How to Pay Next-to-Nothing in Taxes During Retirement

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Mike Scott
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by Mike Scott »

Many people don't pay much, if any, tax.
The biggest secret is having a low income.
Next is having the discretion of choosing your income sources.
The IRS publishes many helpful bulletins and guidelines on how to pay the minimum taxes.
Cletus Davenport
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by Cletus Davenport »

Yep. Plan ahead, and you can have very low taxes. Unfortunately, for me, that meant I paid an awful lot in taxes during my working years. As an early retiree though, I’m looking forward to doing my taxes and seeing a pleasantly small obligation.

There is a well known thread here someplace from livesoft. He shows how to support a six figure spending level in retirement and pay zero taxes. Not everybody can do it, but it is possible. Here’s a good place to start: viewtopic.php?t=212723
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retired@50
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by retired@50 »

GrilledSardines wrote: Thu Jan 16, 2025 2:26 pm any comments on this?

https://awealthofcommonsense.com/2025/0 ... etirement/
This didn't come as news to me. I've been a volunteer tax preparer so I've seen this sort of thing first hand.

What do you think about it?

Regards,
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unwitting_gulag
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by unwitting_gulag »

All of these "low tax in retirement" threads make the same assumptions:

* A person does NOT have multiple millions of dollars in a taxable account, throwing off dividends (or heaven forbid, capital gains).
* There is either no Social Security and/or other defined benefit pension, it's very small.
* No inherited IRA.
* No RMDs from one's own IRA or 401K.
* Little or no part-time job.

Now imagine a retiree with several of these components. Then what?
Dasnyc
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by Dasnyc »

I live in a VHCOL area. Although I maintain a modest lifestyle, there is no way for me to keep my income low enough to take advantage of most of what is described in this article. Between Social Security, small company pension and RMDs, my income is mostly predetermined, and with it my taxes.
Dasnyc
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by Dasnyc »

unwitting_gulag wrote: Thu Jan 16, 2025 7:13 pm All of these "low tax in retirement" threads make the same assumptions:

* A person does NOT have multiple millions of dollars in a taxable account, throwing off dividends (or heaven forbid, capital gains).
* There is either no Social Security and/or other defined benefit pension, it's very small.
* No inherited IRA.
* No RMDs from one's own IRA or 401K.
* Little or no part-time job.

Now imagine a retiree with several of these components. Then what?
+1
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by jebmke »

unwitting_gulag wrote: Thu Jan 16, 2025 7:13 pm All of these "low tax in retirement" threads make the same assumptions:

* A person does NOT have multiple millions of dollars in a taxable account, throwing off dividends (or heaven forbid, capital gains).
* There is either no Social Security and/or other defined benefit pension, it's very small.
* No inherited IRA.
* No RMDs from one's own IRA or 401K.
* Little or no part-time job.

Now imagine a retiree with several of these components. Then what?
Give it away.

Also, pay attention to cycles and bank a ton of losses when you have them. Over the first 10 years of retirement I sold a fair amount of equity for cash and re-balancing and never paid a dime of CG taxes.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
the_wiki
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by the_wiki »

High taxes in retirement is a great problem to have. It means you are wealthy. I’ll happily take the income that puts me in the top bracket, thanks. :moneybag
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by VanGar+Goyle »

Cletus Davenport wrote: Thu Jan 16, 2025 2:37 pm Yep. Plan ahead, and you can have very low taxes. Unfortunately, for me, that meant I paid an awful lot in taxes during my working years. As an early retiree though, I’m looking forward to doing my taxes and seeing a pleasantly small obligation.

