero three B or TSP or whatever it might be your employer plan.
• 5:07
  Really, we're talking about tax deferred money here because here's the thing, whenever everybody thinks about an IRA or just tax deferred accounts in general, they're thinking about Roth conversions. Hey, I gotta be doing conversions so I can get money out of my tax deferred account. Jacob said it was gonna be a really bad thing in the future because there's so many issues that can pop up with my RMDs being way too big and paying a ton of money in taxes in the future. And that might be true, right? There might be some justification of Roth conversions, we have to analyze it and see it for yourself.
• 5:35
  But what most people don't think about when it comes to IRA taxation is going to be the fact that you could actually have distributions out of your traditional IRAs or your four zero one ks, as I've said before, at a 0% tax rate. Now, how's that possible? I know the tax rates here in at least in 2025 are 10%, 12%, 22, 24, and so on. How is there a 0% tax bracket? Well, you've got this thing called a standard deduction.
• 5:58
  So at a minimum, you're going be able to deduct a certain amount of money from the get go, regardless of how much you've earned. So for married filing jointly folks in 2025, that is $31,500 now after the One Big Beautiful Bill Act that has been passed and is now law. So So $31,500 here in 2025, married filing jointly for single folks, it's half of that at 15,750. Obviously, if you are above 65 or blind, you have an opportunity to have a higher amount there. So I won't get into that today, but regardless at a minimum 31,500 or 15,750, depending on your tax filing status.
• 6:33
  So at a minimum, if you're married filing jointly, you can have $31,500 of normal taxable income and pay no taxes. That's what I call the 0% tax bracket because you're using your standard deduction to your advantage. Now, how does this play into retirement? Well, if you think about it this way, if you have no other taxable income, right, and you pull $31,500 out of your IRA or your four zero one ks, you can do that and pay no tax on it. But Jacob, are the odds of having only that distribution of 31,500 be my only source of income?
• 7:04
  And maybe not, right? You have to have something else, maybe it'd be a pension, maybe it's social security, maybe it's dividends or interest from your different cash or investments within your brokerage accounts. There's different things that are probably coming in, but here's the key. Whenever you have these different sources of income, this plays in again to the tax planning picture. Let's take these two things.
• 7:23
  Let's take $31,500 out of our IRA. Let's then also realize $30,000 from our brokerage account and take that money to live on. So we're gonna have a total income here in retirement of about 61,500 between those two things. Now, here's the catch, whenever we have a brokerage account, we take $30,000 out of that account, we have to sell something that's probably gone up in value in order to take that 30,000. Let's just assume that the basis on that 30,000, our original investment was actually only 15,000.
• 7:51
  So we have $15,000 of growth and then $15,000 of our original investment. So what happens there is the original investment that's not included on your tax return at all. So really what's happening is you have $31,500 of IRA distribution that's classified as normal income, but then you also have this long term capital gain of 15,000 from the sale within your brokerage account, that is going to be classified as a long term capital gain and that tax rate again is either zero, fifteen or 20%. Now, if we look at this 31,500 plus 15, that's about 46,500. That's our total AGI at this point.
• 8:28
  So if we've got that, we know that our standard deduction is 31,500. So we're going to subtract that out of this and really what that's going to do there is that's going to offset our IRA distribution. And then we have 15,000 left over. So does that mean it's going be taxed at normal income tax rates? Nope, it's going to be taxed at those long term capital gain rates of 1520%.
• 8:48
  And here's the catch. Again, for assuming that we're married filing jointly, here in 2025, the 0% long term capital gain bracket is from $0 of taxable income all the way up to $96,700 So just call it $96,000 for a round number. Now, zero to $96,000, that's what our taxable income can be and still have no taxes on our capital gains. And remember, we already reached our taxable income by saying we had, what was it 46,500 of AGI, we subtract out our standard deduction of 31,500, which basically just accounts for our IRA distribution, and then the 15,000 that's left over, that is our taxable income, and again, since we're less than $96,000 and we're married filing jointly, then we would pay no tax on that capital gain, and we also paid no tax on that IRA distribution because of that standard deduction. So that's just for married filing jointly, you have to cut these numbers in half and to make it work for single folks, But the key here is that most people just don't realize that they can actually take money out of their traditional IRAs with other tax planning opportunities out of their brokerage account if they have one and still pay no taxes.
