Transcription
There are five things sitting in your financial life right now that the IRS is going to tax the moment you retire. Not because you did anything wrong, because of where they are. And the window to move them is closing faster than most people realize.
The video with 3.6 million views that went viral last year told you to sell your house, sell your car, sell your stuff before you retire. That is lifestyle advice. It is fine, but it will not save you a dollar in taxes. What I'm about to show you are five specific financial positions that the IRS treats differently depending on whether you restructure them before your last paycheck or after. The difference, in real dollars, is six figures over a 25-year retirement. Not hypothetically, mathematically.
If you're within 5 years of retirement, this is the most important tax video you will watch this year. Here is why. Every single one of these five moves becomes dramatically more expensive or completely impossible after you stop working. The tax brackets change, the income flexibility disappears, the IRMAA look-back locks in. And by the time most retirees realize what they should have done, the window is already shut.
Before I get into it, I need to be clear. I'm not a lawyer, I'm not a CPA, I'm not a financial advisor. Nothing in this video is legal, tax, or investment advice. These are educational examples based on current tax law and publicly available IRS information. Always consult a qualified tax professional before making decisions about your specific situation.
My name is Kevin, and if you are new here, this channel is for one specific group: retirees and pre-retirees over 60 who want to understand how the IRS actually works in retirement. Not the version your HR department gave you, not the version your financial advisor glossed over, the real version with real numbers in plain English. If that sounds like you, subscribe right now because next week I'm putting out a video on the exact month you should retire to pay the least in taxes. That one is going to change the timeline for a lot of you.
Drop a comment right now. How many years until you retire? Just the number. 1, 3, 5, 10, whatever it is. I read every single comment, and the most common number is going to determine which of these five moves I cover in a full deep dive next. 2 seconds? Do it now. Let us get into it.
Number one, sell your high-turnover mutual funds in your taxable brokerage account. This is the one that bleeds people dry for decades without them noticing. If you own actively managed mutual funds in a taxable brokerage account, not inside an IRA, not inside a 401k, but in a regular taxable account, those funds are generating taxable events every single year whether you sell anything or not. Here is how it works. The fund manager inside your mutual fund buys and sells stocks constantly. Every time they sell a winning position, that creates a capital gain. At the end of the year, the fund distributes those gains to you. You owe taxes on them even though you never sold a single share. You never saw the money. You never made a decision. But the IRS sends you a 1099 and you owe.
High-turnover funds can have turnover rates of 80 to 120% per year. That means the entire portfolio is being replaced annually. Every replacement creates a taxable event. The tax cost of holding a high-turnover fund versus a low-turnover index ETF in a taxable account can be 1 to 2% of your balance per year in unnecessary taxes. On a $200,000 taxable account, that is $2,000 to $4,000 per year in taxes you did not need to pay. Over 10 years, that is $20,000 and you never noticed because the tax came as a line item on your return, not as a bill with a red stamp.
The fix is simple, but it has to happen before you retire. While you're still working, your income is high enough that you are already in a higher bracket. The capital gains from selling the mutual fund positions and buying tax-efficient ETFs will be taxed at your current long-term capital gains rate, either 15 or 20% depending on your bracket. But here's the key. In 2026, the 0% long-term capital gains rate applies to single filers with taxable income below $49,450 and married couples below $98,900. If you wait until after you retire and your income drops into that zone, you can harvest those gains at 0% federal tax. Zero.
So, the strategy is this. If you are still working, start transitioning high-turnover mutual funds to tax-efficient index ETFs now, but do it in stages. Sell the positions that have small gains first. Hold the positions with large embedded gains until your first year of retirement when your income drops and you can potentially harvest those gains at 0%. Either way, every year those high-turnover funds stay in your taxable account is a year of unnecessary tax drag. Get them out.
And let me be specific about the mechanics because people get this wrong. When you sell a mutual fund and buy an ETF, there is no wash sale rule violation as long as the ETF is not substantially identical to the fund. For example, selling an actively managed large-cap growth fund and buying a total stock market index ETF is perfectly fine. They are different investments. The wash sale rule only applies when you sell at a loss and buy a substantially identical security within 30 days. If you are selling at a gain, the wash sale rule does not apply at all.
I had a viewer email me last month who had been holding a high-turnover international fund in his taxable account for 12 years. He never looked at the tax drag. When he finally pulled his 1099s for the last 5 years and added up the capital gain distributions he had been taxed on, the total was over $11,000 in taxes paid on gains he never chose to realize. $11,000 gone because of where the fund was sitting. He moved it to an index ETF in one afternoon. The bleeding stopped that day.
