Summary

The article outlines a tax-efficient withdrawal strategy for retirees with a diversified investment portfolio, emphasizing how saving $18,000 annually can lead to significant wealth accumulation with minimal tax liability.

Abstract

The article details a financial strategy for maximizing wealth through strategic savings and tax-efficient withdrawals. It builds upon a previous discussion that recommended investing $6,000 each into a ROTH IRA, a deferred account, and a brokerage account annually. The current focus is on the withdrawal phase, particularly for a married couple with an annual income of$ 120,000, withdrawing $40,000 from each account type. The strategy leverages the 2022 U.S. tax brackets and standard deductions to minimize federal taxes. It highlights that with careful planning and consideration of capital gains taxes and the tax-free nature of ROTH withdrawals, it's possible for a couple to have a tax bill of$ 0 on their annual $120,000 withdrawal, despite having a substantial nest egg.

Opinions

The author believes that tax rates are likely to increase in the future, making the outlined strategy even more valuable over time.
The author suggests that the strategy could be adjusted to fit individual circumstances, implying that it is flexible and adaptable.
There is an opinion that the strategy could potentially allow for even greater withdrawals without triggering a federal tax bill, possibly with the addition of Social Security payments.
The author notes that while the strategy can result in minimal tax liability, it is important to consult with personal wealth and tax advisors, acknowledging the complexity and individual variability of financial planning.
The author is not a CPA or CFP and explicitly states that the information provided is not professional tax or investment advice.

Part 2. How Saving $18,000 a year can make you a Millionaire many times over.

The tax free withdrawal strategy.

In Part 1 of this post, we covered an investment allocation strategy to build serious wealth by saving $18,000 a year into three separate, specific investment accounts. Briefly, $6,000 each in ROTH, Deferred, and Brokerage. You can read the full post here.

Here I cover the reason for this structure and its advantages in withdrawal.

Let’s dig in…

I am going to run a withdrawal model based on two factors; married with $120,000 annual, total withdrawal. $40,000 from each of the three accounts.

You can adjust this per your individual situation. Also, I am going to use 2022 tax brackets, which will remain the same in 2023. Importantly, the standard deductions will increase.

(Important to take into account here is that taxes are likely to increase in the future, a belief I personally subscribe to. I believe this strategy will become increasingly valuable controlling for that element, alone.)

Here is what 2022 Married, Filing Jointly Tax Bracket for the $120,000 income looks like spread across the three withdrawals.

A deferred account withdrawal of $40,000 counts as regular income:

12% bracket for $20,551 to $83,550 taxable income
$40,000 * .12 =$2,916) = $4,800

Keep in mind, Married, filing jointly 2022 standard deduction is $25,900. So, you wouldn’t actually pay that $4,800.

Moving on, let’s look at Capital Gains taxes for the $40,000 withdrawal on a brokerage account.

Current Capital Gains tax rates:

In our equation, withdrawing $40,000 from the brokerage account balance, the tax bill would be 0% (in our deferred withdrawal situation, taxable income is only $40,000). As the IRS clearly outlines, “some or all net capital gain may be taxed at 0% if your taxable income is less than or equal to $40,400 for single or $80,800 for married filing jointly or qualifying widow(er).” This applies if your withdrawals are against assets you have held for more than 1 year.

What about ROTH withdrawals? Over 59.5 and have met the 5 year holding requirement?

ZERO taxable income.

So, on three separate $40,000 withdrawals annually totaling $120,000, your total tax bill (not accounting for other variables or deductions) is $0.

Even more, you can see that these brackets, combined with the standard deduction, allow for even more upside on withdrawals before triggering a federal tax bill. Perhaps a Social Security payment would do that lifting for you.

I did run this scenario through a federal tax calculator and there seems some variance where a tax bill of $1,400 or so is possible. (*Reminder I am not a CPA or CFP, and that this is not tax or investment advice. Consult your personal wealth and tax advisors accordingly.)

In any event, how does paying little to no taxes on a $2,383,353.42+ nest egg sound to you?

Get saving.

Thanks for reading. Be good stewards of your earnings.