Transcription
In today's video, I'm going to show you tax-free retirement income strategies that have been hiding in plain sight and why these strategies don't require a Roth IRA or Roth conversion or really any special type of account and it can generate income that the IRS will never see on your tax return.
To working with clients who have assumed that tax-free retirement income can only come from Roth accounts, I've discovered that most retirees are sitting on multiple sources of invisible income that they were just never taught how to use properly. And then coordinating those sources with standard deductions and capital gains brackets can produce quite a bit of income, maybe 40 to $80,000 per year, bringing with it very little or no federal income tax, which is exactly why I'm making this video today to show you what those sources are, how they work together, and why you might already have most of the pieces in place without realizing it.
If you're new to the channel, I'm your humble host, Ben Brandt. I've been a financial adviser for almost 20 years, and I want to help make your retirement even better. So, let's start with one of the most powerful and most overlooked tax-free income tools in the entire tax code. And the best news is you already have access to it. It's the standard deduction.
Now, formerly just another boring part of the tax code, it was super-sized in 2017 as part of the TCJA, that's the Tax Cut and Jobs Act, and it essentially doubled. It took your deduction from $6,350 to $12,000 for single filers and from $12,700 to $24,000 for married couples filing jointly. Now, fast forward a few years in 2026. The standard deduction for married couples filing jointly is $32,200. And if you and your spouse are both 65 or older, you get an additional $3,200 on top of that. That alone gets a retired couple to $35,400 of tax-free income space. Cut that in half if you're single.
But here's how it gets even better. For tax years 2025 through 2028. And I should tell you this is a temporary provision scheduled currently to expire in 2028 unless Congress extends it. There's a new senior bonus deduction of up to $6,000 per person for taxpayers 65 and older. So for a married couple where both spouses qualify, that's an additional $12,000. Again, cut that in half if you're single. Now, I should also mention that if your income is too high, you'll start to lose some of that, but we're keeping things simple today.
So, when you stack all those together, we've got our super-sized standard deduction. We've got our senior add-on, and we've got a new senior bonus deduction. A married couple over the age of 65 in 2026 has roughly $47,400 of tax-free income space just sitting there waiting to be used before a single dollar touches the lowest federal tax bracket. Now, again, before the rule changes in 2027, we were at $12,700 for a couple. We're now at over $47,000 for that same couple over age 65. That's a huge increase in tax-free income in just under a decade.
Now, smart super savers can then use that $47,000 of free income space and then we strategically fill it with IRA withdrawals or pension income or any other ordinary income at a 0% effective tax rate. So, that's tax-free income. Yes, no Roth IRAs in sight yet. The retirees who capture the maximum value from that deduction are the ones who control their income sources, pulling spending from accounts that don't trigger taxable income and then using the deduction to shelter the income that they do choose to create. So the standard deduction creates over $47,000 of tax-free space every year if you're single, again, just cut that number in half.
But the second source of tax-free income is even more exciting because it has the 0% tax rate already built in. But before we get into that, if you want the best retirement content on the internet sent to you each week, you're going to love my free newsletter, This Week in Retirement. Every Thursday morning, I send you the best two or three retirement planning articles and podcasts and YouTube videos from retirement creators that I respect and Kevin Lum. So, check it out in the description or visit this weekendretirement.com.
So, let's talk about the most underrated number in the entire tax code. And I think this might be the section that genuinely changes how you think about your taxable brokerage account. So, in 2026, long-term capital gains are taxed at 0% for married couples filing jointly with taxable income below $98,900. Again, cut that in half for singles, $49,450. That's not a deduction or a credit or a phase-out. That's just a 0% rate written right into the tax code on long-term capital gains available to really available to a huge number of retirees who might not even know that it's just right there in their account built in.