There is a well known thread here someplace from livesoft. He shows how to support a six figure spending level in retirement and pay zero taxes. Not everybody can do it, but it is possible. Here’s a good place to start: viewtopic.php?t=212723
I think that the number for 2025 Married Filing Jointly with Standard Deduction is over $125,000, more if over 65 or blind.
It is more complicated with Social Security, but about 40% of Social Security recipients pay no Federal income taxes on Social Security.
Or you could convert all your pre-tax retirement funds to Roth, and invest only in Muni money market funds to reduce taxes,
at a possible loss of spending ability.
Well, you pay a little bit, we're a little bit tough. | You pay very much, very much tough. | You pay a too much, we're too much a tough. | How much you pay? ... Well, then we're plenty tough. - Marx
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watchnerd
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by watchnerd »

GrilledSardines wrote: Thu Jan 16, 2025 2:26 pm any comments on this?

https://awealthofcommonsense.com/2025/0 ... etirement/
I thought this was common knowledge
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watchnerd
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by watchnerd »

unwitting_gulag wrote: Thu Jan 16, 2025 7:13 pm All of these "low tax in retirement" threads make the same assumptions:

* A person does NOT have multiple millions of dollars in a taxable account, throwing off dividends (or heaven forbid, capital gains).
* There is either no Social Security and/or other defined benefit pension, it's very small.
* No inherited IRA.
* No RMDs from one's own IRA or 401K.
* Little or no part-time job.

Now imagine a retiree with several of these components. Then what?
We expect to have a good 15 years, before we take delayed SS at age 70 and RMDs kick in even later, where we can milk this.

A couple mill in taxable is kicking off about $40k-$50k of income for us.

That still leaves $70k-$80k of LTCG we can collect at 0% with the standard deduction for married filing jointly.

That's $70k x 15 years = $1.05M in 0% LTCG
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MikeG62
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by MikeG62 »

watchnerd wrote: Thu Jan 16, 2025 11:02 pm
GrilledSardines wrote: Thu Jan 16, 2025 2:26 pm any comments on this?

https://awealthofcommonsense.com/2025/0 ... etirement/
I thought this was common knowledge
+1.

I would add that one should look at taxes not necessarily year by year but over one's lifetime. One could pay almost no tax for a while, but once SS and RMD's kick in things might be very different. It might be better to pay some taxes earlier (like through Roth conversions) if it would lower taxes later. It's a very fact specific analysis.
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by dukeblue219 »

the_wiki wrote: Thu Jan 16, 2025 8:04 pm High taxes in retirement is a great problem to have. It means you are wealthy. I’ll happily take the income that puts me in the top bracket, thanks. :moneybag
No kidding! :sharebeer
Claudia Whitten
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by Claudia Whitten »

the_wiki wrote: Thu Jan 16, 2025 8:04 pm High taxes in retirement is a great problem to have.
Agree.
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Kenkat
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by Kenkat »

MikeG62 wrote: Fri Jan 17, 2025 8:47 am
watchnerd wrote: Thu Jan 16, 2025 11:02 pm

I thought this was common knowledge
+1.

I would add that one should look at taxes not necessarily year by year but over one's lifetime. One could pay almost no tax for a while, but once SS and RMD's kick in things might be very different. It might be better to pay some taxes earlier (like through Roth conversions) if it would lower taxes later. It's a very fact specific analysis.
This is a critical point, it is not great if you are paying little to no tax in your 60s only to run into a tax time bomb and IRMAA in your 70s and higher due to RMDs and social security.

The other factor is that if you lose your spouse someday, you move into the higher single tax brackets. You may lose a little income but there are still social security survivor benefits, lifetime and joint pension payments and inherited IRA accounts with RMDs that still generate income. My dad is grappling with this a bit now as he is solidly in the 22% tax bracket. There are probably things he and my mom should have done while he was still in the 12% bracket and filing jointly but that opportunity was lost.
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by MikeG62 »

Kenkat wrote: Fri Jan 17, 2025 9:04 am
MikeG62 wrote: Fri Jan 17, 2025 8:47 am

+1.

I would add that one should look at taxes not necessarily year by year but over one's lifetime. One could pay almost no tax for a while, but once SS and RMD's kick in things might be very different. It might be better to pay some taxes earlier (like through Roth conversions) if it would lower taxes later. It's a very fact specific analysis.
This is a critical point, it is not great if you are paying little to no tax in your 60s only to run into a tax time bomb and IRMAA in your 70s and higher due to RMDs and social security.

