Ready For Retirement
Retirement Income Strategies: IRA vs. Brokerage Withdrawals (The Tax-Smart Choice for Retirees)
Mark asks a common question – What should I do regarding my withdrawal strategy? Should I first pull from my brokerage account or my IRA?
There is no one-size-fits-all answer, but James provides a framework for creating a strategy to increase your odds of getting the most out of your money saved. He walks through the pros and cons of first pulling from your IRA versus a brokerage account, taking into consideration required distributions, tax rates and strategies, capital gains, Roth conversions, tax gain harvesting, and charitable giving.
Questions answered:
What are the tax implications of giving to family members versus charities?
How should capital gains affect my withdrawal and tax strategy?
Timestamps:
0:00 - Mark’s question
3:12 - Pros of pulling from IRA
7:24 - Lower tax rate today
9:27 - Cons of pulling from IRA first
11:38 - Charitable giving
13:58 - Pros of brokerage pulls
18:40 - Other potential pros
21:39 - Cons of pulling from brokerage
26:03 - Things to consider
30:50 - Wrapping up
Create Your Custom Strategy ⬇️
Mark asks a common question – What should I do regarding my withdrawal strategy? Should I first pull from my brokerage account or my IRA?
There is no one-size-fits-all answer, but James provides a framework for creating a strategy to increase your odds of getting the most out of your money saved. He walks through the pros and cons of first pulling from your IRA versus a brokerage account, taking into consideration required distributions, tax rates and strategies, capital gains, Roth conversions, tax gain harvesting, and charitable giving.
Questions answered:
What are the tax implications of giving to family members versus charities?
How should capital gains affect my withdrawal and tax strategy?
Timestamps:
0:00 - Mark’s question
3:12 - Pros of pulling from IRA
7:24 - Lower tax rate today
9:27 - Cons of pulling from IRA first
11:38 - Charitable giving
13:58 - Pros of brokerage pulls
18:40 - Other potential pros
21:39 - Cons of pulling from brokerage
26:03 - Things to consider
30:50 - Wrapping up
Create Your Custom Strategy ⬇️
Let's imagine you just retired. First of all, congratulations. But secondly, how are you going to begin drawing down your nest egg? Let's further assume that part of your nest egg is a brokerage account Maybe there's some stock with large unrealized gains and the other part of your portfolio is your traditional IRA or your 401k. How on earth are you supposed to decide what you should pull from your brokerage account versus what you should pull from your 401k or IRA? That's exactly what we're going to discuss on today's episode of Ready for Retirement. We're going to talk about everything from required minimum distributions and how that should play a role in your decision making process, as well as tax gain harvesting and some of the other risks involved with the wrong withdrawal mistakes.
Speaker 1:This is another episode of Ready for Retirement. I'm your host, james Canole, and I'm here to teach you how to get the most out of life with your money. And now on to the episode. All this is based upon a listener question. This question comes from Mark. Mark says the following Hi, james, I very much enjoy listening to your podcast and your videos.
Speaker 1:I have a question that I've not heard addressed before. My wife and I we are 65 and 62, both just retired we have a single stock in our brokerage account that has $300,000 of capital gains and makes up close to 10% of our total portfolio. I plan on waiting until age 70 to take social security. Until then, though, we're going to need to live off of our portfolio. What are the pros and cons of IRA withdrawals versus selling some of the large positions in that one stock? We've been donating shares of that stock to reduce its percentage of our holdings, and we're also worried about taxes on future RMDs if we don't withdraw earlier or do Roth conversions. Best regards, mark. Mark, thank you very much for taking the time to write that question, and thank you, of course, for you and all of you really for supporting the show. Appreciate that very much, and what Mark is writing in he's describing a very common challenge that most people have, specifically people who have accumulated a larger portfolio balance. Now, larger portfolio balance, of course, is relative, but what I mean by that is people who have gone beyond saving to their 401k to prepare for retirement. If you get to retirement and all your money is in your 401k or your IRA, there's certainly strategies around that, but there's less to balance around. How do you balance between what should come from the brokerage account versus what should come from the IRA or other account types. So that is a common question. That is going to be what we're addressing in today's episode of do you pull funds from the brokerage account or do you pull funds from the traditional IRA? As is always the case, it depends. So what we're going to be talking about today is the pros and cons of each and when. You might want to lean towards one versus the other.
