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Time for another cautionary tale!
A client sent me this video last week, along with the question: “Is this legit – or fake news?“
If you don’t have time to watch it, the creator (John) suggests that a retired couple can have $3.23 million in their portfolio, withdraw exactly 4% per year (~$130K), and never pay taxes on it.
My response to my client:
He is making a major tax law mistake. There is a kernel of truth to what he’s saying. But it’s mostly bad advice.
Online financial content is a “buyer beware” landscape.
John’s Major Tax Error
Why is John wrong?
First – yes, 0% capital gains tax is a real thing. Here’s some of my previous work on the topic:
But John makes, frankly, a terrible assumption in his analysis:
That capital gains are the ONLY income source you have in retirement (!!!)
He is assuming no Social Security. No interest income. No dividend income. No pension income. No withdrawals from Traditional 401(k) or Traditional IRA accounts (and therefore no required minimum distributions). No Roth conversions. No other income!!!
The only income he’s thinking about is capital gains income.
So – why is this such a big error?
Because all of those income types I listed above can be taxable, reducing the remaining space to realize 0% tax on capital gains.
I work with $3M retirees who have more than $100,000 in “unavoidable” taxable income annually. Interest, dividends, capital gains, IRA withdrawals, etc. That income fills space in their tax return that can no longer be used for 0% capital gains harvesting.
The idea of realizing $130,000 in 0% capital gains in one year – let alone every year – is not even “questionable.” It’s purely misleading.
Duh, Jesse…
I hear people saying, “C’mon, Jesse, of course we’re not going to believe some random influencer.”
Fair enough.
But this guy has over 1 million followers (!!) across TikTok, Instagram, and other channels.
He’s speaking authoritatively. He’s “showing you the math” in the video. People are drinking this Kool-Aid.
And to be fair to John, he’s far from the only influencer of this ilk. The online finance creatorsphere is rife with bad advice.
The blind are leading the blind.
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GREAT topic, I have mentally debated this one a few times over. Would, and if so, to what degree, would it be beneficial to have money in a brokerage, to pull from before 59.5, assuming I could hang out in the lowest federal tax bracket?
That is a pretty large and complex question in itself. John (the influencer) makes a case for it, and truthfully, a little brokerage money could be useful. BUT there ARE pitfalls and traps everywhere if that’s the route you want to take.
Before ANYONE considers this as the best route before forgoing a Roth IRA, one should become VERY VERY knowledgeable about when you can take out funds from a Roth, penalty, and tax-free before 59.5. There ARE scenarios, and a few of those are just NOT that hard. Basically, you can take out your Roth basis ANYTIME. In a bad situation and need to tap a little money… if you TRACK your Roth contributions, you can work with an accountant to pull out some basis. If you are buying a home (10k), got laid off and need to pay medical insurance premiums, need a “loan” for 60 days or less, or a few other situations… work with an accountant and boom… no penalty or tax on SOME withdrawals… you can do your own research on the fine print. Then there is a 72T distribution.
Now you’re saying….ok…But I like simple….I’ll just put it in a brokerage account, in an ETF that doesn’t pay dividends, and as long as my gains are long-term, I will have ultimate freedom and minimal taxes. What’s the downside?
Well…there are a few UNINTENDED consequences here….
1) ACA. I am just pulling this from Gemini (feeling lazy today lol), “ACA eligibility is based on MAGI, which includes taxable capital gains, even if they are taxed at a 0% rate.” So, you pull “130k” from your brokerage and pay 0 federal tax, BUT lose ALL, or MUCH of your potential ACA credit. For 2026 (and hopefully the foreseeable future) …. distributions from a Roth are not added to your MAGI and do not reduce your ACA eligibility.
2) Great, you saved on FEDERAL income tax. What DIDN’T you save on….state income tax. A handful of states do not tax capital gains, but most do. Most states also do NOT give extra tax breaks for “long-term” capital gains. New York State certainly doesn’t. That 130k “tax-free” distribution from your brokerage will net a married couple filing jointly, over $4k in New York State income tax. Enjoy that.