The other factor is that if you lose your spouse someday, you move into the higher single tax brackets. You may lose a little income but there are still social security survivor benefits, lifetime and joint pension payments and inherited IRA accounts with RMDs that still generate income. My dad is grappling with this a bit now as he is solidly in the 22% tax bracket. There are probably things he and my mom should have done while he was still in the 12% bracket and filing jointly but that opportunity was lost.
Yup excellent points.
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by StartedAt22 »

unwitting_gulag wrote: Thu Jan 16, 2025 7:13 pm All of these "low tax in retirement" threads make the same assumptions:

* A person does NOT have multiple millions of dollars in a taxable account, throwing off dividends (or heaven forbid, capital gains).
* There is either no Social Security and/or other defined benefit pension, it's very small.
* No inherited IRA.
* No RMDs from one's own IRA or 401K.
* Little or no part-time job.

Now imagine a retiree with several of these components. Then what?
I would imagine that retiree would pay more in taxes and have far more income in retirement than the retiree fitting the modus described in the initial post.

This reminds me of my parents, who have had to start taking RMDs, but have absolutely no need for them. They're actively looking for ways to avoid taxes and spend money. Seems like a decent retirement challenge and definitely beats clipping coupons in my opinion.

I agree with the other commenter who said having to pay a lot in taxes is a good problem to have. It means you have a high income, and that's pretty atypical for the average american in retirement.
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by rkhusky »

the_wiki wrote: Thu Jan 16, 2025 8:04 pm High taxes in retirement is a great problem to have. It means you are wealthy. I’ll happily take the income that puts me in the top bracket, thanks. :moneybag
I’ll take a large retirement portfolio, low income, and low taxes.
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by the_wiki »

rkhusky wrote: Fri Jan 17, 2025 9:30 am
the_wiki wrote: Thu Jan 16, 2025 8:04 pm High taxes in retirement is a great problem to have. It means you are wealthy. I’ll happily take the income that puts me in the top bracket, thanks. :moneybag
I’ll take a large retirement portfolio, low income, and low taxes.
So you want a giant pile of money that you never spend? You can live the same on a small pile of money, and that's a lot easier to save for.
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by piper »

the_wiki wrote: Fri Jan 17, 2025 9:37 am
rkhusky wrote: Fri Jan 17, 2025 9:30 am

I’ll take a large retirement portfolio, low income, and low taxes.
So you want a giant pile of money that you never spend? You can live the same on a small pile of money, and that's a lot easier to save for.
A person can take a large income out of the portfolio and not have to pay taxes on it. High basis on funds where there is little capital gains or Roth or muni fund interest.
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by chw »

As a mid 60's retiree, I would agree that this is somewhat easily done for some retirees. It's very situational depending on income streams, and level of spending needed(and where that income is coming from). We've had several years of low to zero tax obligations in our early retirement years, but are now solidly in the 22% marginal bracket. The low tax years were managed that way for ACA credits. Now are starting to spend down our tax deferred accounts until SS and the RMDs kick in 70 and 73 respectively. I would think for those with significant nest eggs (especially if in tax deferred accounts), it's difficult to remain in a low to zero tax bracket.
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by rkhusky »

piper wrote: Fri Jan 17, 2025 9:46 am
the_wiki wrote: Fri Jan 17, 2025 9:37 am

So you want a giant pile of money that you never spend? You can live the same on a small pile of money, and that's a lot easier to save for.
A person can take a large income out of the portfolio and not have to pay taxes on it. High basis on funds where there is little capital gains or Roth or muni fund interest.
+1
I have converted a lot to Roth at a low tax rate and have had some large deductions to lower income. (Eg in 2024 taxable income was top of the 12% bracket and owe $800 in taxes. Tax/AGI = 0.6%.)
Last edited by rkhusky on Fri Jan 17, 2025 10:02 am, edited 2 times in total.
feh
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by feh »

My spouse and I are in this tax nirvana at the moment (both 58 and retired).

Last year's income is just a hair under $100K, and our federal taxes will be $0. That is more than enough for us to live on for the year.
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by unwitting_gulag »

watchnerd wrote: Thu Jan 16, 2025 11:09 pm
unwitting_gulag wrote: Thu Jan 16, 2025 7:13 pm All of these "low tax in retirement" threads make the same assumptions:

* A person does NOT have multiple millions of dollars in a taxable account, throwing off dividends (or heaven forbid, capital gains).
* There is either no Social Security and/or other defined benefit pension, it's very small.
* No inherited IRA.
* No RMDs from one's own IRA or 401K.
* Little or no part-time job.