The IRS does not care whether you meant to generate those gains. The fund manager made the decision, you paid the tax. That is why this has to be fixed before you retire because after retirement, every dollar of unnecessary ordinary income pushes your social security into a higher taxation zone and can trigger IRMAA surcharges. The cascading cost of unnecessary income in retirement is far worse than the same income while you are working.
Number two, sell your traditional IRA balance. By that, I mean convert it to Roth. I have talked about Roth conversions on this channel multiple times, but in the context of what to do before you retire, this is the single most valuable move you can make. And the math is so overwhelming that I need you to hear it one more time.
Every dollar in your traditional IRA is a dollar the IRS has not taxed yet. They are going to get their cut eventually. The question is when and at what rate. If you do nothing, those dollars sit in the traditional IRA. They grow. They compound. And at age 73, the IRS forces you to start pulling them out through required minimum distributions. By that point, the account is larger, the forced withdrawals are bigger, and every dollar comes out taxed as ordinary income on top of your social security and any pension. The effective tax rate on those RMD dollars can be 30 to 40% when you factor in the social security taxation cascade and IRMAA surcharges.
The alternative is converting some of that traditional IRA into a Roth before you retire or in the first few years after. The years between your last paycheck and age 73 are the gap years. During those years, your income is at its lowest. You are not earning a salary, you may not be collecting social security yet, your RMDs have not started. In 2026, a married couple filing jointly can fill the 12% bracket with roughly $133,000 of taxable income. If your only income during the gap years is controlled IRA withdrawals, you have enormous room to convert at 12% instead of 22% or higher later.
Let me put a number on this. A couple who converts $300,000 over five gap years at 12% pays about 36,000 in federal taxes on the conversions. That same 300,000 left in the traditional IRA and forced out as RMDs at an effective rate of 25% over 20 years cost them 75,000. The conversion saves $39,000 on the same money.
But here's what makes this a before you retire move. While you are still working, your salary fills the 12% bracket. There is no room for conversions at low rates. Every conversion dollar gets stacked on top of your salary and taxed at 22% or higher. Your last year of work is too late for big conversions. You need to plan the timing so the gap years begin when your salary stops. If you are within 3 years of retirement, talk to a tax planner this month, not next year, this month. Because Roth conversion planning requires modeling multiple years of income, IRMAA exposure, and social security timing, it cannot be done in April when the return is due.
And there is one more layer to this that almost nobody explains. If you are between 60 and 63 years old in 2026, the IRS just created a new super catch-up contribution rule. You can now contribute up to $11,250 in additional catch-up contributions to your 401k, bringing your total employee contribution to 35,750 per year. That sounds great, more money going in. But if your prior year wages exceeded $150,000, those catch-up contributions must go into the Roth side of your 401k, not pre-tax, Roth. You're paying taxes on that money now at your highest working bracket.
Here is why that matters for your pre-retirement planning. Congress is forcing high earners over 60 to make Roth contributions at 22% or higher when they could retire and convert at 12% during the gap years. The system is pushing you to put money in the Roth bucket at the worst possible rate. The only way to beat it is to plan the timing of your exit carefully so the gap years open up as soon as possible and you can convert at rates that actually make sense.
There is also the IRMAA interaction. Every dollar you convert from a traditional IRA to a Roth counts as income for IRMAA purposes. The 2-year look-back means a conversion you do in 2026 can spike your Medicare premiums in 2028. For single filers, the first IRMAA tier starts at 109,000. For married couples, 218,000. If you are doing conversions, you need to model the IRMAA tiers year by year to make sure you are not saving 12,000 in income tax while spending 4,000 in extra Medicare premiums. The math still usually favors the conversion, but you need to know the full cost before you pull the trigger.
Did you already know about the gap years? Drop yes or no in the comments. I'm genuinely curious because this is the concept that changes people's entire retirement timeline. And I want to know how many of you are hearing it for the first time.
Number three, sell your appreciated stock at 0% capital gains while you still can. This one is related to number one, but it is a separate strategy. In 2026, if your taxable income is below $49,450 as a single filer or 98,900 as a married couple, you pay 0% federal tax on long-term capital gains. Zero. That means if you own individual stocks or ETFs in your taxable brokerage account that have appreciated significantly, you can sell them, pay no federal capital gains tax, and immediately buy them back. You have just reset your cost basis to the current value. When you sell them again years later, the gain is calculated from the new higher basis. You eliminated years of embedded gains without paying a penny in tax.
The strategy is called capital gains harvesting. And it is the mirror image of tax loss harvesting. Instead of selling losers to offset gains, you are selling winners when your income is low enough to pay zero on the gain. But here is why it has to happen before or immediately after you retire. The 0% rate only applies when your taxable income stays below the threshold. Once Social Security starts, once RMDs kick in, once your pension begins, your taxable income climbs above the threshold and the window closes. For most retirees, the 0% capital gains window exists for only 3 to 5 years maximum. Some people have an even shorter window.
