As we preach to clients, it’s not just how much you’ve saved; it’s how much you get to keep of what you've saved. Some of the best ways to achieve wealth preservation come down to tax minimization. Taxes generally play a big role in determining how successful one's retirement can be.
You have many strategies to consider for reducing taxes in retirement. Common ones include Roth conversions and the zero percent capital gains strategy, also referred to as the capital gains exemption or capital gains exclusion. These strategies are not considered tax loopholes, more so tax avoidance strategies available to the everyday investor. They can also play a big role in your estate planning by reducing future taxes for non-spouse beneficiaries. To be clear, these can be implemented before retirement but often aren't as advantageous, as household income tends to be near its peak prior to retirement.
The purpose of this blog post is to explore the 0% capital gains strategy, how it works, and the interplay with Roth conversions.
Capital Gains
First, let’s identify what a capital gain is. When you open a taxable (non-retirement) account, if you sell an investment (e.g., stock, bond, or ETF) for more than you paid, you have a “gain.” This gain will be characterized as either a short-term or long-term gain.
Short Term: Held less than a year; the gains are taxed as ordinary income.
Long Term: Held more than a year; the gains are taxed as long-term capital gains.
Long-term capital gains rates have tiers (0%, 15%, and 20%) that are based on your taxable income. Few people are even aware that it’s possible to pay no tax on capital gains. With proper planning, investors have the potential to avoid these taxes over many years. These tax savings can really add up over time.
It should be noted that 0% is only on the federal level, unless you live in a state that has no income tax.
To qualify for the 0% capital gains rate in 2025, your taxable income must be:
$48,350 or less for single filers and married couples filing separately
$96,700 or less for married couples filing jointly
Taxable Income
Much confusion arises on this topic. The 0% capital gains strategy is based on your taxable income, not your adjusted gross income (AGI). So what is the difference?
AGI is your total income of all sources minus specific "above the line" deductions” (e.g., 401(k), IRA, or HSA contributions). This number is used by the IRS to determine eligibility for various tax credits and deductions.
On the other hand, your taxable income is your AGI minus the greater of the standard or itemized deduction. Most retirees end up with the standard deduction, but it depends on a variety of factors and could vary year to year.
Standard Tax Deduction: $15,750 (single) or $31,500 (married filing jointly).
For those age 65 or older, there is an additional $2,000 (single) or $1,600-per-person (married filing jointly) deduction.
The standard deduction for a married couple can reach as high as ~$35,000, which means if there isn’t much other income, the opportunity to fill in the 0% capital gains bracket is immense.
To itemize, your total deductions must exceed the numbers above.
The good news is that the 0% rate is not eliminated if your taxable income runs a tad higher. Let’s take a look at an example:
Jake, who’s unmarried and 62, is recently retired. For 2025, he has no income and will claim the standard deduction. His taxable investments that have been held longer than a year will generate ~$15,000 of interest and dividends. Jake’s cash reserve will cover his expenses for the year. Under this scenario, Jake could recognize ~$49,100 of capital gains at a 0% rate.
$48,350 0% capital gains limit + $15,750 standard deduction = $64,100 of qualified income that Jake can take tax-free.
From this, we subtract the $15,000 interest and dividends = $49,100 of long-term capital gains income Jake can take at 0%.
For illustration purposes, let’s say Jake earned ~$20,000 in interest and dividends. If he recognized the same $49,100 in capital gains, $44,100 would qualify for the 0% treatment and $5,000 would’ve been taxed at the 15% long-term capital gains rate. The takeaway here is that you do not have to worry about getting the numbers to be exact as only the overage would be subjected.
But this raises another question. Let’s say Jake has enough cash to live off for the next three years, then what’s the point of this? Why sell things now when money isn’t needed? This is where a strategy called tax gain harvesting comes into play. Most investors have heard of the term tax loss harvesting, but not tax gain harvesting. So, in Jake’s case, he would essentially sell and immediately rebuy those same investments. This would allow him to step up his cost basis and reduce future taxable gains without paying tax.
Jake invested $10,000 (cost basis) in an S&P 500 Index ETF in 2012, which is now worth $59,100. Jake could sell and immediately repurchase the ETF. The $49,100 of gains would qualify for the 0% treatment, and his cost basis would step up to $59,100, not the original $10,000. This could be repeated again in 2026, assuming the same assumptions and that the S&P 500 increases in value.
Roth Conversion or 0% Capital Gains?
The most common retirement tax-minimizing strategies we deal with are Roth conversions or 0% capital gains. Often, we are asked, “Which strategy is better?” The answer depends on several factors, which need to be addressed on a case-by-case basis. Nothing prevents you from doing both in the same year if the numbers work out. But it’s vital to remember that implementing these strategies could impact other parts of your financial picture (e.g., subject you to Medicare surcharges aka IRMAA or miss out on the newly enacted enhanced senior deduction).
Roth IRAs are a retirement account that allow for tax-free investment gains that are not subject to required minimum distributions (RMDs). This allows you to keep more of your profits and grow part of your wealth on a tax-free basis. They can be viewed as a tax shelter of sorts.
A Roth conversion also allows for the growth of tax-free dollars, but income taxes are due on each conversion as pre-tax money is “converting” to tax-free (Roth). If you have an immediate need for capital, the appeal for a conversion is extremely low and you’d be better off utilizing the 0% capital gains strategy to get immediate access to funds. Roth conversions work best when you allow for compounding tax-free portfolio growth over the long term, as they are an extremely efficient way to protect wealth from taxes.
The reality is there is no one-size-fits-all answer. Conducting financial planning over the years will properly position yourself to capitalize on tax-advantaged investments strategies throughout retirement. Many investors focus their time on attempting to maximize investment returns, which is extremely challenging, while spending much less time on retirement wealth protection, also known as reducing your taxes, which is more in your control with the right amount of planning!
Feel free to discuss your situation with our financial planning firm.
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