Now imagine a retiree with several of these components. Then what?
We expect to have a good 15 years, before we take delayed SS at age 70 and RMDs kick in even later, where we can milk this.

A couple mill in taxable is kicking off about $40k-$50k of income for us.

That still leaves $70k-$80k of LTCG we can collect at 0% with the standard deduction for married filing jointly.

That's $70k x 15 years = $1.05M in 0% LTCG
You expect to have no additional taxable income, other than dividends from your taxable account?

I do note, that lifestyle decisions... can be helpful. A taxable account with $X M in it, is much more gently treated tax-wise, if/when it corresponds to a couple (and we might note in passing, especially a couple with children). These things get more complicated when there's one solitary person, with no dependents, no spouse, no heirs and so on. The calculation becomes more... fraught.
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by rockstar »

With taxable mfj and the standard deduction, you can pull out almost $100k a year of capital gains tax free other than state taxes.
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by watchnerd »

unwitting_gulag wrote: Fri Jan 17, 2025 10:39 am
watchnerd wrote: Thu Jan 16, 2025 11:09 pm

We expect to have a good 15 years, before we take delayed SS at age 70 and RMDs kick in even later, where we can milk this.

A couple mill in taxable is kicking off about $40k-$50k of income for us.

That still leaves $70k-$80k of LTCG we can collect at 0% with the standard deduction for married filing jointly.

That's $70k x 15 years = $1.05M in 0% LTCG
You expect to have no additional taxable income, other than dividends from your taxable account?

I do note, that lifestyle decisions... can be helpful. A taxable account with $X M in it, is much more gently treated tax-wise, if/when it corresponds to a couple (and we might note in passing, especially a couple with children). These things get more complicated when there's one solitary person, with no dependents, no spouse, no heirs and so on. The calculation becomes more... fraught.
Yes.

No other income than what the portfolio generates in the taxable accounts.

Is that so unusual?
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by Hacksawdave »

unwitting_gulag wrote: Thu Jan 16, 2025 7:13 pm All of these "low tax in retirement" threads make the same assumptions:

* A person does NOT have multiple millions of dollars in a taxable account, throwing off dividends (or heaven forbid, capital gains).
* There is either no Social Security and/or other defined benefit pension, it's very small.
* No inherited IRA.
* No RMDs from one's own IRA or 401K.
* Little or no part-time job.

Now imagine a retiree with several of these components. Then what?
I am in year five of early retirement and am doing this in CA at the single tax rate. Only bullet items 3 and 5 apply to me as I have no pension in item 2 and RMDs in item 4 are a way off and have been kept in check through small annual withdrawals and low returning income producing assets. I keep the taxable ordinary income at just over the amount of deductions and the QD/LTCG rate at zero.

One does have to plan ahead and consider one’s options. Many factors came into play for me to determine which path to take when I decided on this direction in 2015:

• How the portfolio was built.
• The size of the portfolio.
• How weighted each account type is.
• At what age does retirement drawdown start?
• How much are the drawdown requirements of the portfolio?
• How tax efficient the portfolio is.

I found that a hybrid withdrawal approach using municipal income gave the biggest bang for the buck. My combined federal and state tax rate on AGI has been below 4%, and when factoring in the municipal income, it does not exceed 2.5%.

Here is a link to a Kitces article often cited from 2016 when I first started looking at which direction to take.

https://www.kitces.com/blog/tax-efficie ... ing-needs/
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by unwitting_gulag »

watchnerd wrote: Fri Jan 17, 2025 10:54 am
unwitting_gulag wrote: Fri Jan 17, 2025 10:39 am

You expect to have no additional taxable income, other than dividends from your taxable account?

I do note, that lifestyle decisions... can be helpful. A taxable account with $X M in it, is much more gently treated tax-wise, if/when it corresponds to a couple (and we might note in passing, especially a couple with children). These things get more complicated when there's one solitary person, with no dependents, no spouse, no heirs and so on. The calculation becomes more... fraught.
Yes.

No other income than what the portfolio generates in the taxable accounts.