Know what DOESN’T get taxed, though: qualified distributions from a Roth IRA / Roth 401k.
3) Have kids in college? If so, tune in. Your brokerage account will be counted as an asset on the FAFSA and will reduce your financial aid. I am NOT talking about distributions from the brokerage account either (those will reduce the aid package too, though), the MORE INSIDE the brokerage account you have, the less aid you get, whether or not you sell some annually. Just having over 10k in a brokerage will start to reduce the financial aid package for your kid(s).
Know what doesn’t get counted in your assets? Qualified retirement accounts like an IRA / Roth IRA, 401k, Roth 401k, SEP, 403B, and so on.
4) OTHER benefits. Look, very few to NO one is looking to optimize to get SNAP (food stamps), HEAP (heating assistance), and/or other state or federally provided government assistance…..but many people do get them for a bit. One thing that could prevent you from collecting the funds you would otherwise collect is “means tests/asset tests”. Basically, if you have a large brokerage, no benefits for you. Know what is frequently excluded from those tests: qualified retirement accounts.
5.) Some benefits don’t have means or asset testing. But that doesn’t mean it will always be the case. Funds in a qualified retirement account are slightly less likely to be counted than those in a brokerage account if there are future changes. One benefit I have a LITTLE concern over in the future, ACA insurance premiums. It is a little less likely they will include qualified retirement account values vs. brokerage accounts if the ACA adds asset tests in the future.
6.) Roth IRAs are a little more forgiving with tax planning. If you slip up, buy a dividend-paying security or ETF and get a dividend in an ETF….no biggie…in a brokerage account…you’ll need to reevaluate your tax planning for the fiscal year.
7.) Cake on the table effect. In my house….IF you leave a cake on the table…I WILL sneak some multiple times a day. I will grab a fork and sneak a little here, and a little there, and maybe a little slice when the kids go to bed. Its THERE, it’s easy to get to, and there is no paperwork to do after.
The same is true for a brokerage. In my opinion, I like that it is a little bit of a pain to access my Roth funds before 59.5. It’s possible, but a little inconvenient to withdraw funds. It requires extra thinking, paperwork, and mental effort. I am less likely to NOT try to sneak a little bite here and there. I have never had an “emergency kitchen remodel issue needing 5k” or “once in a lifetime vacation sale that I NEED”. I like to THINK I have more than enough discipline to not sell off a little of my brokerage to pay for “opportunities” like the ones above, but I am even happier that it is slightly more challenging to do so with funds in a retirement account. I don’t need more temptation in my life, I am already struggling to keep cakes off my kitchen table after all lol.
8.) Keeping it simple. Look…Roths can be VERY simple. Wait til you are 59.5, leave the money in for at least 5 years, track your basis (or learn about 72t distributions), and you have a solid setup with some options to access your funds in emergencies or after MUCH thought and coordinating with an accountant on 72t distributions. It is the Goldilocks of accounts, in my opinion… able to access funds… without being TOO easy to access, and gives me the MOST options for benefits (ACA, financial aid, and so on).
8.) I am NOT anti-brokerage….brokerages are great if you have maxed out your other options (Roth, HSA, 401k, and so on), or are saving for something long-term (like a house down payment, large home reno, or a once-in-a-lifetime vacation). But in MY opinion, there are many other accounts I want to max before putting funds into a brokerage for MY family. If I made 500k a year, I would 100% be putting SOME funds in a brokerage AFTER I max out my qualified retirement accounts, HSA, did a mega backdoor Roth contribution, and paid off my primary home.
Great stuff, and the previous commend is very insightful, too. ACA is pretty much our only concern until we’re both on Medicare. Lost subsidies are a huge “tax.”
Thanks, Jesse and Will!
When I retire in a few years as a single person with a pension, I will never have to think about 0% capital gains.