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Don't Retire Early Without Understanding THIS Tax Strategy First · Retirement Answers

• 0:00
  Jacob: Hey, friends, and welcome back to another episode of Retirement Answers. My name is Jacob Duke. I'm your host, as always. Hey, I've got a question for you. What if I told you that you could retire earlier than you expected, pull from your retirement savings without penalty, qualify for health insurance subsidies and pay no taxes in year one through four of retirement.
• 0:22
  Would you believe me if I told you all that was possible? Well, today on the show, I want to walk through a real life case study of a client of mine who's going through this exact situation, how we're making all of these things possible. So that's what we're going to go through today. But first, if you're new here, welcome. My name is Jacob Duke.
• 0:39
  I'm glad that you're here. I hope you find today's episode valuable. If you do be sure to share with a friend, but also go back and listen to other episodes on similar topics related to retirement planning. Hopefully you find them valuable. Now, before we jump in, I did want to make a quick announcement because a lot of you are very big fans of the important numbers data sheet that I give out for free every single year.
• 1:00
  In fact, many of you requested the 2025 data sheet, but I've got great news. The 2026 important numbers data sheet is available now. So if you want a copy of that, I'll be referring to it throughout the episode today because I use it myself every single day in the planning that we do with our clients. But if you want one for yourself to be able to use on your own throughout 2026, there's gonna be a link in the description below for you to click on. You have to do is enter your name and email address.
• 1:25
  I'll send it over to you. It's 100% free for you to use no questions asked. So if you want that, go ahead and click that link in the description and you can grab it yourself. All right, let's go ahead and jump in. I want to share Joe's information.
• 1:38
  I'm using a different name. This is not his my client's real name, but Joe is the name we'll use for this example. I want to give you his information, kind of give you the lay of the land in the background before we jump into what we're tactically doing to make all of these things possible. And hopefully explain it in such a way that's easy for you to understand. Okay, let's go ahead and jump in.
• 1:56
  Alright, so Joe is 54. He's wanting to retire in January 2026. So about a month from now, he is single. He wants to travel and go do things out West. He likes to overland, which is basically you you rig out your truck and get campers and all kinds of stuff on there to be able to basically be self sustaining out of your own truck.
• 2:16
  And so he wants to be able to go do that and have more time for it. His big question is number one, is retirement possible? We answered that previously up until this point as we've planned throughout 2025. But now the questions are as follows. The big question is, hey, what funds can I access first without penalty?
• 2:33
  The next question is, is how can I keep my taxes low or lower them if possible? And then finally, how do I solve this health insurance issue pre 65? Obviously, he's 54 now. He'll be retiring in 2026. And there's a reason for that.
• 2:46
  I'll get to it in just a moment. But how do I qualify for those subsidies if I can at all? Okay, so those are the big questions on his mind. But what about his assets? Well, the first thing to know is Joe does not have any debt, which is a major plus.
• 2:58
  If you are trying to retire and you have no debt, that is a huge deal and a big marker for anyone who's trying to retire successfully. Now, in terms of his assets, he's got $55,000 currently in cash, 308,000 in his four zero one ks. We'll come back to that in just a moment. 53,000 in an HSA, dollars 114,000 in a brokerage account of which 35,000 of that 114 is actually a long term capital gain. 92,000 in a Roth IRA and then 948,000 in a traditional IRA.
• 3:28
  So the bulk of Joe's retirement savings is in tax deferred accounts in combination of that four zero one ks and the traditional IRA. Now, here's the thing to know, that four zero one ks that was not always like that. When Joe came to me about nine months ago, he said, I want to be able to retire in 2026 whenever I am 55. Now, at this time, he had no four zero one ks money, although he did have a four zero one ks available to him. There was minimal matching on it, so he was not contributing to it.
• 3:55
  So there was no dollars in it. All of it was rollover traditional IRA. So what we have done is in preparation for his retirement in January '26, is we've actually rolled a portion of his traditional IRA back into his current employer plan. Now, why would we do that? This goes back to be able to access funds from his retirement savings without penalty.
