I know you don't want to pay more than you need to in taxes , but too often people start discussing Roth conversions the concept that if you've invested well , your 401k or your IRA , if you've moved it from a previous company , is going to keep growing and then in the future you're hit with those required distributions .
Now , ideally , we can avoid paying a crazy amount in taxes by doing something called a Roth conversion to essentially minimize your lifetime tax bill . But sometimes there's an even better strategy and that's what I'm going to discuss today . It's called tax gain harvesting .
Most of you have heard of tax loss harvesting , but tax gain harvesting can actually be more effective . I'm going to show you an example why . If you don't already know , my name is Ari Taublieb . I am a certified financial planner , I'm the host of the Early Retirement Podcast and I'm the vice president at Root Financial Partners .
We're going to hop right in and I'm going to start with a comment from the YouTube channel . Now , if you're listening on the podcast app , I'm going to explain the comment . If you're watching on YouTube , you can see it on your screen . This comes four days ago from Trisha 54 .
If I'm single and my taxable income is less than 47,000 a year and I sell my house , will I owe 0% in capital gains from the sale ? I've lived in the house for 25 years . What an interesting question . Most people don't understand what Trisha's bringing up , not due to competency , but because they've just never heard of it before .
And what Trisha is alluding to is called tax gain harvesting , and I'm going to explain an example so you can see what I mean . Let's assume you bought Apple stock for $10,000 and it grew to $100,000 . Awesome , that's $90,000 of growth . Now most people just put in their heads I'm going to have to pay capital gains taxes on that , and they're not wrong .
But capital gains has a different tax bracket , meaning a different schedule that you have to pay taxes on compared to ordinary income . So ordinary income , that is your traditional 10% , 12% , 22 , 24 , 32 , and so on . That's the marginal bracket system that we have here in the US . Capital gains goes on a different schedule .
So I'm going to explain it , but you can also see it on my screen right now . If you want to pay 0% in taxes this is not me misspeaking or making up something from Ozark , that Netflix show . This is real stuff here that too many people ignore . Now let me be clear the tax gain harvesting that I'm going to tell you right now .
This only applies if you have a brokerage account . If you're wondering about should I do this in a 401k or a Roth , this is not something you can do . It's only in a brokerage account . So that is an account that you put money into . There's no time constraint , so you can take it out before 59 and a half , but you can pay capital gains taxes .
It's a powerful tax technique that too many people overlook . So , for example , you buy Apple stock for $10,000 . It's now worth a hundred thousand . That is $90,000 of gains If you are married finally jointly .
So the example was single , but I'm going to tell you married finally jointly , because that's most of you , and your income is below $94,050 and you've held the position for over a year . So you buy Apple stock for 10,000 in 2022 . Now we're in 2024 . Your income is hypothetically $0 . Now it's probably not going to be zero .
You're going to have interest , you're going to have dividends . I'm just keeping it simple . You buy it for $10 . It's worth $100 . Well , that's $90,000 of gains . You would pay 0% taxes on that . The next $4,050 , you would also pay 0% taxes . It's only once you actually have income above 94,050 that you jump to the 15% capital gains .
Most people just default to going , yep , I'm going to have to pay 15% in capital gains . But that's not actually how it works and it's actually missing a step because there's something called a standard deduction . Most of you already know this , but this is a decision you get to make at tax time . Should I take the standard deduction or should I itemize ?
If I have mortgage interest and big healthcare expenses and charitable giving , itemizing might be more effective . It might minimize your taxes beyond a standard deduction .
But if you're taking a standard deduction of , let's just call it , $29,200 and you're adding that to the $94,000 , well , that's north of $125,000 that you could generate in tax-free income in retirement . So when does this make sense ? Do you have an appreciated stock ? Did you buy a stock for $10,000 that's now worth $100,000 ? Do you have an appreciated stock ?
Did you buy a stock for $10,000 that's now worth $100,000 ? Do you have significant gains in a brokerage account ? If I see someone come to me with a $3 million brokerage account , on average a million dollars of that is actually cost basis and the rest is growth . Maybe they have Nvidia or Microsoft or Apple or Tesla , and so they want to diversify .
They just want to do it intentionally . If this is you , with a healthy amount in a brokerage account as opposed to a Roth IRA or 401k , it can be special . It can almost act like a Roth IRA because you put money in after tax , just like a Roth , it grows . You assume that you have to pay taxes on it .
But if you take it out and you're intentional and let's assume you retire at 50 , you could hypothetically realize $94,050 plus the standard deduction of about $30,000 and say I'm going to , on purpose , go sell Apple stock , but not a ton of it , just $125,000 so that I can pay 0% taxes .
And I'm going to do that every year to make sure you don't pay more than you need to . So it's pretty cool . This is called tax gain harvesting . Most of you are familiar with tax loss harvesting . Tax loss harvesting is if you've bought Apple stock for $5,000 and it grew to $8,000 and you go sell it , you have to pay taxes on that . Now you're paying .