Speaker 1:I do want to say this up front there is no perfect equation that will establish the exact, optimal game plan. I think so often with finances, we want to know exactly. What do we do. Plug the numbers into an equation. Out comes a perfect output. Unfortunately, that perfect output does not exist, and that does not exist because we have no idea what the future is going to hold in terms of inflation, in terms of returns of different asset classes, in terms of your own spending and your own expenses and the unexpected things that will come up. There's just too much that's unknown that you could predict that and plan for that in various outputs, but there's always going to be some limitation. That limitation is just the fact that the future is unknowable. That being said, there are things we do know and we can start to understand when one might be better than the other.
Speaker 1:So let's start by discussing the pros and cons of pulling money from the IRA, then we'll discuss pros and cons of pulling money from the brokerage account and then have some other considerations as well at the end. So, starting with the benefits of pulling money from his traditional IRA, from Mark and his wife's traditional IRA, the first benefit is it helps to keep the IRA balance manageable or helps to keep it lower. What do I mean by that? Well, I have no idea how much money is in Mark's portfolio. What I do know, by reading through the lines or reading between the lines, is he says that he has a $300,000 gain in one stock and that stock represents 10% of his portfolio. So I have no idea what he purchased that stock for, but let's assume he purchased that stock for $100,000. There's gains of $300,000 and then there's now $400,000 total in that stock. Well, if that $400,000 represents 10% of his portfolio balance, then the total portfolio is somewhere around 4 million.
Speaker 1:Now, whether you have 4 million in your portfolio or a significantly lower or large number does not matter for the sake of what we're going to be talking about today. Today is all about the principles of how do you know when to pull from one or the other. I will say, though, while the actual numbers aren't going to change, change the principles we discuss here. The larger the portion of your IRA balance and the larger your IRA balance in general, the more the specific point is likely to be pertinent to you. If I'm assuming Mark and his wife have a $4 million total portfolio balance, and I assume and again, this is just an assumption, this is not from anything Mark said that maybe $2.5 million of that is in his IRA and $1.5 million of that is in his IRA and 1.5 million of that is in the brokerage account. Well, if Mark and his wife are just to live on the brokerage account and they spend all their money from there, the IRA is likely to continue growing. So if that continues growing and they get let's just assume a growth rate of 7% completely arbitrary, that's not a guarantee of any sort, but let's assume that they get a growth rate of 7% for the next eight years until his required minimum distribution age, they would have about $4.3 million in IRAs at that time.
Speaker 1:Now, there's an age gap here, so they both wouldn't start their required distributions at the same time. They even have different RMD ages based upon their ages. But let's just assume both had to start at age 73 for the sake of simplicity here. But let's just assume both had to start at age 73 for the sake of simplicity here. Well, your required minimum distribution is a percentage of your IRA balance. When you're looking at calculating it, there's a life expectancy table and you base that life expectancy table or you divide essentially the ending balance of your IRA the previous year by that life expectancy table. The math comes out to about 3.8% that first year of retirement, or I shouldn't say the first year of retirement, I should say the first year that you are required to start taking distributions from your pre-tax accounts.
Speaker 1:So let's assume that Mark and his wife get to required distribution age. For simplicity, I'm assuming they both reach that age at the same time, which they won't because of an age gap and difference in birth years. But if they did, they would need to start taking out a percentage of their IRA balance. If their IRA balance is $4.3 million, you can start doing the math here. The portion that they're going to have to take out is going to be fairly significant and to put some numbers to that term significant probably somewhere in the neighborhood of 150 to 160,000 or so that first year required a minimum distributions and then increasing over time.