• 4:17
  There's this thing called the rule of 55. This is an opportunity that's available to anyone who is currently employed and retires in the year in which they turn 55 or later, and has a four zero one ks or 403b or TSP, you can access any of the money in that current employer plan without the additional 10% penalty. You'll always pay taxes on it, assuming it is tax deferred, but you will not pay that additional 10% penalty under the rule of 55. So this leads to a couple things. Number one, we had to roll money back into the four zero one ks for this to be possible at all since he had minimal dollars in that four zero one ks whenever he came to me.
• 4:53
  The second thing is he wanted to wait to retire until 2026. And that's important because the rule of 55 only works with your current four zero one ks from which you are retiring, and you must retire in the year in which you turn 55 or after. Now, the key here is that Joe is not going to yet be 55 whenever he retires in January. Okay, he will be 55 in October later in the year, but he's still eligible for the rule of 55 because he is retiring in the year in which he turns 55. So key point, you do not have to be 55 years old in order to use the rule of 55, you just have to be 55 within the year that you do retire.
• 5:33
  So that's the second thing. And then the third thing that we checked on here with Joe was that his employer plan specifically allowed for qualified distributions early from that plan under that rule of 55. Now, here's the thing, most plans do allow for this, but I always want to double check it before we get to retirement and we start doing the distributions out of the four zero one ks and we get a ten ninety nine at the end of the year that says these are non qualified early distributions. Okay, that's not a wake up call that any of us want. So we want to double check that on the front end, especially on the recorded line.
• 6:05
  You know how all these four zero one ks providers have the recorded line, right? That can be your advantage. If they say, yep, we can do that. You are able to do the rule 55 with our four zero one ks plan. If they ever come back and say, nope, we don't do that.
• 6:18
  Well, we've got a recorded conversation saying that yes, you did in fact tell us that that was possible and now you're saying it's not. So we have something at least to go back on there. All right, so that is the situation. That's why the four zero one ks is important. And that's how we can access that money before fifty nine and a half using that rule of 55.
• 6:36
  We had to get the money back into there, but he also has these other savings. He has this brokerage account. He has this cash, right? He also has a Roth IRA, that Roth IRA, while we might not want to use it if we don't have to, especially early in retirement, it can, you know, keep compounding, we can always access any contributions that he has made to that Roth IRA, regardless of his age, regardless of how long the account has been open. Only that growth amount is subject to the five year rule and the age 59.5 requirement.
• 7:04
  Now for that brokerage account, remember I mentioned that there was a $114,000 in that account of which 35,000 is actually long term capital gains. So a good chunk of that brokerage account is actually the basis. And that's going to come into play here in just a moment whenever I explain how we're going to be drawing down his accounts so that they can be tax free and he can still qualify for the subsidies. Also, the cash position of about 55,000 that he has, that was not always the case. Something that I like to do and like to recommend for my clients to do is start building up that after tax cash before you get to retirement if you don't already have it in place, because it gives you just so much flexibility.
• 7:41
  It gives you the opportunity to have extra income in any given year for random expenses and not hit you with any taxes. Maybe you don't want to pull from cash first if you could otherwise avoid it. We'll talk more about that here in just a moment, but it is there if you did need to have it. So that's his situation. Now, a few different things that I want to kind of point out is like, hey, these are the sticking points for us.
• 8:03
  For him being 65, he's trying to qualify for at least some of the subsidies there with the ACA health insurance plans. Now, for the one that he's targeting and what we're trying to plan for from an income standpoint is in 2026, for him to have a health insurance plan with about a $350 per month premium, the income that he has to be under is $46,500 of modified adjusted gross income. So that's the number that's been provided based on the agent he's been working with. So we're going to go with that number as his top top line for his total modified adjusted gross income in 2026 that we can stay at or below to still qualify for the subsidies that he wants. Now, me personally, I always like to leave a little bit of room here instead of pushing it right up to that number.
• 8:48
  What we're going to try to do is say, what if we just try to hit $45,000 of total modified adjusted gross income? That way we have a little bit of buffer here. I mean, who knows, there could always be some random extra income or interest that just pops in unexpectedly. We don't want to get caught off guard, especially with these ACA subsidies and the premiums going back to the hard cliffs. There's no longer the COVID provisions that are a little more flexible.
