What if I didn't leverage tax advantaged accounts before retiring?

[dangbe]

I recently retired but my portfolio seems a bit abnomal compared to most people here.  I have only about 5% of my portfolio in tax-advantaged accounts and the rest in a regular brokerage.  How bad did I screw myself?  I'm assuming I will be paying more taxes every year so the 4% rule may be more like the 3% rule for me. And perhaps I may not be able to control whether I qualify for MAGI or not.  Is there anything else?  How big of a deal is this?  Should I throw all of my money away and start over?

[Rob_bob]

I would think the brokerage would be most tax efficient as that is where you normally pull money from first, then 401k/IRA and Roth last.

A 401k and tIRA are a way to convert LTCG into ordinary income in regards to taxes.  LTCG and qualified dividends have the lowest tax rate.  If you sell stock with the lowest cap gains you might be able to have a zero Federal tax.

[kite]

Maybe you’re not as screwed as you might think.

I’m 90% in tax deferred accounts. And I’m going to have to pay that tax as I draw down the accounts. Deep in the weeds on ROTH conversions right now before the tax rates reset in 2026. As it happens, all my expectations of having a lower income tax rate in retirement turned out to not be exactly right.

If the CBO projections are true, my rates will be far higher as my retirement progresses than they are in 2024 & 2025. The rates are resetting anyway, but funding future obligations is going to take even more money and the only place for congress to get it is from those who still owe income tax.  That was the deal all along, that the IRS would eventually get their share of our 401k’s and 457b’s. 


If all your money is after tax, you won’t have income tax.
If you can get any of it into ROTH accounts now, you can let it accumulate with no further tax exposure.

[dangbe]

I would think the brokerage would be most tax efficient as that is where you normally pull money from first, then 401k/IRA and Roth last.

A 401k and tIRA are a way to convert LTCG into ordinary income in regards to taxes.  LTCG and qualified dividends have the lowest tax rate.  If you sell stock with the lowest cap gains you might be able to have a zero Federal tax.

So I had this completely backwards.  I thought having some taxed as income and some taxed as capital gains let you stay under a tax bracket for both, but I think I misunderstood.

How do I determine stock with the lowest capital gains if I'm all index funds?  Do I choose a Last-in-first-out strategy since those probably have the least gains?  Sorry for my ignorance I have never drawn from my brokerage accounts before.  And not familiar with how to reduce my taxes when doing so.  Perhaps I need to do some reading.

[Tass]

Be careful that your "last in" purchases have been held long enough to qualify for long-term instead of short-term capital gains.

I do not have any hands-on experience with this so take my thoughts with a huge grain of salt, but I have been working on a spreadsheet that includes withdrawal strategies, so I'm going to take a stab at this and I welcome any corrections:

Your LTCG rate is 0% if your taxable income is less than $44k for single and $89k for married couples. https://www.irs.gov/taxtopics/tc409#

This means you can take that number + the standard deduction out of your brokerage each year without paying any tax. For 2024, that's $44,625 + $14,600 = $59,225 for a single filer, or $89,250 + $29,200 = $118,450 for a married couple. Pulling these amounts out of a brokerage will result in $0 taxable income. (If you're going to itemize in retirement you'll have to do the math yourself.)

Those high standard deductions are going to expire in 2026, so expect them to revert to roughly half their current value, giving you approximately $52k single or $103k married to work with.

I think you should be fine if you spend lower than this amount annually. You've missed out on tax savings while you were earning, but if you've gotten this far anyway that's just water under the bridge. If you want to spend more than this amount, you'll start paying the 15% LTCG rate on brokerage withdrawals over these numbers.

If you want to qualify for the ACA instead of Medicaid, you may have an issue because you'll need a certain amount of taxable income for that, but that's the extent of my knowledge on that subject.

[dangbe]

This means you can take that number + the standard deduction out of your brokerage each year without paying any tax. For 2024, that's $44,625 + $14,600 = $59,225 for a single filer, or $89,250 + $29,200 = $118,450 for a married couple. Pulling these amounts out of a brokerage will result in $0 taxable income. (If you're going to itemize in retirement you'll have to do the math yourself.)

Hmm my wife is still working and we typically file jointly.  I wonder if it'd be better to file separately because of this...

If you want to qualify for the ACA instead of Medicaid, you may have an issue because you'll need a certain amount of taxable income for that, but that's the extent of my knowledge on that subject.

