How to Pay ZERO Taxes On $100K of Income in Retirement
Retirement planning can be tricky. But what if we told you that a retired couple could earn $100,000 yearly and pay zero federal income tax? It might sound impossible, but with the right strategies, it’s achievable.
Setting the Stage:
Imagine a retired couple, both 66 years old. They plan to claim their Social Security benefits at 70, anticipating a combined total of $65,000. Their assets include:
- $600,000 in a 401(k) plan.
- $600,000 in low-basis stocks in a personal brokerage account.
With no money in Roth IRAs or bonds, the challenge is to generate an annual income of $100,000 tax-free. Here’s how:
1. Leverage the 401(k) Plan:
Withdraw $30,000 from the 401(k). Typically, this is taxable. However, the $30,700 standard deduction for married couples offsets this, making it effectively tax-free.
2. Capitalize on Long-Term Capital Gains:
Sell $70,000 worth of the long-held stocks from the brokerage account. With a taxable income under $89,250, including the capital gain, this sale benefits from the 0% long-term capital gains tax rate.
By combining these strategies, the couple can achieve their $100,000 income without incurring federal income tax.
Key Takeaways:
- Understanding Tax Brackets: Tapping into accounts without exceeding tax-free limits is vital.
- Diversified Asset Allocation: Holding assets in various types, each with distinct tax treatments, offers flexibility and planning options.
- Flexible Withdrawal Rates: Depending on other income sources, like impending Social Security benefits, it’s feasible to adjust withdrawal rates temporarily.
Why Lucia Capital Group?
While this strategy may seem unconventional, it aligns with a well-managed bucket strategy. Our advisors at Lucia Capital Group are equipped to help clients navigate these intricacies.
Tax management, diversified income sources, and strategic asset allocation—these pillars drive our financial planning. At Lucia Capital Group, we craft solutions tailored to each client’s unique situation.
Ready to optimize your retirement plan? Let Lucia Capital Group guide your journey. Contact us today!
Important Information:
The information provided should not be considered specific tax, legal, or investment advice and is not specific to any individual’s personal circumstances. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
Different types of investments and/or investment strategies involve varying levels of risk, and there can be no assurance that any specific investment or investment strategy will be profitable for a client's or prospective client's portfolio, thus, investments may result in a loss of principal.
You should always seek counsel of the appropriate advisor prior to making any investment decision. All investments are subject to risk including the loss of principal. This material was gathered from sources believed to be reliable, however, its accuracy cannot be guaranteed.
Examples cited are hypothetical, are for illustrative purposes only, are not guaranteed and subject to potential federal and state law amendments. There is no guarantee that you will achieve the results discussed or illustrated.
Roth IRA distributions of principal from a Roth IRA are tax-free; however, any earnings will be taxed at ordinary income rates and a 10% penalty tax will apply if withdrawn prior to age 59½ or within five years of the date the Roth IRA was established, whichever is longer.
It is important to keep in mind that investments in fixed income products are subject to liquidity risk, interest rate risk, financial risk, inflation risk and special tax liabilities. Interest may be subject to the alternative minimum tax.
The information provided is based on current laws, which are subject to change at any time. Lucia Capital Group is not affiliated with or endorsed by the Social Security Administration or any government agency.
Social Security rules can be complex. For more information about Social Security benefits, visit the SSA website at www.ssa.gov, or call (800) 772-1213 to speak with an SSA representative.
Rick Plum is a registered representative with, and securities and advisory services offered through LPL Financial, a registered investment advisor and member FINRA/SIPC. The investment professionals are affiliated with LPL Financial and are conducting business using the name Lucia Capital Group, a separate entity from LPL Financial.
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