• 9:12
  These are going to be very strict here in 2026. So I want to be a little cautious here as we build out the income plan. Okay, so $45,000, that's our total modified adjusted gross income that we're wanting to hit in 2026. And the total amount of expenses that Joe projects for himself in 2026 is about $50,000 Remember, he's got no debt, which is a big deal. So he wants 50,000 net of taxes to spend throughout the year, this month to month, that's his annualized amount he needs to spend, but he can only have $45,000 of modified adjusted gross income.
• 9:46
  How is that going to work? Well, that's where the cash that he has and other tax planning ideas that we're about to get into come into play. So for 2026, the standard deduction for single tax filers is $16,100. And again, I'm looking at my data sheet right here in front of me. Again, if you want your free copy, just click the link.
• 10:04
  You can grab it there below. Now that's important because Joe is saying, is it possible for us to pay no taxes in 2026? I'm curious, at least at the federal level, is that possible? Not barring any state potential income taxes there? So $16,100 that's how much room we have at what I call the 0% tax bracket.
• 10:23
  That's the standard deduction. You can have that much income as a single filer in 2026 and pay no taxes. Now, Joe's gonna work about a week or so in January. He's gonna earn $1,200 he projects in that first week or two until he retires of earned income. So $1,200 is how much he's actually gonna make in 2026.
• 10:43
  If we think about his brokerage and his cash, we could maybe project some interest in dividends. I might shoot just a little high here of about $3,000 that he might end up coming in with next year, depending on how much he spends down throughout the year out of those accounts. So what we've got is we've got some built in income on the front end that we're gonna kind of assume before we start taking money out of his four zero one ks. So $1,200 plus 3,000, that's about $4,200 that we're kind of building in from interest and earned income that's going to take portion of that standard deduction away from us. That's gonna leave though about $11,900 of standard deduction that we have to work with.
• 11:21
  And that is where we can pull the four zero one ks money from. So the four zero one ks, we're gonna pull $11,900 out of that four zero one ks in 2026 under the rule of 55. Okay, so by doing that and pulling only $11,900 in conjunction with his earned income and the assumed interest in dividends, all three of those sources of income will end up being tax free because the standard deduction will cover all of it. So Joe's got $16,100 of income in 2026 so far based on those three sources. All right, now, if we think back to that brokerage account, that's going to be an important part of his early retirement.
• 11:59
  Again, tax diversification, if you can have money in other accounts outside of a tax deferred four zero one ks or a tax deferred IRA, you are gonna be that much farther ahead and you're probably gonna be shocked at how much flexibility that you have in retirement. But that brokerage account that he has, it has about 114 in it, and of that 35,000 is capital gain. Now, we don't have to sell the entire account to get the rest of his money that he needs, because remember, we've already given him 16,100, we have about $45,000 of total room that he can use before he gets to above that ACA income limit that he needs to hit to stay and get the subsidies, but he really needs $50,000 all in. Okay, so if we kind of back out the $16,100 from the 45,000 of modified adjusted gross income that we need to stay under the subsidy income limits, that leaves us with about $33,900 to work with. Okay, of the gains in the brokerage account, we have a total gains of about 35.
• 13:03
  So if we sell a $100,000 of that brokerage account out of the one fourteen, we will be less than how much room we have to work with at the modified adjusted gross income. So we'll just assume like 31 or $32,000 of actual capital gains there within the brokerage account that we can realize, and that would free up a $100,000 of cash immediately. So a $100,000 is freed up, and that is going to both just assume 31,000 of capital gains that are long term. Now, here's the key. Again, going back to the datasheet that $31,000 Yes, it is going to be included in the modified adjusted gross income, which determines whether or not he's going to get the subsidy.
• 13:42
  So that's kind of the main point of this is, is it would fall under that limit whenever you combine it with his other three forms of income we just discussed. But the key with that $31,000 of long term capital gains, if you look at the data sheet that I provided you, you'll see there, there is a long term capital gains bracket section. And for single filers in 2026, the 0% long term capital gain rate goes from $0 all the way up to $49,450 of taxable income. So taxable income is what happens after you already take out the standard deduction. So technically, for a single filer in 2026, you have room of about $49,004.50 plus 16,100, whatever that math comes out to be not going to do it in my head because I'll do it wrong.