Speaker 1:Now keep in mind, over this time, tax brackets even if they didn't change the tax brackets or the thresholds before which you move up into the next bracket. So the threshold until you move into the 12% or 22% or 24% bracket, even if tax brackets today froze, the thresholds until you reach those brackets does increase. So there's a little bit of mitigation going on there with that, but that's still quite a bit of money that they would be forced to take from their portfolio. And then they also have some dividends and interest from their brokerage account. They also have social security benefits which have been fully maximized at that time. So you can start to see that, look, if you don't do anything with that IRA, the future required distribution. The tax liability may be fairly significant from that, especially considering that that IRA balance may continue growing for the first several years of your RMD ages, of the timeframe in which you reach your RMD age. So bringing this back to what's the benefit of spending down your IRA first or spending your IRA first is you're helping to manage that balance. By not letting that balance get too out of control because you're spending it down, you're lessening the impact of RMDs in the future. The second benefit of pulling funds from your IRA first is you're potentially paying taxes at a lower rate today than you will in the future.
Speaker 1:Now look at Mark and his wife's situation Today. No social security Today. They're not at their required distribution age, they're not going to be forced to take a certain amount out of their IRAs. So today they may very well be in a lower tax bracket than they would in the future, and that's before even considering the impact of higher tax brackets as a whole in the future. So when you're looking at tax planning, what you're really trying to do is you're trying to determine your specific tax situation based upon what types of income sources, what types of taxable income sources you're going to have, and also looking at kind of the macro view of tax rates or tax brackets in general. So your specific tax situation because of your income sources and the macro tax brackets as a whole. Your specific tax situation because of your income sources and the macro tax brackets as a whole, which, of course, you have no control over. If we fast forward, for Mark and his wife, there's a very good chance that both their micro tax situation, their specific tax situation, is going to be higher due to the types of income that they're going to be receiving, and there's a very good chance that tax brackets as a whole will be higher, just because we know that current tax brackets are likely to sunset or currently scheduled, I should say, to sunset at the end of 2025. So that is a benefit as well of potentially pulling money out of your IRA today to lower tax bracket overall than you would if you were to do that in the future.
Speaker 1:Now quick side note here before we move on these two benefits of managing your IRA balance and potentially paying taxes at a lower rate today than you will in the future. You can also accomplish these things via Roth conversions. In fact, those are the same two goals that you're accomplishing via Roth conversions. The difference is, instead of spending your IRA to accomplish those two goals today, you're converting your IRA into Roth money, meaning that's money that can continue growing tax-free for you, where there's all kinds of benefits that go along with that into the future. So, as I'm outlining this, these two pros so far, these are not exclusive to spending your IRA, and in fact, they're the same benefits that you would get through Roth conversions.
Speaker 1:Now, though, let's talk about the cons of spending down your IRA. The first con is kind of the opportunity cost of not doing what I just described, of not doing Roth conversions. So if you were in fact spending your IRA, if you're Mark and Mark's wife and you're spending this down, well, is there an opportunity cost of what if, instead, you were converting those same dollars? Instead of spending $70,000 a year just making up a number, you converted $70,000 per year while simultaneously living on your brokerage account, which you could do at a much lower tax impact if you had the right strategy and the right makeup of assets in your brokerage account. So the number one con is probably well, could you have done better the opportunity cost of what if you had done conversions instead of spending?