If you have a stock you bought 20 years ago for $10,000 and it is now worth $60,000, that is 50,000 in embedded gains. Selling it while your income qualifies for the 0% rate saves you $7,500 in federal taxes compared to selling it later at 15% on a single position. If you have multiple positions with embedded gains, the savings multiply. Your last year of work and your first two or three years of retirement are the sweet spot. After that, the window is usually gone.
Let me give you a concrete example so you can see the scale. A married couple retires in January of 2027. In 2027, their only income is 30,000 from controlled IRA withdrawals. Their taxable income after the standard deduction of 36,300 is negative. They are well below the 98,900 0% threshold. They own three stock positions in their taxable account. Position A, cost basis 15,000, current value 40,000, embedded gain 25,000. Position B, cost basis 8,000, current value 22,000, embedded gain 14,000. Position C, cost basis 20,000, current value 35,000, embedded gain 15,000. Total embedded gains, $54,000. They sell all three. Total capital gains, 54,000. Federal tax at 0%, zero. They immediately buy similar but not identical ETFs with the proceeds. Their new cost basis is the current market value. If they sell those same positions in 10 years when their income is higher, the gain will be calculated from the new higher basis. They just erased $54,000 in future taxable gains without paying a penny. If they had waited until age 75 to sell those positions when their RMDs and Social Security are pushing their income above the threshold, the 15% capital gains rate would have cost them $8,100 in federal taxes on the same 54,000 in gains. That is $8,100 saved by selling 2 years earlier.
And one important note, unlike tax loss harvesting, capital gains harvesting does not have a wash sale restriction. The wash sale rule only applies to losses. You can sell at a gain and immediately buy back the same security. However, most advisors recommend buying a similar but not identical fund to ensure the transaction is clearly documented as a separate purchase for cost basis purposes.
Number four, sell your bond funds and REITs out of your taxable account. This is about asset location, not asset allocation. The distinction matters enormously and almost nobody gets it right. Asset allocation is what percentage of your portfolio is in stocks versus bonds. Asset location is which account those investments sit in. And the IRS treats different account types very differently.
Bond interest is taxed as ordinary income. REIT dividends are taxed as ordinary income. If those investments are sitting in your taxable brokerage account, every dollar of interest and every dollar of dividends gets added to your adjusted gross income. That income pushes your provisional income higher, which pushes more of your Social Security into the taxable zone. It can trigger IRMAA surcharges. It increases your state tax bill. The same bond fund or REIT sitting inside your traditional IRA generates the exact same income, but you do not pay taxes on it until you withdraw. Inside a Roth IRA, you never pay taxes on it at all.
The strategy is straightforward. Before you retire, sell your bond funds and REITs from your taxable account. Buy them inside your IRA or Roth IRA. In the taxable account, hold tax-efficient index stock ETFs that generate mostly long-term capital gains, which are taxed at lower rates or potentially 0%. The dollar impact of correct asset location can be 1/2 to 1% of your portfolio value per year in reduced taxes. On a $500,000 portfolio, that is 2,500 to $5,000 per year. Over a 25-year retirement, that is 62,500 to $125,000 for moving the same investments between accounts. The allocation does not change. The risk does not change. The tax bill changes dramatically.
Why do this before retirement? Because while you're working and contributing to your 401k or IRA, you have natural inflows to purchase the bonds and REITs inside the tax-sheltered account. After you retire, there are no new contributions. You have to sell and rebuy, which can trigger taxable events. It is cleaner and cheaper to get the location right while money is still flowing in.
If you have made it this far in the video, you're exactly the kind of person this channel is built for. Hit the like button right now. It takes 1 second and it tells YouTube to show this to more pre-retirees who need to hear this before their window closes. And if you are not subscribed, do it now. The video I am putting out next week on the best month to retire is going to save some of you thousands of dollars.
Number five, sell your high-tax state residency. I know, moving sounds extreme, but the math is not extreme. It is straightforward and for some of you, it is the single biggest financial decision of your retirement. Nine states have no income tax at all. Florida, Texas, Tennessee, Nevada, Wyoming, South Dakota, Alaska, New Hampshire, and Washington. Three more states, Pennsylvania, Illinois, and Mississippi, have income taxes but exempt all pension and retirement income. That means IRA withdrawals, 401k distributions, pension payments, and Social Security are all state tax-free.
Compare that to California, where retirement income is taxed at rates up to 9.3% or New York, where everything above 20,000 in pension income is fully taxable, or Minnesota, which still taxes a portion of Social Security benefits at the state level, or Connecticut, which phases out its Social Security exemption above 75,000 for single filers. For a retiree with $60,000 in annual income, the difference between California and Florida is roughly 3,500 to 4,500 per year in state taxes. Over a 25-year retirement, that is 87,500 to 112,500. That is not a lifestyle choice. That is a financial decision with a six-figure consequence.
