There is an old saying in financial circles that the thing that matters most is not how much you make; it’s what you get to keep. When you make a dollar in the stock market, or virtually anywhere else, the IRS and other taxing authorities will be waiting with their hands out, expecting to claim their share of your good fortune.
As you move from saving money to spending it, you likely will be selling off some of your investments, which could mean incurring capital gains and the associated taxes. There is nothing wrong with funding your retirement this way; the strategic selling of assets is a sound way to generate income in your later years.
If you are not careful, however, you could give away more of your income than you need to. It’s important to pay your taxes, and doing so is the price you pay for living in a civilized society. Even so, you shouldn’t pay more than you’re required to. Here are seven smart ways to minimize your capital gains taxes as you move into retirement.
1. Adopt a long-term holding strategy.
There are many reasons to take a long-term approach when investing for retirement, including the fact that you have decades to put that money away. Avoiding higher-than-necessary capital gains taxes is one more reason, since rates on short-term gains are far higher than those on assets held for longer periods of time.
2. Shed your losers to harvest losses.
Not all of your investments will be winners, but you can profit from those losers just the same. Harvesting your losses by selling off your bad bets is a great way to offset your gains elsewhere, so check your performance numbers and act accordingly.
3. Time your big sales for low-income earning years.
Another great way to minimize your overall tax bill is to time the sales of those appreciated assets. You might, for instance, choose to sell stocks with big capital gains the year after your retirement, when the absence of earned income could make your overall tax bill lower.
4. Take steps to reduce your taxable income.
Whether you are still working or already in retirement, there are steps you can take to reduce your taxable income. From putting money in a health savings account to padding your IRA, you can take certain steps to reduce your taxable income, all without running afoul of the IRS and its auditors.
5. Donate appreciated assets and reap the tax benefits.
Giving money to your favorite charity feels good, but gifting appreciated assets could feel even better. When you donate appreciated stock and mutual funds, the charity you choose gets the money, and you get to avoid paying capital gains on the assets you have donated.
6. Include stocks and mutual funds with large capital gains in your estate planning.
If you have saved well for retirement and done some smart planning, you may end up with more income than you need. If you find yourself in that fortunate position, you can simply pass on the appreciated assets in your portfolio to your chosen heirs by including them in your estate plan. When you do so, your children or grandchildren will inherit the assets on a stepped-up cost basis, meaning their future gains will be calculated based on current value, not on the price you paid all those years ago.
7. Move to a state with a lower or no income
Last but not least, you can always move to a state with a lower income tax on appreciated assets, or to a state with no income tax at all. It’s not just the IRS you have to worry about, after all — many states heavily tax unearned income like capital gains and pensions.
Building a portfolio of assets you can rely on is hard work, and it requires an enormous amount of discipline and personal sacrifice. Funding a comfortable retirement does not happen overnight, but you have worked at it year by year, creating a portfolio you can rely on in your later years.
Now there is one more thing to do, and that is to minimize your taxes. Every dollar you save on taxes is one more you get to spend on your hobbies, your grandkids, and your lifestyle. We can help you maximize your tax credits and deductions, so you get your biggest possible refund.