Speaker 1:Another con and this is maybe more for Mark specifically and anyone that happens to be in a similar position as Mark is if he spends his IRA and is simultaneously keeping that individual stock position that he talked about, he could, as always, suffer a pretty devastating loss with that specific stock. No idea what the stock is no idea what it's going to do over time, but any stock, there's always the risk that that stock could suffer a catastrophic loss. Would that be the end of the world for Mark? I have no idea because I don't know how much he wants to spend from his portfolio, but I do know that that single stock represents about 10% of his portfolio. Worst case scenario if that stock loses 70, 80, 100% of its value, can Mark still carry on? Can he and his wife still do what they want to do if they lost 10 percent of their portfolio value because that stock suffered such a significant loss? Not necessarily likely, but always a risk and something to take into account. So, in general, the con of spending on the IRA is the risk of maybe being too lackadaisical, not doing the things simultaneously on the brokerage account side to engage in not the tax planning with that stock, but just proper diversification, proper investment allocation there, because they were more focused on spending down the IRA. So not mutually exclusive, but that's something I could see being a potential risk for a lot of people. Now, just in general when it comes to IRAs, this isn't necessarily a pro or a con, but just in general, the big risk of not doing something with IRAs now is the tax hit that you will take in the future?
Speaker 1:Mark mentioned donations. I'm assuming this is charitable giving and not giving to family. If you're doing donations to family members, that's great and there's some gifting, gift tax or inheritance or estate tax. I should say that you need to be mindful of with that there's no real tax benefit from an income tax standpoint. If it's charitable donations, then there is a potential tax benefit there and if donations are a big, big part of what they're doing, then this can potentially offset some of the impact of required minimum distributions.
Speaker 1:This is the concept of a qualified charitable distribution. For example, if Mark has $4.3 million in IRAs by the time that he and his wife reach required distribution age, that first year RMD might be 160 grand, give or take a few bucks. Well, if Mark and his wife gift to charity and let's say they give 10,000, which is a good amount of money Well, if they give 10,000 in the form of a qualified charitable distribution I mean it comes right from their IRA instead of from cash that they have that counts against their required distribution. So if the required distribution is 160,000 and they gift 10,000, it lowers the remaining amount that they have to pull out themselves to 150,000. So it's nice but it's not a significant, significant benefit or it's not a significant offset, I should say, of the required distribution, because that gift is a relatively small part Now still absolutely makes sense to do, but it's not going to majorly change their tax situation. Versus, let's say, mark and his wife are big givers and they're giving $100,000 away.
Speaker 1:I'm using kind of an extreme example here. Well, if they gift $100,000 to charity, all of a sudden their $160,000 of required minimum distributions drop to $60,000 because $100,000 of that is satisfied via the qualified charitable distribution. The amount they personally have to take is now down to 60. So why do I say that I'm using big round, generalized numbers to say that there are more than one way to offset the impact or minimize the impact of required distributions? And if charitable giving isn't just a small part of what you do but it's a big part of what you do and even a really big part of what you do, the more tax strategy that can come into play as you're determining not necessarily the gifting side of things. But where should I even pull money? It doesn't seem like where you should pull money first in retirement has anything to do with charitable giving, but it really does, because of the things that you can do in the future with how that charitable giving is implemented.
Speaker 1:All right, let's now turn our focus to the pros and cons of pulling funds in the brokerage account instead. The first pro is potentially taking advantage of tax gain harvesting. So we'll talk about this quite a bit and almost everyone's familiar with tax loss harvesting and, at the risk of people misinterpreting what I'm saying as oh, I think he meant tax loss harvesting, no, I don't mean tax loss harvesting, I mean tax gain harvesting. Tax loss harvesting does have some benefits, but tax gain harvesting potentially has significant benefits. The way that it works is if your taxable income for 2024 and you're married, finally jointly, if your taxable income is under $94,050, you don't pay any federal capital gains taxes on qualified dividends or long-term capital gains up to the point that those reach $94,050. Anything above that is in tax at 15%. Anything above that is in tax or another threshold is in tax at 20%. If you are single, that number is $47,025. This is a significant benefit.
Speaker 1:Brokerage accounts are really great because they offer you a tremendous amount of flexibility. The downside of them is there's no tax deferral. There's not really any tax benefits to putting money in a brokerage account unless you treat this wisely in your retirement. If you're doing this the right way in retirement brokerage accounts and I want to be careful saying this because they're definitely not Roth IRAs, but they can potentially have many of the same benefits of Roth IRAs when you start to understand that if you keep your long-term capital gains and qualified dividends under a certain threshold, those gains are tax-free, just like a Roth is tax-free. So they're absolutely not the same thing, but if you manage it correctly, for people in retirement, tax gain harvesting can be pretty powerful. If you want to see just how powerful, I'm going to use an example, and again this is a totally made up example.