But here is why this move has to happen before or immediately at retirement. Many states have residency rules that require you to establish domicile, change your voter registration, update your driver's license, and spend a majority of the year in the new state. If you wait until you are 73 and your RMDs are pushing income higher, you are paying the high state tax rate for every year you delayed. Each year of delay costs you the full annual difference. I made a full video ranking the three worst and three best states for retirees. If your state is costing you, go watch that one after this.
And here is one more layer that nobody is connecting. The $6,000 senior bonus deduction from the one big beautiful bill is a federal deduction. It reduces your federal taxable income by 6,000 per person, 12,000 for a married couple, for tax years 2025 through 2028. But if you live in a state that conforms to the federal tax code, that deduction also reduces your state taxable income. In states like California that start with federal AGI, the senior deduction flows through and saves you money at the state level, too. But if you are in a no income tax state, the federal deduction is all you get. And that is still $1,440 per year for a couple at the 12% bracket.
The point is that the state decision interacts with every other move on this list. If you move to Tennessee and do Roth conversions at 12% during your gap years, those conversions cost you zero in state tax. In California, those same conversions would be taxed at the state level on top of the federal rate. The effective rate of a Roth conversion in California can be 21 to 23% when you combine federal and state. In Tennessee, it is 12% flat. The difference on a $100,000 conversion is 9 to $11,000 on a single conversion in a single year. I'm not telling everyone to move, but if you are planning conversions and you live in a high-tax state, the math on relocating before the conversion start is dramatically different from what most people assume.
Now, I am not telling everyone to move. If your family is in California and your grandchildren are in New York and your life is built in Minnesota, do not uproot your entire existence to save on taxes. But if you were already considering a move, if you were already thinking about warmer weather or lower cost of living, add the tax number to your decision. For a lot of you, it will tip the scale.
Let me bring all five together with one example. Imagine a married couple, both 63. They have 400,000 in a traditional 401k, 150,000 in a taxable brokerage account, and they live in California. They plan to retire at 65.
Move one, they sell their high-turnover mutual funds in the taxable account and replace them with tax-efficient index ETFs. Annual tax drag eliminated, approximately $2,000 per year. Lifetime savings, 50,000 over 25 years.
Move two. They begin Roth conversions in their first year of retirement. They convert 50,000 per year for 5 years at 12% instead of waiting for RMDs at 22% or higher. Tax savings on conversions, approximately 25,000 over 5 years.
Move three. In their first year of retirement, when their income drops, they harvest 60,000 in embedded capital gains at 0%. Tax avoided, $9,000.
Move four. They move their bond allocation from the taxable account to the IRA. Annual tax savings from correct asset location, approximately $2,000 per year. Lifetime savings, 50,000 over 25 years.
Move five. They relocate from California to Tennessee at retirement. Annual state tax savings, approximately $4,000. Lifetime savings, 100,000 over 25 years.
Total estimated lifetime savings across all five moves, approximately $234,000. Same couple, same money, same retirement. $234,000 more in their pocket because they restructured five financial positions before the window closed.
And here is the part that should make you uncomfortable if you have not done any of this. Every single one of those moves is legal. Every single one is well documented in the tax code. The IRS does not prevent you from doing any of them. But the IRS also does not tell you they exist. Nobody calls you at 63 and says, "Hey, you should probably convert your IRA before your gap years end." Nobody sends a letter saying your mutual funds are bleeding $2,000 a year in unnecessary tax drag. Nobody warns you that your bond funds are in the wrong account. The system is designed to collect the maximum from people who do not ask questions. These five moves are the questions.
Here's what I want you to do right now. Three things. First, pull up your taxable brokerage account. Look at what you own. Are there high turnover mutual funds in there? Are there bond funds or REITs generating ordinary income? Those are positions one and four. Fix them. Second, look at your traditional IRA or 401k balance. If it is above $200,000, you need a Roth conversion plan before you retire. That is position two. Talk to a fee-only tax planner. Not next year, this year. Third, calculate your embedded capital gains. Look at the cost basis of your taxable holdings. If there are large gains and you're within 2 years of retirement, plan the harvest for your first low-income year. That is position three. The 0% window does not last long.
Drop a comment and tell me which of the five moves surprised you the most. Just the number, one through five. That number tells me exactly what to cover next. And the most common answer becomes next week's full deep dive video. If this helped you, hit like. Subscribe if you have not already. I make videos like this every week. And the next one, the one about the best month to retire, is going to change some of your timelines. I will see you in the next one.