• 9:55
  So essentially people can turn their tax deferred IRAs where they received a tax deduction on the front end, when they put the money in while they were working and take that money out as if it were a Roth IRA in the future because of how the tax code works, how you can stack your income together. So that's just a couple of things, brokerage accounts, IRA taxation, obviously Roth conversions can play a big role into this. I'm not going to talk about Roth conversions today because I could do a whole episode on that and I have in the past. I want to talk more about these other items that could be beneficial from a tax planning standpoint. So just so you know, Roth conversions do play into the IRA taxation game, and you can actually use those to your advantage if your account balances warranted.
• 10:32
  Now, if we keep going down the list here, let's think about Social Security taxation. Okay, so I've talked about Social Security taxation a bunch. I've done episodes on it as well. I have that link so you can go check it out. But Social Security taxes are not done the same way as normal income.
• 10:45
  So at most 85% of your benefits are ever going to be subject to taxation. So that's the first thing. Now, the second thing is this, you could have none of your benefits subject to taxation if a few things are true. Number one, if you have no other taxable income, no IRA distributions, no brokerage account, capital gains, no dividends or interest or anything else, you know for certain that you're not going to pay any taxes on your benefits at all because of how Social Security taxation works. Again, not going to run through it right now because that would take a little bit of time, but there's this thing called a provisional income and you have to run it through the brackets there and then see how much of your benefits are subject to taxation.
• 11:22
  When you do all that, regardless of how much social security benefits you get and what your totals are, if you don't have any other income, you're not paying tax on those social security benefits. Okay, so that's what you need to know. Now, here's the next thing. You can actually add a certain amount of money, whether it be from IRA distributions or capital gains from tax gain harvesting or pension or anything else. You can add a little bit of extra income to this still have none of your social security benefits being taxable, but also you might not have any of your IRA distribution or pension or anything else be taxable as well because of how again, this whole thing fits together.
• 11:56
  So I encourage you to go check out Social Security Taxation episode, it's gonna make things a lot more clear for you as you understand how these taxes work on your benefits, but also you can take what I'm giving you here in this episode and kind of understand how these things fit together. Now, the next thing that's an easy win for everyone is gonna be what's called asset location. Again, done an episode on that, but asset location is whenever you strategically position your different investments within your different account types to match how those account types are being taxed. So for example, you wouldn't want to have high dividend payers or income producing money markets or bonds or treasuries if you can avoid it in your brokerage account. Now, why is that?
• 12:35
  Well, because every single year, again, the brokerage account is going be taxed whether you want it to be or not on dividends, interest and long term capital gains or any sort of capital gains that are being realized. So you don't have to sell investments in your brokerage account to actually get a ten ninety nine and be forced to pay taxes on it. You wouldn't want to hold these high income producing assets in your brokerage account if you can avoid it, you'd rather hold those high income producing assets. Again, dividend stocks, treasuries, interest bearing fixed income type investments, hold those in your traditional or tax deferred accounts like your four zero one ks's and your IRAs, okay? Because those are what's called tax sheltered.
• 13:10
  You only pay taxes on those tax deferred accounts whenever you pull money out of the account. So you can have as much dividends or interest or capital gains and turn over the account as much as you want to and still pay no taxes. The only time that a tax is actually created is whenever you take money away from the account. A brokerage account does not do it that way. You do not pay taxes on any distributions that happen from the account, you pay taxes as you go.
• 13:33
  Now, here's the next thing with a Roth IRA, you probably wanna have your highest growth assets, whatever they are in the Roth IRA, because again, the Roth IRA is a tax free account. So you want that money to grow as much as you possibly can, so you build up as much tax free income potential for yourself in the future. So that one you don't wanna have in fixed income, you don't wanna have it in bonds, you don't wanna have it in very conservative assets because you would be giving up the benefit of the account being tax free growth and then tax free distribution. So that's asset location in a quick summary. And again, this fits into all of these decisions.