Is that so unusual?
I have no basis (or standing) to judge. Merely, my point is that a lifetime of sedulous preparation for retirement - that is, building wealth - isn't without adverse consequences. This isn't necessarily obvious, when we're young, or even middle-aged. And by the time that we become cognizant of the looming problem, it might be too late to adequately address it.

It may also become the case, that for a FIRE person drawing a small income as consultant or adjunct professor or something like that, the effective tax rate on the W2 becomes... high... because the AGI crashes through the various gates and thresholds. Then one must scrutinize whether it's even worth to work at all.
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by quantAndHold »

We’re in this situation. Six figure spending, with little to no taxes. My wife gets about $35k in Social Security, and has $13k in RMDs, we have $6-10k in dividends, and pull living expenses from a taxable account with a high basis. I do Roth conversions as we have space.

I expect that to change somewhat when I start collecting social security and RMDs, but I don’t see a scenario coming where we’ll ever be paying more than we were when we were working.
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by watchnerd »

unwitting_gulag wrote: Fri Jan 17, 2025 11:40 am
watchnerd wrote: Fri Jan 17, 2025 10:54 am

Yes.

No other income than what the portfolio generates in the taxable accounts.

Is that so unusual?
I have no basis (or standing) to judge. Merely, my point is that a lifetime of sedulous preparation for retirement - that is, building wealth - isn't without adverse consequences. This isn't necessarily obvious, when we're young, or even middle-aged. And by the time that we become cognizant of the looming problem, it might be too late to adequately address it.

It may also become the case, that for a FIRE person drawing a small income as consultant or adjunct professor or something like that, the effective tax rate on the W2 becomes... high... because the AGI crashes through the various gates and thresholds. Then one must scrutinize whether it's even worth to work at all.
The plan is to FIRE after 55, specifically next year, 2026.

No IRA withdrawals from age 55-59.5, so no income other than dividends / interest.

I have no plans for part time employment, unless I get bored or something.

I'm not sure what the 'looming problem' is?
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by LilyFleur »

Cletus Davenport wrote: Thu Jan 16, 2025 2:37 pm Yep. Plan ahead, and you can have very low taxes. Unfortunately, for me, that meant I paid an awful lot in taxes during my working years. As an early retiree though, I’m looking forward to doing my taxes and seeing a pleasantly small obligation.

There is a well known thread here someplace from livesoft. He shows how to support a six figure spending level in retirement and pay zero taxes. Not everybody can do it, but it is possible. Here’s a good place to start: viewtopic.php?t=212723
Well, you know what happens to plans. :mrgreen: Somebody ends up laughing.

I do see the value of managing my portfolio and doing my own 100+ page tax return. It helps me understand tax strategy much better, as does my large, detailed spreadsheet (includes all the applicable brackets for federal and state taxes and medical deductions for myself and an ill dependent adult child), so that I can see what happens with different amounts of withdrawals from my tax-deferred account, and the effect of differing amounts of Roth conversions. I view it as a part-time job that is tax-free.

As a single person in a high-tax state with a pension and a small Social Security benefit, I'll always have a tax bill. I view this "problem" as better than the alternative.
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by GP813 »

Most people's aversion to paying taxes is irrational, especially LTCG, which is among the most favorable tax treatment there is.
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by unwitting_gulag »

GP813 wrote: Fri Jan 17, 2025 2:18 pm Most people's aversion to paying taxes is irrational, especially LTCG, which is among the most favorable tax treatment there is.
Sometimes. Sometimes not.

We hear a lot about 4% or 3% SWR, meaning a ratio of portfolio-size to annual expenses of around 25X-33X. But what if it's 1000X? Then we may find that income tax is a large annual expense than everything else put together, perhaps by a substantial multiple. Would he aversion in that case still be irrational?
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by watchnerd »

GP813 wrote: Fri Jan 17, 2025 2:18 pm Most people's aversion to paying taxes is irrational, especially LTCG, which is among the most favorable tax treatment there is.
Minimizing taxes seems pretty rational to me.

We even have whole sections of the Wiki devoted to tax-optimal fund placement, tax loss harvesting, etc.

