There’s a piece of your retirement strategy that, if done right, can potentially earn an extra half to a percent each year. It’s related to tax alpha. Alpha is easy to find, but few advisors focus on it. One of the most important parts of a good retirement plan is implementing a tax-efficient withdrawal strategy.

With a little planning, you can really improve the results of your plan by simply not paying more tax than you have to. One thing to understand is how different accounts affect your taxable income, so that’s what we’re going to discuss.

If you’re thinking about your retirement more now, but your advisor is mainly focused on investments, and you’re starting to realize there are more important parts to your financial life like tax planning, income planning, and withdrawal strategies, reach out to us for a free planning session.

#1 – Capital Gains From Selling Your Home

The first one is really just the money that comes from a single event, but we’re sure happy it’s not taxed, and it’s the capital gains from the proceeds of a house sale. Try to think about when you’re retired – are you going to live in the same house you’re in now? Maybe you’re there now because of a job or your kids, but in a new season of life your location may change. We see this once our clients retire. A lot of people move somewhere warmer, sometimes near their kids and grandkids, sometimes away from their kids and their grandkids.

Making sure you plan for how the house sale will impact your retirement plan. If you move and sell your primary residence where you’ve lived in the house for two out of the last five years, then the capital gain should not be taxable if it’s under $500,000, if you’re married filing jointly, or if the gain is under $250,000 for a single filer. Those are the two numbers that you want to keep in mind. Let’s say you bought the house for $500,000 and it appreciates up to $900,000, now you have a positive gain of $400,000. If you’re married filing jointly, that gain is not taxable, which is a huge benefit.

#2 – Roth IRA

The second example that we have is the more obvious one – the Roth IRA. It’s the most common non-taxable account. Don’t worry if you don’t have as much as you wished in your Roth IRA. I’ll share how some retirees are funding this more after they retire. A quick recap: if you have a Roth IRA and you make qualified Roth distributions, then the money you withdraw is considered non-taxable.

For it to be a qualified withdrawal, you have to take the money out after your 59 and a half-birthday (not just in that year when you turn 59 and a half), and you have to have held the Roth IRA for five years or more. Be careful not to make this mistake – if you have Roth conversions, there is a new five-year hold rule for every Roth conversion to make sure that that is a qualified distribution.

The IRS orders the withdrawals for you like this: First they start with contributions; that’s the first thing that you take out of your Roth IRA. Secondly, it’s the conversions, and lastly, it’s the earnings. This is something that you may want to keep track of if you start to use your Roth IRA soon, especially near that five-year rule.

Put More Into Roth After Retirement

Here is how some retirees are getting more into their Roth after they retire. If they work with us, they can look to see how much they can save in taxes over the lifetime of the plan, not just this year or next year. The benefit of converting IRA to Roth can make a lot of sense, especially if they stopped receiving a wage from work before they start social security.

This could be the optimal time to convert. As I’m thinking about this, there’s another non-taxable money account related to this. I’ll call this the bonus method, that sweet spot age we just mentioned could work for your non-retirement accounts where you wouldn’t have to pay tax on gains. If you have a non-retirement account, that’s an investment account, an individual, a joint, a TOD trust, those are some of the names around the taxable non-retirement accounts, and you have investments with big gains.

#3 – 0% Tax on Long-Term Capital Gains

If you have a few years of low income right after you stop working, before you start IRA distributions or social security, you may be able to sell those big gainers and pay 0% tax on the gain. This can be done due to the fact that there’s currently a long-term capital gains tax rate that says if you’re married and have a taxable income under ~$80,000, or if you file singly and it’s around 40,000 year long-term gains that you recognized in that bracket or tax at 0%. 

Be sure to talk with a wealth advisor or a CPA before doing anything big here. Realizing capital gains does increase your taxable income, so while taking them at 0% sounds fun, it’s not something to just go and do. We put a capital gains budget for our clients’ taxable investment account that we stick to after we run their long-term tax plan. When we’re making changes or portfolio adjustments throughout the year, we make sure not to go over that budget.

If you’re thinking about retirement and you’d like to talk to one of the advisors on our team, click here to schedule your free retirement strategy session. If you’re a few years out from retirement, check out our video on the taxable investment account. It’s one of my favorites and it’s probably not too late to start building or adding to that bucket while you’re still earning a good income.

#4 – Health Savings Account (HSA)

So the last type of money that’s not taxed in retirement is one that not many people think about, it’s your HSA. If you have money in your HSA and you’re under 65, you can still use that money from medical expenses and not pay tax on the distributions. The really nice thing about the HSA is that you got to deduct the amount you contributed, it grew tax-deferred, and if you spend it on qualified medical expenses, it’s not taxed.

Some people worry that any money left in the HSA at age 65 is either wasted or taxable, but that’s not true. You should be able to roll that HSA money into your IRA and not pay tax on that rollover, which is a really nice benefit.

Don’t forget to check out the links for our videos on the retirement sweet spot for Roth conversions and capital gains harvesting, the taxable investment account too. Both of these strategies are adding a lot of value for our retirees.

TL;DR

We discussed four different types of money not taxable in retirement, the first being capital gains on house proceeds on a personal residence. Number two, Roth IRAs and qualified Roth distributions. Number three, 0% tax on long-term capital gains for the right tax bracket. Lastly, HSA on qualified medical expenses.

If you have any questions, please reach out to us.

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Disclosures: Securities offered through LaSalle St. Securities LLC (LSS), member FINRA/SIPC. Advisory services offered through LaSalle St. Investment Advisors LLC (LSIA), a Registered Investment Advisor. Streamline Financial Services is not affiliated with LSS or LSIA. LSS is affiliated with LSIA.