• 14:08
  So for example, if you're thinking, hey, I might have to do Roth conversions because my tax deferred account balances look like they're gonna be really high in twenty years after they grow over time. What you might wanna do is actually intentionally cut back on how much that particular account is growing if you have a Roth and if you have a brokerage account to offset or counter that by investing those more aggressively because you can control the investments within your IRA. What that does is it actually helps you reduce or curb the amount of growth that you're gonna have, which lessens or lowers the tax consequences of those large RMDs in the future because your account balance will be a little bit smaller than if you had invested aggressively. Instead, you might wanna invest the brokerage account because you can get again, tax gain harvesting, invest that aggressively, but also your Roth invest that aggressively for either higher tax free income for you or a better inheritance for who's behind you. Now, brings up the next thing we've got to consider here whenever it comes to tax planning overall, if we think big picture, it's gonna be legacy planning.
• 15:09
  So two things I want to hit on here really quickly. Number one is the widow's tax trap, recently did an episode on that explaining how the risk isn't so much a big deal while you're married filing jointly on your RMDs, it's after one spouse passes and at that point, the surviving spouse would have much larger taxes because they're going to have the same amount of money in terms of tax deferred assets, but also the same amount of RMDs required minimum distributions. But the problem now is that they're gonna be a single tax filer rather than benefiting from the larger and wider married filing jointly tax brackets. So the widow's tax trap is something to think about whenever you're thinking about long term and legacy planning, because what happens here is if you don't consider the effects of this, you could end up forcing your, number one, your spouse to pay a lot more in taxes in order to do those RMDs and have that flow onto their individual tax return. But the problem then is not so much that, it's that you have less money in your family's possession because whenever your surviving spouse passes away, then they will have paid a lot of taxes on the tax deferred money, which leaves left to your heirs down the road.
• 16:12
  So what's the solution to this? Well, it might be Roth conversions, getting as much money again out of those tax deferred accounts, if it's gonna be a problem, you might need to project this forward and kind of look and anticipate what the issues could be and how big those issues might be. But if you can identify that, hey, I've got too much money already in a tax deferred account and I need to be doing Roth conversions to not have that large of an RMD so that the widow's tax trap is never an issue. But then also to the next step of this legacy planning is what will your heirs receive one day? Because there are some unique rules around how people receive an inheritance depending on the type of funds they get.
• 16:46
  For example, a brokerage account, that one gets a step up in basis whenever it moves to the next generation. So if your kids one day are gonna receive some assets, you'd want them to receive the most tax advantaged or tax friendly assets. One of those is gonna be real estate that gets a step up in basis. Another one's gonna be a normal brokerage or investment account that's gonna get a step up in basis as well. But then also Roth IRAs or Roth money, that's what you wanna leave to your kids or your heirs down the road as well, because they're not gonna pay tax on any of that upon receipt or upon distribution.
• 17:18
  And then finally, one of the worst things you can leave to your heirs is gonna be tax deferred IRAs or 401ks. And not only because that money has to be taxed as normal income, whenever they receive that and then start taking money from it, but because they have to have all that money taken out by the end of a ten year window after your death. So what that does is it speeds up the timeline in which they have to take the money out of the account, and also makes the annual distributions depending on what they plan to do and how they plan to do it. It likely is gonna make those larger, which is gonna simply increase how much tax they're gonna pay because they're likely working earning an income, and if they're doing really well for themselves, they could be paying upwards of 30 plus percent on these distributions because they're forced and they have to have that money out by the end of that ten year window. So the legacy planning piece plays into the tax planning conversation overall, because you've got to think about this not just in one single year.
• 18:10
  Now, the final thing that I want to share with you here is around charitable giving because a lot of people are charitable and whether they give to their local church or charity or want to leave something after they're gone. So whether it's giving while you're alive or post death, there's a few different things to look at. Number one is what's called a QCD or a qualified charitable distribution. This is a direct gift from a traditional IRA, where you can give that money to the charity of your choice in that particular tax year, and essentially this is going to offset or accommodate any required minimum distributions you have up to a 100 ish thousand dollars depending on the year, it slightly increases based on inflation. So let's call it a $100,000 for round numbers, you can do up to that amount in QCDs every single year.