Speaker 1:These numbers are almost certainly not actually the case for Mark and his wife, but let's assume that they want to live on $100,000 and they have zero dividends or interest in their portfolio or bank accounts. So a stretch for sure. This is probably not reality. They don't have social security yet. They're not taking money from their IRAs yet. They're just taking $100,000 per year from their brokerage account. Well, if that's the case, then the only income source that they even have that's subject to taxes, because again, I'm assuming no interest or dividends from bank or anything else, which again is very unlikely $100,000 is all that they're going to live on.
Speaker 1:They sell stock. They sell $100,000 of stock and then they pull it out to live on. Well, let's assume this is the stock that had lots of gains. Maybe they purchased that stock for $25,000 and it's now worth $100,000. Well, what does that mean? It means they have $75,000 in long-term capital gains, assuming that stock has been held for at least 12 months.
Speaker 1:Well, they then take the standard deduction which, for 2024, married filing jointly is $29,200. And in fact I believe Mark said he is age 65. Yes, so Mark actually has a little bit, even more, of a standard deduction, because once you turn 65, you get a little bit more. However, I already wrote out my notes, so I'm going to go with this. As if they're both under 65, they would have a standard deduction of $29,200, which means their taxable income is $45,800. So where did I get that number from? Well, $75,000 of long-term capital gains which is subject to taxes. Potentially, that money is potentially taxable.
Speaker 1:You then back out the standard deduction of $29,200 to get to the taxable income of $45,800. So Mark and his wife are saying, okay, we just sold that stock, we lived on $100,000. What should we set aside in taxes? I don't know what they live in or what state they live in, so I can't say what state taxes might be. But at the federal level, that $45,800 of taxable income is under it's well under the $94,050 of taxable income threshold to be eligible to realize long-term capital gains or qualified dividends at a 0% federal tax bracket. So what does that mean? Well, if this was actually their situation, I'd be encouraging Mark and his wife to realize more in gains on purpose. Look, even if you're selling and repurchasing the same stock, sell it, realize gains up to that threshold because it's not going to cost you anything in taxes, at least at the federal level Could be a different story with the state that they live on, but that's one really strong benefit of living on your brokerage account is the tax rates you're going to pay may potentially be zero. And even if they're not zero, long-term capital gain tax rates and qualified dividend tax rates are lower than ordinary income tax rates like you would pay on an IRA distribution. Now, just to wrap this example up, the reality is they almost certainly have interest or dividends or other income sources. That would skew these numbers a bit, but that was just designed to be an example to illustrate how that works.
Speaker 1:Another benefit of another pro of living on the brokerage account as opposed to the IRA is it could help to keep income low to pave the way for Roth conversions or potential health insurance subsidies. So what do I mean by this? Let's start with health insurance subsidies first. Mark is already 65, so he's eligible for Medicare. Subsidies aren't necessarily anything that he needs to worry about, but his wife is 63. So, as his wife is looking to get a plan, she's not eligible for Medicare yet, unless there's some type of a disability that she has. But, assuming that's not the case, she's not Medicare eligible, so she needs to go to the marketplace most likely to get a health insurance plan. If they keep their income low enough, they could very well qualify for a subsidy which helps to keep their overall cost in retirement low.