We can't control returns, but being clever with taxes is one of the things we can do.
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by rockstar »

watchnerd wrote: Fri Jan 17, 2025 4:47 pm
GP813 wrote: Fri Jan 17, 2025 2:18 pm Most people's aversion to paying taxes is irrational, especially LTCG, which is among the most favorable tax treatment there is.
Minimizing taxes seems pretty rational to me.

We even have whole sections of the Wiki devoted to tax-optimal fund placement, tax loss harvesting, etc.

We can't control returns, but being clever with taxes is one of the things we can do.
It should be treated like an expense and minimized like other expenses.
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by bombcar »

The best way to pay low or no taxes in retirement is to not need the income.

One common example of this is paying off your house before retirement, so you don't have a mortgage expense.

But there are other things you can "pre pay" or otherwise avoid having to have income to pay for, but each also comes with some form of risk, often counterparty (you can prepay 10 years on something, but the company may disappear).

It's not how low your tax is, it's how much you get to "keep", and in pursuit of minimum taxes you may end up making less and spending more.

However, the long-term value of taxable investments shouldn't be overlooked, especially in a tax-structuring way.
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Hacksawdave
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by Hacksawdave »

GP813 wrote: Fri Jan 17, 2025 2:18 pm Most people's aversion to paying taxes is irrational, especially LTCG, which is among the most favorable tax treatment there is.
I find it much more rational than:

• Chasing the highest yield available
• Generating as much taxable ordinary income as is humanly possible.
• Paying the higher rate and NIIT tax on ordinary income and CGs.

One can choose to be either tax-miserly, tax-efficient, tax-moderate, tax-inefficient, or tax-stupid in their investment plan. I prefer tax-efficient with the hybrid withdrawal plan using municipal funds as part of income.
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by watchnerd »

bombcar wrote: Fri Jan 17, 2025 4:59 pm The best way to pay low or no taxes in retirement is to not need the income.

One common example of this is paying off your house before retirement, so you don't have a mortgage expense.

But there are other things you can "pre pay" or otherwise avoid having to have income to pay for, but each also comes with some form of risk, often counterparty (you can prepay 10 years on something, but the company may disappear).

It's not how low your tax is, it's how much you get to "keep", and in pursuit of minimum taxes you may end up making less and spending more.

However, the long-term value of taxable investments shouldn't be overlooked, especially in a tax-structuring way.
We have no debt (no mortgage, no car loans).

What else can be "pre paid"?
Global stocks, IG/HY bonds, gold & digital assets at market weights 78% / 17% / 5% || LMP: TIPS ladder
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by GP813 »

watchnerd wrote: Fri Jan 17, 2025 4:47 pm
GP813 wrote: Fri Jan 17, 2025 2:18 pm Most people's aversion to paying taxes is irrational, especially LTCG, which is among the most favorable tax treatment there is.
Minimizing taxes seems pretty rational to me.

We even have whole sections of the Wiki devoted to tax-optimal fund placement, tax loss harvesting, etc.

We can't control returns, but being clever with taxes is one of the things we can do.
Doing some tax planning and portfolio placement is fine but people overrate and overthink this stuff. Also most financial advice I have read over the last 20 years tries to spook people about taxes being higher in the future when in reality taxes are historically low and one major political party seems to have made endless tax cuts part of their permanent political agenda(I am not trying to debate this or have a political discussion), just stating what has observably happened in our lifetime. Many people could be planning for future tax rates that could just as easily be lower as they could be higher. What's clever today might not look so clever tomorrow.
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by quantAndHold »

unwitting_gulag wrote: Fri Jan 17, 2025 4:43 pm
GP813 wrote: Fri Jan 17, 2025 2:18 pm Most people's aversion to paying taxes is irrational, especially LTCG, which is among the most favorable tax treatment there is.
Sometimes. Sometimes not.

We hear a lot about 4% or 3% SWR, meaning a ratio of portfolio-size to annual expenses of around 25X-33X. But what if it's 1000X? Then we may find that income tax is a large annual expense than everything else put together, perhaps by a substantial multiple. Would he aversion in that case still be irrational?
If it’s 1000x, then you’re extremely wealthy, and probably should be paying more tax than I do on my measly 33x.

