Planning for Retirement

If you’re about to retire and you own appreciated positions, this could be a key piece of an integrated distribution plan.

For example, consider a married couple who retires together at age 62, with $200,000 in low-basis stock. If they defer Social Security benefits and IRA withdrawals, they will have virtually no taxable income (assuming no pension benefits exist). They could sell the stock early in retirement with little or no tax consequences, and live off the proceeds. During that time, their IRAs could continue growing. Best of all, deferring Social Security boosts the monthly payout once those benefits begin. This is a powerful example of how smart planning can simultaneously bolster several aspects of your retirement.

The Details

There’s a limit to the amount of capital gains that qualify for the 0% rate. The 0% rate applies only to the extent you are below the top of the 15% income tax bracket.

For example, assume a married couple has taxable income of $55,900, which is $20,000 below the $75,900 top of the 15% tax bracket. In that event, only the first $20,000 of long-term capital gains would be taxable at 0%. If their taxable income were $35,900, up to $40,000 of long-term capital gains would enjoy the 0% rate. Further gains would be taxed at 15%. If the taxpayer had a large enough gain, eventually some of it would be taxable at 20%. Therefore, if you have a large amount of gains, you might consider spreading any sale out over several tax years.

Another important caveat is if you are receiving Social Security, capital gains can cause a greater percentage of these benefits to be subject to income taxes. So, even if you pay no capital gains taxes, these gains may cause your taxes to increase in other ways. Be sure to include your tax adviser in the process, or run your own calculations.

Asset-Allocation Implications

Capital gains tax treatment only applies to stocks held outside of retirement accounts. Therefore, in retirement, you might want to tilt your stock allocation higher in your non-retirement accounts. To keep your overall asset allocation intact, you could increase your bond allocation accordingly in your retirement accounts (IRAs, 401(k)s, etc.).

As an added bonus, the long-term capital gains tax rates discussed above apply to qualified dividends as well. Those who plan well could enjoy a significant increase in their spendable income.

If you’re holding onto a stock simply because you don’t want to trigger capital gains taxes, you might be able to have your cake and eat it too.

The 0% long-term capital gains rate is just one of many ways retirees with a well-planned distribution strategy can get more from their money. As always, keep your CPA and other advisers involved to ensure a coordinated effort on all fronts.

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