Speaker 1:Because that brokerage account, because anything that you already put in has already been taxed, you could pull out your own contributions or you could live off qualified dividends or interest. You can keep your income lower. If pulling it out of a brokerage account, then you can oftentimes pulling it out of an IRA. So another benefit of drawing down money from the brokerage account is that could help to keep your modified adjusted gross income lower, which helps to qualify for health insurance subsidies. The other thing it helps to do is to qualify for Roth conversions. So, as we talked about previously, in order to do Roth conversions really effectively, you want your income prior to Roth conversions to be as low as possible, because if your income, if you're keeping your income really low because, say, for example, you're just living on cash that you already have in the bank, that money's already been taxed, so you're not gonna pay taxes on it again when you live on it that keeps your taxable income really low. What that allows for is saying, while we're in these low income tax years, do we start to move money from our traditional IRA to our Roth IRAs and convert a specific amount to fill up certain tax brackets so that we don't have to pay taxes on that money in the future. So this can be a pretty significant benefit in that living on the brokerage account first is actually the thing that enables you to do Roth conversions.
Speaker 1:Quick disclaimer here is that it's very tough to simultaneously take advantage of tax gain harvesting plus Roth conversions, plus qualify for health insurance subsidies. All those different things are competing for your income to do different things for it. So you're not usually going to do all of those three things at once. You're going to prioritize which is going to be most effective for you and your plan and then you're going to lay out a game plan for what makes most sense in terms of what you're going to take advantage of first. Finally, the last pro for living down the brokerage account and this again applies maybe more so to Mark than anyone else is you're potentially de-risking by getting out that single stock that they have, whether that's because you're going to take advantage of tax gain harvesting and sell that individual stock first and maybe not pay anything in long-term capital gains taxes or at least pay less than you otherwise would have. Like I said before, doing this isn't necessarily mutually exclusive. You could, at the same time, diversify out of that stock while also pulling money from your IRA. But just in general, the more you spend that down, it's more likely that you're going to be at the same time addressing the concentration risk of that stock, the con to pulling money out of your brokerage account and save your IRA is not having an overall withdrawal strategy.
Speaker 1:What do I mean by that? Well, so many times people say, oh look, I can retire. I heard this thing about tax gain harvesting and if I pull money from my brokerage account, I'm going to be in a really low tax bracket. And they do that and they enjoy it and there's nothing necessarily wrong with this. They're in a very low tax bracket for that year, maybe the following year and maybe years to come. The downside is that there's not an overarching withdrawal strategy. To this. You're missing a significant opportunity cost. You're enjoying a very low tax bracket for that first year or handful of years when you should have been implementing some type of a tax strategy.
Speaker 1:Usually, the goal is not actually to pay very little in taxes one year, it's to minimize your lifetime tax liability. Usually what that means not always, but usually what that means is in years where your income tax liability is lower. What can you do to manufacture income? Via Roth conversions, via realizing capital gains, via doing different things to say, can we shift more income into this lower income year to avoid having to have more income and higher income tax years in the future? So that is one downside I'll often see is people just spend on the brokerage account, which is a good starting point. They're not simultaneously doing the things with their IRA or other assets to get the full strategy in place.
Speaker 1:Another downside is having the wrong asset location strategy, and this is not inherently a con or a downside of spending on the brokerage account first, but it's a mistake I see too many people make, and oftentimes it's because it was something suggested to them by their financial advisor. Financial advisor says hey, I've taken my CFP test, I know a lot about finances, and let me tell you what to do. You have these things called bonds, and these bonds pay interest. Well, interest isn't very tax efficient. It's taxed at ordinary income rates. So we're going to stick those things in your IRA, where all that interest is tax deferred. And then you have these great stocks, and these stocks pay qualified dividends or long-term capital gains if we hold them long enough. These are more tax efficient. So we're going to stick these in your brokerage account and look at what we just did for you. We saved you a lot of money on taxes by having the right asset location. There is truth to that, until it comes time to implementing a withdrawal strategy because with that, you're going to have more money in stocks in your brokerage account and more money in bonds in your IRAs.