Using legal means and planning to avoid tax is rational. Fearing a “tax bomb” when you have more than your children or grandchildren will ever need is not rational.
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by GP813 »

unwitting_gulag wrote: Fri Jan 17, 2025 4:43 pm
GP813 wrote: Fri Jan 17, 2025 2:18 pm Most people's aversion to paying taxes is irrational, especially LTCG, which is among the most favorable tax treatment there is.
Sometimes. Sometimes not.

We hear a lot about 4% or 3% SWR, meaning a ratio of portfolio-size to annual expenses of around 25X-33X. But what if it's 1000X? Then we may find that income tax is a large annual expense than everything else put together, perhaps by a substantial multiple. Would he aversion in that case still be irrational?
If it's 1,000x than the person saved too much, or was simply fortunate enough to accumulate/inherit that level wealth, at that point they have many many options, including charitable giving which would also alleviate the tax obligation.
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by MA405 »

GP813 wrote: Fri Jan 17, 2025 6:32 pm
unwitting_gulag wrote: Fri Jan 17, 2025 4:43 pm

Sometimes. Sometimes not.

We hear a lot about 4% or 3% SWR, meaning a ratio of portfolio-size to annual expenses of around 25X-33X. But what if it's 1000X? Then we may find that income tax is a large annual expense than everything else put together, perhaps by a substantial multiple. Would he aversion in that case still be irrational?
If it's 1,000x than the person saved too much, or was simply fortunate enough to accumulate/inherit that level wealth, at that point they have many many options, including charitable giving which would also alleviate the tax obligation.
Or they could be living a humble lifestyle where they don’t see a need to draw much of anything to supplement their SS+pension(s).
If they have a $5M portfolio and draw $5K/yr from it, they have 1000x.
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by VanGar+Goyle »

feh wrote: Fri Jan 17, 2025 9:58 am My spouse and I are in this tax nirvana at the moment (both 58 and retired).

Last year's income is just a hair under $100K, and our federal taxes will be $0. That is more than enough for us to live on for the year.
Congratulations. But does this mean that you were always in the 0% tax bracket, or did you overpay some time in a distant high tax hahava?
Well, you pay a little bit, we're a little bit tough. | You pay very much, very much tough. | You pay a too much, we're too much a tough. | How much you pay? ... Well, then we're plenty tough. - Marx
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by GP813 »

MA405 wrote: Fri Jan 17, 2025 6:49 pm
GP813 wrote: Fri Jan 17, 2025 6:32 pm

If it's 1,000x than the person saved too much, or was simply fortunate enough to accumulate/inherit that level wealth, at that point they have many many options, including charitable giving which would also alleviate the tax obligation.
Or they could be living a humble lifestyle where they don’t see a need to draw much of anything to supplement their SS+pension(s).
If they have a $5M portfolio and draw $5K/yr from it, they have 1000x.
So why would taxes be a problem for this hypothetical couple? They could give away money to children, charity, spend more, they have so many options.
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by oragne lovre »

Hacksawdave wrote: Fri Jan 17, 2025 5:54 pm
GP813 wrote: Fri Jan 17, 2025 2:18 pm Most people's aversion to paying taxes is irrational, especially LTCG, which is among the most favorable tax treatment there is.
I find it much more rational than:

• Chasing the highest yield available
• Generating as much taxable ordinary income as is humanly possible.
• Paying the higher rate and NIIT tax on ordinary income and CGs.

One can choose to be either tax-miserly, tax-efficient, tax-moderate, tax-inefficient, or tax-stupid in their investment plan. I prefer tax-efficient with the hybrid withdrawal plan using municipal funds as part of income.
I like your tax-efficient approach.

Could you suggest some municipal funds that are available at either Vanguard or Fidelity if you happen to park your money in those mutual funds?

Thanks in advance
The finest, albeit the most difficult, of all human achievements is being reasonable.
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by feh »

VanGar+Goyle wrote: Fri Jan 17, 2025 10:05 pm
feh wrote: Fri Jan 17, 2025 9:58 am My spouse and I are in this tax nirvana at the moment (both 58 and retired).