So, here's what it means in practice. After your standard deduction reduces your ordinary income, you can sell appreciated investments from your taxable brokerage account and pay zero federal tax on the gains. Again, as long as your income stays below $98,900. Now, this is a second layer of tax-free income stacking on top of your standard deduction. The deduction shelters ordinary income at 0%, the capital gains bracket shelters investment gains at 0%. And the two work simultaneously at the same time in the same year.
Now, keep in mind, we're talking about federal taxes here. You want to keep your own state income taxes in mind as well, but that's a story for a different day. And it gets better because there's a strategy that's built around this called tax gain harvesting. Now, most people have heard of tax loss harvesting. That's where we sell investments that are down at a loss and we want to bank that as a tax deduction. Well, tax gain harvesting is the opposite. This is where you sell investments that have gone up and then you pay zero tax on the gain because we're in that 0% tax bracket for capital gains. And then we can immediately repurchase those shares that we sold.
Now, why would you want to do something like that? Well, because now your cost basis, which is the number that the IRS uses to calculate your future taxable gain, that number has been reset to the current higher price. So, you permanently erased future taxes on that appreciation without changing your investment position, changing anything about your portfolio, or or really changing anything about it by a single share. And here's a fun wrinkle that a lot of people don't know. The wash sale rule, that's a 30-day rule that prevents you from claiming an artificial loss. Well, that doesn't apply to gains. So you can sell and re-buy the same day in a waiting period, no penalty, no problem.
So let me put some numbers on this. A retiree who harvests $40,000 in gain at 0% every year for 10 years, well, they permanently erased $400,000 of future taxable gains. Out of a 15% long-term capital gains rate, those gains, had we not managed them properly, would have cost $60,000 in future taxes. So, that's $60,000 in lifetime tax savings without a Roth conversion, without changing anything about your investments, and without any special accounts.
Now, I want to be transparent here. There is a lot of nuance to this. Capital gains distributions from mutual funds can sneak up on you at year-end, and they can accidentally push you above this threshold. So, just like with Roth conversions, we want to leave ourselves a little bit of wiggle room and execute these moves late in the year when we have a really clear picture of our total income. Also, I think in my opinion, more of a reason to use passive funds versus active funds because they're going to have passive funds are going to have less forced distributions because they're just doing less trading in the accounts.
The third source of tax-free income is one that's been in your pocket since you turned 62. And most retirees underestimate how tax-favored it really is, and it's your Social Security benefits. Now, I'm not going to tell you that all of your Social Security is always going to be completely tax-free because for most retirees with meaningful savings, it's just not the most realistic thing in the world, especially for the audience watching this video. So, if you've got a couple million dollars in retirement accounts and any other income at all, some portion of your Social Security is probably going to be taxable.
But here's the thing. Even when Social Security is taxed, it's never fully taxed. The maximum the IRS can tax is 85 cents on the dollar. That means that a minimum of 15 cents of every Social Security dollar that you receive is permanently tax-free. No matter how high your income gets, it's just permanently tax-free. There's no income level that's going to change that that 15% anyway.
Now, depending on how you structure your other retirement income, you can do significantly better than just the 15% tax-free. The amount of your Social Security that's taxed is determined by something called provisional income. The formula adds up your adjusted gross income plus any tax-exempt interest plus half of your Social Security benefits. The lower your provisional income, the less you pay on Social Security as far as taxes go.
So, how do you keep your provisional income low? Well, you pull more of your spending from sources that don't increase AGI, which is adjusted gross income. Roth withdrawals don't account towards provisional income, right? Return of cost basis from your brokerage account, meaning if we harvested our gains properly, right? Those don't count either. Again, the gain portion does, but it's only the gain, not the full withdrawal when we're talking about a brokerage account.
Now, as you approach retirement, opening up a brokerage account and funding it can create some great additional flexibility to your retirement income plan. And if you're already retired, unspent RMDs, that's required minimum distributions, what's forced out of your IRAs in your mid-70s, well, the brokerage account could be a good home for those funds as well. So, with the right structure between the built-in 15% tax-free portion and the additional Social Security that you can shelter through managing your provisional income, well, a meaningful chunk of your Social Security can stay off a federal return every year.