Speaker 1:Well, if your strategy is to live off your brokerage account first, do you see the issue? Well, if all the money that you're living on first is in stocks, and stocks are the things that go way up and way down each year, and you're potentially forced to sell stocks when they're down because that's all the money that you have in your brokerage account, that's not good. You could just go spend down your bonds, but that's in your IRA and now you'd be triggering taxable events and maybe that's causing you to deviate from your tax strategy. So, really, what you want to do is understand what do you need from your brokerage account, and I'm assuming right now that your strategy is live on your brokerage account first and then live on your IRA next. Once you understand that, you need to understand what risks exist.
Speaker 1:Sure, maybe it's a risk to pay more in taxes because of bonds in a brokerage account as opposed to an IRA, but I'll tell you what's more of a risk is having your stocks entirely in your brokerage account, stock markets going down 30 or 40% and then having to sell those stocks to create income to live on in your first years of retirement. That just costs you a 30, 40% haircut on these assets. That had you simply rearrange your assets a bit better maybe not even a bit better a lot better, more intentionally for your specific withdrawal strategy, you could have had an investment allocation, not just that made sense on paper, theoretically, of what's going to minimize the taxation of the portfolio itself, but what's also going to minimize the risk as you start pulling funds out of your accounts during retirement. This all, of course, is based upon what is your actual strategy for where you're going to minimize the risk as you start pulling funds out of your accounts during retirement. This all, of course, is based upon what is your actual strategy for where you're going to pull funds from, first, when you do retire.
Speaker 1:And then, finally, another con, and this is really a potential con. With some basic planning you should be able to avoid this but potentially selling and incurring short-term capital gains. So if you have a brokerage account, ideally you want any of the gains that you are realizing in that account to be of a long-term nature, so held for over a year, simply because then they're subject to long-term capital gains tax rates as opposed to short-term capital gains tax rates, which are really just ordinary income tax rates. So with some intentionality and careful planning, you should be able to avoid that. But if you're just blindly doing this or mindlessly doing this, there's a chance you're incurring short-term capital gains and that's not good. So, as we start to wrap up, those are some basic pros and cons of spending on an IRA versus a brokerage account.
Speaker 1:I want to leave you with these things to consider because pros and cons, they're not going to apply to the same extent to every single person individually. That's because we all have a different makeup of portfolio assets, we're all in different tax brackets, we all have different lifestyle goals, so there's so many things that go into this. What should you be considering, even beyond these pros and cons? Well, if you do have a brokerage account and you do have an IRA and you're trying to understand which you draw down, first you kind of want to have a sense of what's the size of my long-term capital gains versus the size of my pre-tax retirement balances. Here's what I mean by that. Let's assume you look at your portfolio and you say, okay, my brokerage account only has about $10,000 of long-term capital gains, but I have $2 million in IRAs. Well, the potential liability of those IRAs and the required distributions you're going to be forced to take so significantly outweighs any potential liability you're going to face incurring a $10,000 capital gain that it almost probably almost certainly makes sense to say.
Speaker 1:I don't want to say don't consider the capital gain, but focus almost exclusively on the IRAs. That's probably where your priority should be versus on the flip side. What if you have the inverse? What if you have a lot of investments in brokerage accounts and you have $2 million in long-term capital gains and you only have $10,000 in your IRAs? Well, the opposite is true. I am so unconcerned with that $10,000 in an IRA I'm not saying it's not important but I'm going to be hyper-focused and hyper-concerned with how do we implement a strategy to harvest these gains in the most tax-efficient manner possible. To harvest these gains in the most tax-efficient manner possible.
Speaker 1:So, as you're looking at this, which of these pros and cons applies most to you probably depends, first and foremost, on what's the breakdown between your IRA balance and not even your brokerage account balance, but the portion of your brokerage account that is gains, because that's really where the tax planning comes into play. The second thing to consider is your future tax bracket and, as we talked about before, this can be very difficult to project. It depends upon your personal situation, your taxable income as well as tax brackets as a whole. So, to the extent that you can try to do in a projection to see where are you today versus where you're going to be in the future, because that will help to inform should you prioritize drawing down brokerage account assets or IRA assets. But, granted, that can be challenging, simply because the future is unknown and there's a lot of things that can change.