• 18:55
  So here's a hypothetical. Let's say that you have a $20,000 RMD requirement because of your account balance that you have tax deferred, you're like, I don't need all $20,000 I only need $10,000 to meet my living expense needs, but I also like to give to my local charity, and I like to give 10,000 a year. Perfect, these are great numbers. So 10,000 a year is what you like to give. Well, instead of taking your $20,000 RMD, and then giving $10,000 cash to the charity, you're likely still gonna be using a standard deduction, so you might not ever use that 10,000 as an itemized deduction on your return.
• 19:30
  So what you would do instead of doing it that way is you would just simply cut a check from your IRA with $10,000 on it and send that to the charity of your choice. And then your RMD requirement is now only $10,000 because the QCD accommodates half of your $20,000 RMD requirement. So basically QCDs can offset RMD requirements, and if you're charitable or plan to be, it's a great way to think about how to minimize your tax burden on those RMDs, which again goes back to this conversation of Roth conversions, because a lot of people think about Roth conversions and the fact that they need to get no money in their tax deferred accounts and they'll wipe them clean and have $0 and I'm like, well, that's not exactly true because again, there might always be an opportunity to take money out of your IRA at 0% using your standard deduction, but then also if you are charitable, you might wanna think about leaving a certain amount of money in your tax deferred IRA so that you can use these QCDs to your advantage and the charity wins and you win in the future and you didn't have to pay tax on the front end by doing a conversion to only give that money later when you could have just waited and gave it to them in a tax efficient manner at that point.
• 20:32
  So hopefully you're seeing how this really all works together that you can't just make one decision in a silo. You can't just say I want to do a Roth conversion because Jacob said to, you've got to think about the big picture and factor all these different tax planning opportunities into it because what might work for one person may not work for another. Now, one of the final thing here on charitable giving is if you do have maybe a really high income year or you have the opportunity through highly appreciated stocks, maybe you can do what's called bunching in terms of your gift. You can do this bunching technique where you take three to five or ten years worth of anticipated giving and you pile that into one year and you can use a donor advised fund to where you can basically take ten years worth of giving front load that into one year, contribute that all to a donor advised fund. The deduction actually happens this year when you make that contribution to the donor advised fund.
• 21:22
  And so what you do is you can use that to offset your income in that particular tax year, and then you can meet your giving obligations in the years to come from the donor advised fund instead of doing it one piece at a time over that ten year period. So bunching with donor advised funds, maybe using highly appreciated stocks to do so, or if you have a really high payout or a big income year, maybe you sold a business, a donor advised fund could be very helpful. If you are charitable already or plan to be in the future, think about using bunching strategies for your giving. So again, this is real tax planning. These are the things that you need to be thinking about.
• 21:56
  There's obviously other stuff here that might be in play that I might not have covered, but these are the big ticket items. You gotta think about brokerage accounts and the advantages you have there. IRA taxation, how you can still take money out of a 0% bracket if a few things line up, how Roth conversions fit into the overall plan, Social Security taxation in general, the fact that not all of your benefits are taxable, and in fact, none of them could be if you do a few things right, asset location, legacy planning and giving to your kids or your heirs, and then also charitable giving while alive. There's so many things that can be done rather than Roth conversions or around Roth conversions, but the key is, is you have to know what to look for and you have to know how to fit it all together through income stacking, proper location of your investments, and understanding when and where you can pull money from at certain times, given the opportunities you've created for yourself. So this is a lot of high level stuff.
• 22:46
  What I want to offer to you is number one, if you want the updated important number sheet, then please shoot me an email, it should be listed down there below. So you can just shoot me an email saying that you want that important numbers PDF, and I'll send that over to you. It's got the new updates for the one big beautiful build that was passed here a couple weeks back. I want to share that with you. If you have an old version, shoot me an email, I'll send that to you again.
• 23:07
  And then also too, if you're someone who's like Jacob, I get it. There's a lot going on here. I just don't understand how to fit it all together. I want you to help me if you're in that camp. If you're like, hey, I want some help with this.
• 23:16
  Then there's a link down in the description as well for you to book a call with me. Happy to have a conversation, see if there's anything that I can do to help you on a specific individualized advice and planning level. I'd love to have a conversation to evaluate that with you. Other than that, I hope you have a great day and a great rest of your week. We'll talk to you again very soon.
• 23:38
  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. Retirement Answers is for educational purposes only. Thanks for tuning into this week's episode. Look forward to talking with you again next week.