How to Keep More of Your Money in Retirement
Imagine this: two neighbors, Alice and Bob, both invest in the same stock, Apple. Fast forward a few years, and they both see their investments double. But when it comes time to sell, one neighbor pays over $30,000 more in taxes than the other. Why? The answer lies in a strategy called tax gain harvesting. In this post, we’ll explore how you can use this strategy to keep more of your hard-earned money in retirement.
The Problem: Taxes Can Eat Away at Your Gains
When it comes to investing, the returns you see on paper don’t always translate to what you keep in your pocket. Many people, like Bob, hold onto their winning investments, fearing the tax implications of selling. But this can lead to a significant tax bill down the line.
Bob’s Approach: He holds onto his Apple stock, avoiding taxes now but facing a hefty bill later.
Alice’s Strategy: She sells her stock in a low-income year, realizing gains without incurring taxes.
The difference in their approaches leads to vastly different tax outcomes. Understanding how to navigate these waters can make a world of difference in your retirement.
What is Tax Gain Harvesting?
Tax gain harvesting is a strategy that allows you to sell winning investments in a year when your income is low, thereby minimizing or even eliminating your tax liability.
Sell High, Pay Low: By selling your investments when your taxable income is low, you can take advantage of the 0% long-term capital gains tax bracket.
Reset Your Cost Basis: When you sell and repurchase, you reset your cost basis, which can lead to lower taxes in the future.
For example, if Alice sells her $200,000 Apple stock in a year where her taxable income is low, she realizes a $100,000 gain but pays zero in federal taxes. Bob, on the other hand, holds onto his stock and faces a $200,000 taxable gain later, resulting in a $47,000 tax bill.
Timing is Everything: When to Sell
To effectively use tax gain harvesting, timing is crucial. Here are three key factors to consider:
Low-Income Years: Identify years when your income is lower than usual, such as after retirement but before Social Security kicks in.
Tax Bracket Awareness: Know the thresholds for capital gains tax. For married couples filing jointly, the 0% bracket applies up to $96,700 of taxable income in 2025.
Diversification: Ensure you can reinvest the proceeds into similar diversified holdings to maintain your investment strategy.
A Simple Workflow for Tax Gain Harvesting
Here’s a straightforward checklist to help you navigate tax gain harvesting:
Identify Low-Income Windows: Look for years where your income is lower than usual.
Sell Lowest Basis Lots First: Focus on selling investments with the lowest cost basis to maximize your tax savings.
Run the Numbers: Calculate your taxable gain, expected tax rate, and any additional taxes like the net investment income tax (NIIT).
Decide on Reinvestment: Choose diversified investments to repurchase after selling.
Important Considerations
While tax gain harvesting can be beneficial, there are a few important factors to keep in mind:
State Taxes: Many states tax capital gains, which can affect your overall savings. Always model state tax implications.
Net Investment Income Tax (NIIT): This 3.8% tax can increase your effective tax rate, so factor it into your calculations.
Medicare Premiums: Realizing gains can push your income up, potentially raising your Medicare premiums later.
The Takeaway: Don’t Let Fear Drive Your Decisions
The story of Alice and Bob illustrates a crucial lesson: don’t let fear dictate your tax decisions. By understanding and utilizing tax gain harvesting, you can keep more of your money in retirement.
Just like a well-timed three-pointer in the NBA, the right move at the right time can make all the difference. If you want to dive deeper into this strategy, check out the full video on our website.
Education only, not advice. Consult your professional(s).