Speaker 1:The third thing to consider, beyond these pros and cons, is the duration of your tax planning window. What do I mean by that? Well, your tax planning window is typically thought of as that time between when you retire and when social security and or required minimum distributions kick in, because typically in your working years you're going to be in a higher income tax bracket. Then you retire, depending on the makeup of your assets, you might be in a pretty low tax bracket for a while. That feels really good, until social security and then required distributions kick in down the road and you very well might be back into a very high tax bracket, even a potentially higher tax bracket in retirement than you were in during your working years, and that, of course, comes down to what the size of your portfolio and required distributions is. So how long is your tax planning window? What's the duration of your tax planning window? Well, that's going to be different for someone who is, say, retiring at 55 and doesn't have required distributions kick in until age 75.
Speaker 1:Do you maybe prioritize and this is all just a random example, so don't necessarily think this is the order in which you should do things but do you maybe prioritize tax gain harvesting for two or three years to realize some of the gains you've incurred, to realize some of the gains you've incurred, and do so at a minimal tax hit? Then do you implement a Roth conversion from there for several years. Then do you start doing things that are there for several years. Then do you start doing things that are more reactive, based upon how markets change or how tax law changes, how our new opportunities change in the future. So that's one example. Versus. Compare that to someone who's already 71 and their required minimum distribution age starts in two years. Well, they have a two year tax planning window. They really need to prioritize what's going to be most important and then execute on that, knowing there's only two years to make it happen, as opposed to the previous example where there might be 20 years to make something happen. So the duration of your tax planning window also really matters.
Speaker 1:And then, finally, charitable giving. So Mark mentioned that he and his wife do charitable giving. I already made the qualifier of. I'm assuming this is charitable giving, not giving to family members, but what does this mean for them? Well, do you gift appreciated stock until age 70 and a half? From age 70 and a half and beyond, do you implement qualified charitable distributions? Yes, you can still start those at age 70 and a half. You don't have to wait until your required minimum distribution age. So there's all kinds of things that you can do there. To the extent that you do charitable giving. That is definitely going to inform your withdrawal strategy, because it can help you to offset some of the tax implications of either selling stock that's appreciated or pulling funds from your IRA, which is fully taxable.
Speaker 1:So, as we start to wrap up here, that is an overview of a common challenge that many people face when they go into retirement, which is what on earth do I do when it comes to my withdrawal strategy, knowing that I have different options. I can pull from my brokerage account, I can pull from my IRA, but what makes more sense? It's typically driven by your tax situation, but it really should be part of a total, comprehensive plan that takes into account everything that you're doing to maximize your odds of success in retirement. So, mark, thank you very much for that question. Thank you to all of you who do have questions by the way, I can't get to all of them by read every single one that comes in Really appreciate all of you have taken the time to do that. Also, really appreciate all the time that you dedicate to tuning in and supporting the show. So, thank you for listening. Thank you for watching. For those of you who haven't already done so, make sure that you're subscribed here. If you're watching on YouTube, make sure you're subscribed. If you're listening on Spotify or Apple podcasts, if you leave a review, leave a comment helps more people to find the show and really appreciate everyone who takes the time to do that. With that, that is all we have for today and I'll see you all next time.
Speaker 1:Hey, everyone, it's me again for the disclaimer. Please be smart about this. Before doing anything, please be sure to consult with your tax planner or financial planner. Nothing in this podcast should be construed as investment, tax, legal or other financial advice. It is for informational purposes only. Thank you for listening to another episode of the Ready for Retirement podcast. If you want to see how Root Financial can help you implement the techniques I discussed in this podcast, then go to rootfinancialpartnerscom and click start here, where you can schedule a call with one of our advisors. We work with clients all over the country and we love the opportunity to speak with you about your goals and how we might be able to help. And please remember, nothing we discuss in this podcast is intended to serve as advice. You should always consult a financial, legal or tax professional who's familiar with your unique circumstances before making any financial decisions.