• 14:33
  But whatever that total comes out to, that is how much total income you can have, including the capital gains that you realize before you start paying any taxes on your capital gains. Okay, so this is what's called tax gain harvesting. I've talked about it in other episodes and I've done YouTube videos on it in more depth. But this is an important factor to anyone's retirement plan. And personally, it's one of my favorite kind of strategies to use in retirement.
• 15:00
  A lot of people know about tax loss harvesting, where you intentionally sell losses to save on taxes and offset other income. But what we're doing here is we're actually intentionally selling gains at a 0% rate. So Joe's gonna pay no taxes on the long term gains themselves. And the long term gain amount that we are realizing is actually be low enough to still qualify him for that ACA subsidy that he's wanting to get. Okay, so a few things are kind of happening here all at once, and I hope you can pick up on this.
• 15:32
  We've got to stay under $45,000 in order to get the subsidies that he wants in total modified adjusted gross income. That's your top, top, top, top line number. And also too, we're trying to keep his normal income below at or below that standard deduction of 16,100. That was his earned income, dividends and interest, and then also distributions out of the four zero one ks. Those three sources we've added up to where we take the appropriate amount from the four zero one ks, so that we don't go above the 16,100.
• 16:01
  Now, we also have this room between 16,100 and $45,000 of 33,000 ish dollars that we can work with there of the modified adjusted gross income. And we're realizing gains in the brokerage account to fill that up and get him the rest of his money that he needs throughout the year for his expenses. And by doing that with long term gains in the brokerage, you're paying no taxes on the long term gains. So I know there's a lot of numbers flying around in this, but I wanted to kind of point this out to you because a lot of people think that I'm gonna either pay taxes or I'm gonna not be able to access my income, or I'm gonna have to pay this, you know, full premiums on my health insurance. But what I'm trying to show you is that if you know what to look for and know how to structure your income and have options because you created that for you throughout your savings and working career, you have the ability to pay no taxes in retirement, at least in year one, and we can probably stretch this out and do this for him over the next next three to four to five years as he gets closer to 59.5.
• 17:02
  It depends on how long his cash and his brokerage account will last him, right? We might have to use the four zero one ks more than just the standard deduction. We might have to go up to that 10% bracket, but still that's a good 28,000 plus dollars of income that he can have and pay 10% or less on that four zero one ks distribution. And that's over half of his income need moving forward every year. So the key here is that you can have all of this.
• 17:26
  You can have the ACA subsidies for pre 65 health insurance, you can have minimal to no taxes on your income, you can use tax gain harvesting to help do that. You can access your money through the rule of 55 within your four zero one ks and not pay any extra penalties on that before 59 and a half. And there's no magic to it. There's no secret sauce. There's no hidden strategies.
• 17:48
  Every single thing that I'm talking about is available to you. And this is what we help our clients do on a day to day basis as we plan out their income plans and their tax plans and their health insurance plans, because the key is, is they all work together. As soon as you pull a lever over here on which account you pull from, that impacts your tax plan and that impacts your health insurance plan. And all of it has to work together and be cohesive, because if you don't think about your retirement income plan in a comprehensive manner, you're likely gonna get caught off guard and pay extra taxes or higher healthcare premiums or are not able to access the money you thought you could early in retirement. But because of these different ideas and strategies, Joe is ready to go for 2026.
• 18:27
  He's got his he's already got his trip planned across the country, and I'm super thrilled for him. And he's super excited about the plan. He's confident in it because we can write out all the numbers and draw this out and use the software to help project things forward. And it's been awesome to see the relief on his face as we talk about it each and every time. So if you're someone who's like, Hey, Jacob, I want to see what that looks like for me, or is that possible for me?
• 18:49
  Good news. There's a link in the description. You can book an intro call with me. We can get to know each other, see if we'd be a good fit to help you with your retirement plan and kind of your needs. And again, if you want the free important numbers data sheet for 2026, the links in the description below for you.
• 19:03
  Thanks so much for tuning into this week's episode. I hope it's been helpful. If it was, share it with a friend. We'll see you 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.
• 19:18
  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.