So, we've covered three sources of tax-free retirement income. We've got our standard deduction, our 0% capital gains bracket, and then Social Security taxation management. Each of these is pretty powerful on its own, but then the real magic happens when you can stack them all together in the same year. So, I'll show you what that looks like with a case study.
We're going to look at a hypothetical couple, Chandler and Monica. They're from New York. And Chandler and Monica are both 66 and they're married filing jointly. And here's their income picture for 2026. They receive $48,000 a year in combined Social Security benefits. They take a $24,000 voluntary withdrawal from Chandler's traditional IRA. And during that year, they do some tax gain harvesting from their brokerage account and realize $25,000 in long-term capital gains. So add everything up. $48,000 plus $24,000 plus $25,000. They've got $97,000 of total income flowing into their household for that year.
Now, I'll spare the line-by-line tax return walkthrough, but here's where the magic happens. Once you run all this through the 2026 tax code, after the standard deduction, after the senior add-on, after the senior bonus deduction, the provisional income from Social Security, and the 0% capital gains bracket, all together doing their work, Chandler and Monica's total federal tax bill for the year is approximately $725. $725 on $97,000 of spending money. That's an effective federal tax rate of less than 3/4 of 1%.
To give you some perspective, if we rewind the clock a little bit for Chandler and Monica back to when they were working, a working couple earning $97,000 in regular wages would probably pay somewhere in the neighborhood of $10 to $12,000 in federal income taxes, plus an additional $7,400 in payroll taxes. Chandler and Monica keep 99 cents of every dollar versus the working version of Chandler and Monica kept about 80. So that's anywhere from a $15 to $20,000 swing every single year for the same gross income just because Chandler and Monica are retired and they understand the proper way to structure their income.
And again, here's the part I really want to mention. Again, none of this required a Roth IRA. Chandler and Monica don't have a single Roth dollar in this example. No conversions, no 5-year rule, no special account, just standard deduction, 0% capital gains bracket, and Social Security managed all together properly. Right? Three tools that already exist in the tax code that you probably have access to. They're just sitting there patiently waiting for a retiree that knows how to use them.
So, if you watched that case study of Chandler and Monica and said, "Could I do this?" Well, that's exactly what we help clients figure out with our Retirey Blueprint. So, if you click the link in the description, you can book a call and we'll analyze your specific situation and run your actual numbers and show you how to coordinate your accounts to do what we're demonstrating in this case study.
Now, I want to take a minute and talk just briefly about why the Roth IRA gets all the attention and why these three strategies can sometimes fly under the radar. The Roth is a genuinely amazing retirement tool. I've made maybe a dozen videos about it and probably a few hundred podcasts about it. I love talking about Roths and Roth conversions and I'll probably make dozens more videos. But the Roth has become so dominant in the YouTube retirement conversation that I think a lot of viewers walk away thinking that that's the only path to a tax-free retirement or significantly reduced tax retirement situation. That's just really not true.
The Roth is one tool. It is a fantastic tool, but the standard deduction is another tool. And the 0% capital gains bracket is another tool. And managing our income for Social Security is another tool. Right? The best retirement tax plans don't just pick one of these. They use all of them in conjunction in the right proportions with the right timing.
If you're approaching retirement and you don't have some big Roth balance, you're not locked out of tax-free retirement income. The tax code already gives you multiple paths to get there. You just have to know how to use the tools that are already sitting inside your toolbox and have a plan to think about taxes every year. In the same way we prep our taxes in March and April, we need to prep our income at the end of the year every year. Use the standard deduction fully. Harvest capital gains at 0% when you are able and when you're in that bracket. Manage your provisional income to keep as much of your Social Security as tax-free as possible.
So do those three things and sure, add Roth strategies on top of that if that's part of your plan and you can build a retirement income plan that you know the IRS really barely notices. So these tools are made for us to use. Go use them. Thanks for watching.