I wonder if anyone else can weigh in on this.  Right now I'm on my wife's employer sponsored plan but that won't last forever once she stops working.

[Tass]

This means you can take that number + the standard deduction out of your brokerage each year without paying any tax. For 2024, that's $44,625 + $14,600 = $59,225 for a single filer, or $89,250 + $29,200 = $118,450 for a married couple. Pulling these amounts out of a brokerage will result in $0 taxable income. (If you're going to itemize in retirement you'll have to do the math yourself.)

Hmm my wife is still working and we typically file jointly.  I wonder if it'd be better to file separately because of this...

Filing jointly with only one income earner will probably save you a ton on your taxes. Can you live off your wife's income (partly or entirely), or are responsible for covering your expenses out of your own accounts?

[dangbe]

This means you can take that number + the standard deduction out of your brokerage each year without paying any tax. For 2024, that's $44,625 + $14,600 = $59,225 for a single filer, or $89,250 + $29,200 = $118,450 for a married couple. Pulling these amounts out of a brokerage will result in $0 taxable income. (If you're going to itemize in retirement you'll have to do the math yourself.)

Hmm my wife is still working and we typically file jointly.  I wonder if it'd be better to file separately because of this...

Filing jointly with only one income earner will probably save you a ton on your taxes. Can you live off your wife's income (partly or entirely), or are responsible for covering your expenses out of your own accounts?

Hmm, you're right there could be some pretty hefty tax benefits to doing that.  We have kept our finances quite separate but perhaps its time to combine them as we can live off her income alone.

[dandarc]

Be careful that your "last in" purchases have been held long enough to qualify for long-term instead of short-term capital gains.

I do not have any hands-on experience with this so take my thoughts with a huge grain of salt, but I have been working on a spreadsheet that includes withdrawal strategies, so I'm going to take a stab at this and I welcome any corrections:

Your LTCG rate is 0% if your taxable income is less than $44k for single and $89k for married couples. https://www.irs.gov/taxtopics/tc409#

This means you can take that number + the standard deduction out of your brokerage each year without paying any tax. For 2024, that's $44,625 + $14,600 = $59,225 for a single filer, or $89,250 + $29,200 = $118,450 for a married couple. Pulling these amounts out of a brokerage will result in $0 taxable income. (If you're going to itemize in retirement you'll have to do the math yourself.)

Those high standard deductions are going to expire in 2026, so expect them to revert to roughly half their current value, giving you approximately $52k single or $103k married to work with.

I think you should be fine if you spend lower than this amount annually. You've missed out on tax savings while you were earning, but if you've gotten this far anyway that's just water under the bridge. If you want to spend more than this amount, you'll start paying the 15% LTCG rate on brokerage withdrawals over these numbers.

If you want to qualify for the ACA instead of Medicaid, you may have an issue because you'll need a certain amount of taxable income for that, but that's the extent of my knowledge on that subject.

So this isn't correct. The LTCG tax rates apply to gains - not the total amount you withdraw unless you manage to have $0 basis in whatever the investment is that you're selling. And also to qualified dividends, which you'll pay tax on regardless of whether you withdraw those or not, but dividends tend to run ~2% of portfolio if in the more or less standard index funds, so the taxes tend not to be a huge deal.

With the situation of one person working and other retired (early), all kinds of tax-strategies become viable, assuming a joint-view of all the finances at the end of the day - even if it is a theirs-mine-ours deal operationally, you could still consider it all "ours" for big strategy decisions.

Example strategy:
Wife immediately starts maxing all tax-advantaged accounts available to her, and at least a spousal IRA for OP. Then you could draw from the taxable account to make up whatever gap that creates to cover living expenses. Obviously need much more info than we have here to come up with optimal, but 2-player mode is kind of a fun game to play with regards to minimizing taxes.

[Tass]

Thank you for the correction! Doesn't that mean that you can withdraw even larger amounts of money from a brokerage account, as long as the gains are lower than the values I gave?

[Catbert]

Thank you for the correction! Doesn't that mean that you can withdraw even larger amounts of money from a brokerage account, as long as the gains are lower than the values I gave?

Yes.

At all income levels the capital gains rate will always be less than the earned income rate.

Dangbe - At least at Fidelity selecting particular lot(s) of mutual funds to sell is easy.  When you start to "sell" on their website you first select the particular fund you want to sell.  It will then show you all your individual purchases over the years with the capital gains for each.  You can select which lots you want to sell.  I'm sure other companies have the same easy option.