Here’s How to Pay $0 Taxes on $100k Retirement Income

As a financial advisor, I've often heard the phrase, "If it sounds too good to be true, it probably is." However, in the case of creating tax-free income in retirement, this adage doesn't necessarily hold up. In today’s video, I share a real-life case study of our clients, John and Jane, who we helped generate $100,000 of tax-free income in retirement.

A Common Misconception: Many think that funneling all their savings into Roth IRAs during their working years is the key to tax-free income in retirement. While Roth IRAs can be a valuable tool, they're not always the best strategy for everyone, especially for those nearing retirement age.

John and Jane Doe came to us with a solid retirement plan, including $500,000 in a joint investment account, $650,000 in traditional IRAs, and $150,000 in Roth IRAs. They also had reliable Social Security benefits, with John receiving $3,200 per month and Jane receiving $2,000 per month, totaling $62,400 annually.

Our challenge was to help them maximize their income while minimizing their tax liability. Here's how we did it:

Utilizing Social Security and Dividends: We started by leveraging their Social Security benefits and dividends from their investment account. By strategically combining these income sources, we were able to generate $72,400 annually, tax-free.

Strategic IRA Distributions: We carefully calculated IRA distributions to ensure they remained within a tax-efficient range. By withdrawing $11,600 from their IRA, we brought their total tax-free income to $84,000.

Optimizing Brokerage Account Withdrawals: To reach the desired $100,000 tax-free income, we withdrew $16,000 from their brokerage account. Importantly, half of this withdrawal represented a return of principal and was not subject to taxation, while the other half was non-taxable long-term gains.

John and Jane achieved their goal of $100,000 in tax-free income without incurring any federal tax liability. Even though they had a substantial portfolio and reliable Social Security benefits, careful planning allowed them to minimize their taxes effectively.

We also emphasized the importance of long-term tax planning, encouraging John and Jane to consider strategies such as tax gain harvesting and Roth conversions. These approaches can further optimize their tax situation and reduce their lifetime tax liability.

Creating tax-free income in retirement is indeed possible with careful planning and strategic decision-making. By understanding the nuances of tax law and optimizing income sources, retirees can enjoy a comfortable retirement without the burden of excessive taxes.

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⏱Timestamps:⏱
0:00 - 100k in wages pre-retirement
3:41 - Tax bracket choices in retirement
7:09 - Dividends
8:57 - IRA
11:44 - Brokerage accounts
14:34 - Minimize lifetime tax liability

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Worried about retirement?

[mpat]

I'm a CPA who specializes in taxes. What's impressive to me is not that you have the software, but you understand in detail how the tax laws work to optimize their tax situation. Not many financial advisors could do that.

[lesahofmeyer]

This is the most cheerful and uplifting talk on taxes ever!

[hamiltonjames]

Pretty brilliant. This is the type of service that financial planner should offer to clients, but which few do. Kudos to you.

[dtovar]

Great video. For those of us fortunate to get a pension at retirement, we will have to pay taxes. I've been converting pre-tax dollars for years to minimize taxes at retirement. It's been hard work but I'm proud to be a Roth millionaire.

[bvoyelr]

Life lesson for those of us younger folks: put money in different buckets to give your financial advisor more options when it comes time for you to retire.

[jimludlow]

I figured this out when I retired 8 years ago. I have some interest income b/c I have cash reserves, but I pay less than $800 in taxes with a $100K income. Good to see someone else doing it.

[KAndGrm]

Perfect timing, now I know why we owed 0 in taxes. A major tax software company was unable to explain this to me. Our taxable income was about half of what was shown in your video. Our situation was almost identical to your sample couple. Definitely will be moving some funds to a Roth over the next 6 years minimizing the tax bite.

[shawnbrennan]

Great video.
As I’ve said before, I prefer the ones where you demonstrate something in your software instead of just speaking all the numbers or concepts.

[paulallen]

James, as a retired financial accountant, I applaud your ability to explain this information. Most financial folks understand the nuts and bolts, but struggle teaching their clients how this works. Thank you.

[maxcorder]

He said the clients took $11, 600 from their IRA. At their ages (65) they do have that option to take out or not. Once they reach age 73 they will have Required Minimum Distributions and the amount could be more than enough to put them in a taxable position. I have clients with $Millions in their IRA/401k. They always have a tax bill and the RMD gets larger each passing year.

[d.]

It would be nice to have these examples done for a single person. Why is every example always done for married couples?

[circus]

James, thank you for this phenomenal walkthrough of the taxability thresholds of SS and other unearned income. You've made it extremely clear starting from the ground up. I'm a "basic" volunteer tax preparer and a long-time investor nearing retirement. Very well done.

[stellad]

Thank you for sharing, James! Being an accountant, I understand explaining tax concepts to the general public is not easy. Great job!

[patrickgibson]

This is exactly the information I have been looking for. Was going to sit down and figure this all out but you showed super clearly how this works.

[jibberishballr]

Very thorough and easy to follow!

It'd be great to see something similar taking into account California (state) taxes to keep taxes as low as possible.

[randyharris]

He did kind of gloss over the fact that the dividends in the example are all qualified vs. ordinary, so it made it look like he was saying the IRA distribution was taxed as capital gains, but it is actually the qualified dividends. I had to go back and re-watch that part to figure that out...

[j]

The best of all your videos that I’ve watched. It was shorter and to the point, and dealt with the complexities of retirement income 🏆

[bonegunner]

Great presentation on tax saving in retirement. I have been retired for 6 years, but have not tapped my IRA. My wife is fully retiring next month, and we wil begin taking IRA and brokerage acct. distributions. YOU ROCK!!!

[DzDivz]

Best video I've seen on this. Exactly what I'm laying the foundations for. Cheers!

[richkoehler]

They thought they beat the system. And then they realized that 3.4% inflation destroyed $44, 200 of their portfolio’s purchasing power this year. The silent tax is government borrowing and money printing.