Last year's income is just a hair under $100K, and our federal taxes will be $0. That is more than enough for us to live on for the year.
Congratulations. But does this mean that you were always in the 0% tax bracket, or did you overpay some time in a distant high tax hahava?
Don't know what you mean by "always". We've been in this situation since we retired. Two thirds of our portfolio is in taxable accounts.

During accumulation, the highest tax bracket we were ever in was 28%.
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by Harmanic »

GP813 wrote: Fri Jan 17, 2025 6:18 pm
watchnerd wrote: Fri Jan 17, 2025 4:47 pm

Minimizing taxes seems pretty rational to me.

We even have whole sections of the Wiki devoted to tax-optimal fund placement, tax loss harvesting, etc.

We can't control returns, but being clever with taxes is one of the things we can do.
Doing some tax planning and portfolio placement is fine but people overrate and overthink this stuff. Also most financial advice I have read over the last 20 years tries to spook people about taxes being higher in the future when in reality taxes are historically low and one major political party seems to have made endless tax cuts part of their permanent political agenda(I am not trying to debate this or have a political discussion), just stating what has observably happened in our lifetime. Many people could be planning for future tax rates that could just as easily be lower as they could be higher. What's clever today might not look so clever tomorrow.
Let me add that there are other ways to deal with deficits besides income taxes including sales tax, corporate tax, inflation, tariffs, spending cuts, or any combination of these. Nobody knows. Therefore tax planning is just like other planning, like asset allocation, … a best guess.
The question isn't at what age I want to retire, it's at what income. | - George Foreman
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by Hacksawdave »

oragne lovre wrote: Fri Jan 17, 2025 10:29 pm
Hacksawdave wrote: Fri Jan 17, 2025 5:54 pm
I find it much more rational than:

• Chasing the highest yield available
• Generating as much taxable ordinary income as is humanly possible.
• Paying the higher rate and NIIT tax on ordinary income and CGs.

One can choose to be either tax-miserly, tax-efficient, tax-moderate, tax-inefficient, or tax-stupid in their investment plan. I prefer tax-efficient with the hybrid withdrawal plan using municipal funds as part of income.
I like your tax-efficient approach.

Could you suggest some municipal funds that are available at either Vanguard or Fidelity if you happen to park your money in those mutual funds?

Thanks in advance
Since I see Orange County in one of your prior posts, I will assume CA. Vanguard has three excellent CA tax-exempt funds:

• VCTXX CA tax-exempt Money Market Fund
• VCADX CA tax-exempt Intermediate Bond Fund (Admiral class)
• VCLAX CA tax-exempt Long-term Bond Fund (Admiral class)

I use all three Vanguard offerings. I averaged 37.57 percent combined federal and state tax rate for over 31 years and now in early retirement have paid a combined rate between 3-4 percent for the last 4 years. I realized $31,533 in municipal income for 2024 thus keeping me at the 0% federal QD/LTCG tax rate. I itemized both federal and CA tax returns, so I wind up with more deductions.
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Re: How to Pay Next-to-Nothing in Taxes During Retirement

Post by oragne lovre »

Hacksawdave wrote: Sat Jan 18, 2025 12:20 pm
oragne lovre wrote: Fri Jan 17, 2025 10:29 pm

I like your tax-efficient approach.

Could you suggest some municipal funds that are available at either Vanguard or Fidelity if you happen to park your money in those mutual funds?

Thanks in advance
Since I see Orange County in one of your prior posts, I will assume CA. Vanguard has three excellent CA tax-exempt funds:

• VCTXX CA tax-exempt Money Market Fund
• VCADX CA tax-exempt Intermediate Bond Fund (Admiral class)
• VCLAX CA tax-exempt Long-term Bond Fund (Admiral class)

I use all three Vanguard offerings. I averaged 37.57 percent combined federal and state tax rate for over 31 years and now in early retirement have paid a combined rate between 3-4 percent for the last 4 years. I realized $31,533 in municipal income for 2024 thus keeping me at the 0% federal QD/LTCG tax rate. I itemized both federal and CA tax returns, so I wind up with more deductions.
Yes, I am in CA.
Thanks again for pointing out these 3 funds.
The finest, albeit the most difficult, of all human achievements is being reasonable.
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