Generally , if you have a salary and interest and dividends , you're probably paying 15% in taxes Not the end of the world , but you're paying taxes . But what if you bought Apple stock for $5,000 ? It's now worth $8,000, . But you also bought Coca-Cola for $5 , but it went down in value by 3,000 . So now it's only worth two .
Well , you have Apple you bought for five . That went up by three to eight . You have Coke that you bought for five , that went down , is worth three . You can offset those and now go invest however you see fit without paying taxes on that . You can offset the gains to the losses . And then you can actually go a step further and go .
Yeah , you know I bought Apple , but it actually didn't go up in value . I actually bought Coke and it did go down . And what you can do is go . I know Coca-Cola is down .
I'm going to go sell it on purpose , I'm going to capture these losses and then I'm going to buy something equivalent , not Coca-Cola , but I'm going to buy a different stock or a mutual fund . You're on purpose selling to realize a loss and you can use that to offset gains in future years . So the premise of tax planning has to be integrated with investments .
Now let's go back to the question . If I'm single and my taxable income is less than $47,000 a year and I sell my home , well , I owe 0% in capital gains . This is not enough detail to give an answer . And the reason what if this person bought their home for $100,000 and now it's worth $10 million ?
They're going to be paying a lot of taxes because they have huge gains . What if this person is single and they bought the home for $100,000 and now it's worth $200,000 ?
Well , if you've lived in the home for you can see 25 years you're going to actually be able to qualify for the exclusion , which means the $250,000 of gains on your property you don't have to pay . So if you bought it for $100,000 and it's worth $200,000 , you just get to sell it for $200,000 .
If you bought it for $100,000 and it's worth $200,000 , you just get to sell it for $200,000 . Now , yeah , there's broker fees and commissions and stuff like that , but you don't have to worry about capital gains . But let's get a little more complicated . Let's assume you bought it for $100,000 and now it's worth $300,000 .
Well , well , well , well , that's $200,000 of gains . Let's go a little harder . What if you bought it for $100,000 and now it's worth $400,000 ? Well , that's $300,000 of gains . Now , assuming she has no other income , $250,000 of that you don't have to pay taxes on , you get an exclusion , but there's still $50,000 left over . So she might go $50,000 left over .
I'm going to pay taxes , but she might not have to because if her income is once again below $47,000 , she can pay 0% taxes on long-term capital gains and remember , she has the standard deduction . So 47,000 plus 14,000 is giving us enough income that she will likely pay 0% in taxes . But she probably has interest in dividends and other things .
So there might be a little bit , but this is something for her to consider . The next comment here is someone who says from Bill Nardo 1554 , do you recommend tax loss harvesting in retirement ? Oftentimes it can be a good tool if you have a brokerage account , but often it's really not as important as tax gain harvesting , which is often not discussed .
I know I just said often three times , so I'll stop saying that as often you like that . Okay , I know it's a often three times , so I'll stop saying that as often you like that . Okay , I know it's a bad joke .
Next one this comes from Mr E , who says on a previous video I mentioned this topic and look at this I recently realized that 94,000 of capital gains will be tax-free . We are retired at 49 and have cash brokerage , pension and Roth . Coincidentally , we have 400,000 in an unrealized gain position in Apple .
My plan is to sell $94,000 the next few years to pay $0 in taxes and roll the proceeds into VOO . Then our pension kicks in . We'll cover most of our expenses . We withdraw 2.5% and that will fund our retirement for 50 years and still die with more money than we have .
I just gave you an example , before I even read this , of exactly what this person is going to do . An awesome job of this person isn't worried about Roth conversions . Now , I don't know how much they have in an IRA or 401k and we always want to understand what's going to put more money into our pocket .
Is it doing Roth conversions or is it doing tax gain harvesting ? So should we pay 0% in taxes , which is very attractive , or should we do Roth conversions ? Sometimes it's going to make sense to conversion , sometimes harvesting . The real value in working with an advisor is to help you determine that .
If you're looking for more guidance like this , check out the Early Retirement Academy so you can run your own projections and start to figure this out . If you want to work with an advisor for these big , big I'll call them surgical type financial moves oftentimes you want to make sure you're doing it right . I know I said often .
Again , I'm going to stop saying that . That is it for this episode . Short and sweet , more technical , but hopefully helpful regarding tax planning for an early retirement . Thank you for listening to another episode of the Early Retirement Show .
If you have a question that you want answered in a future episode , you can always go to my website , earlyretirementpodcastcom that's earlyretirementpodcastcom , and you can go ahead and submit a question that I'll look to answer in a future episode . Thank you all for listening .
Please do rate it , review it and share it with someone who you think would benefit from this information . If there's anyone out there that you know , I certainly appreciate it and I will see you all each week . Hey guys , it's me again . Please be smart about this . Nothing in this podcast should be construed as financial , tax or legal advice .
Consult with your tax preparer or financial advisor before taking any action . This podcast is for informational purposes only .