WCI #410: Taxes in Retirement, Tax Gain Harvesting, and Avoiding Probate
Mar 13, 2025
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Dive into the world of tax strategies for retirement! Discover how to forecast tax liabilities and the impact on retirement accounts. Learn about tax gain harvesting in UGMA accounts and its advantages. Explore the dynamics of investing in New York City's real estate market, along with self-directed IRAs for private investments. Finally, unravel the benefits of estate planning, including avoiding probate through revocable trusts, ensuring you protect your wealth effectively.
Forecasting tax liability in retirement requires careful analysis of investment income, capital gains, and effective tax management strategies.
Understanding Social Security tax contributions is crucial for new attendings to prevent overpayment and maximize potential refunds during tax season.
Tax gain harvesting in custodial accounts can minimize future capital gains taxes for children, especially when they're in lower tax brackets.
Deep dives
Understanding Tax Liability in Retirement
Forecasting tax liability during retirement can be complex, especially when dealing with after-tax brokerage accounts. Unlike pre-tax or Roth accounts, where calculating growth is straightforward, after-tax accounts incorporate factors like tax drag on dividends and capital gains. This tax drag can significantly slow the growth of investments, particularly for assets that are less tax-efficient, such as real estate debt funds, which are fully taxed at ordinary income rates. Conversely, tax-efficient assets like Bitcoin accrue tax advantages until sold, but users must still account for capital gains rates upon liquidation.
The Importance of Keeping Track of Tax Brackets
Many retirees may not realize that their taxable income structure greatly influences their tax liabilities. While some retirees rely solely on investment income and dividends to fund their lifestyle, others may find that they fall within the 0% long-term capital gains tax bracket. This means that navigating withdrawals from Roth accounts and capital gains can lead to a surprisingly low overall tax bill. Additionally, strategic planning through charitable contributions can help to offset potential future tax liabilities by managing capital gains strategies effectively.
Social Security Tax for New Attendings
New attendings may have questions regarding their Social Security contributions as they begin to earn dual incomes during and after residency. Social Security taxes, which are applied to the first $176,100 in earnings for 2025, can be confusing, particularly for those who might earn from multiple jobs. Each employer withholds Social Security taxes separately, and without careful planning, high earners risk overpaying. However, they can receive refunds during tax time for the excess contributions made beyond the earnings cap, and understanding this system can help manage future tax burdens.
Exploring Tax Gain Harvesting for Custodial Accounts
Tax gain harvesting is an unconventional yet potentially beneficial strategy for managing custodial accounts, especially for children with minimal income. Parents may consider selling investments held in UGMA accounts to realize gains while their children are in lower tax brackets, minimizing future capital gains taxes. Although this strategy could increase the basis of their investments in the long run, the advantages must be weighed against the effort and complexity involved in managing tax returns. Many families will find that their children naturally fall under the 0% capital gains tax rate without having to undergo tax gain harvesting.
Making Financial Decisions During Early Retirement
For those planning early retirement and seeking tax-efficient strategies, understanding how to manage income and withdrawals is critical. Individuals should evaluate the balance between drawing from taxable accounts and contributing to retirement accounts to optimize their tax liabilities during their post-retirement working years. Living off taxable assets while maximizing contributions to retirement accounts can create a favorable tax situation and build long-term security. Balancing tax savings with lifestyle choices is essential for ensuring financial stability and comfort during early retirement years.
Today we are answering your tax questions. We discuss tax liability in retirement, social security tax limits, tax gain harvesting in UGMA accounts and maximizing tax in retirement. Then we answer a few estate planning questions. The first is around if it is important to avoid probate and then talk about SLAT trusts.
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