The Zero Percent Cap Gains Rate isn’t an April Fool’s joke. Believe it or not, it’s been in existence since 2008.
It only applies to net capital gains and dividends from investments in regular accounts. It doesn’t apply to “tax advantaged” retirement accounts.
The rate is levied to single filers with a taxable income below $44,625 and married taxpayers below $89,250 in 2023. That’s taxable income rather than adjusted gross income.
The threshold also takes into account itemized and standard deductions. If using the standard, then a single tax filer may earn $58,475 and a married couple may earn $116,950, and still pay 0%. Those thresholds increase further for seniors and self-employed individuals.
This affords a planning opportunity for many.
One case would be an individual who hasn’t yet reached the age for required minimum distributions on their Regular IRA. In this case it would be much better for them to live off of regular long-term cap gains and dividends where the 0% cap gains rate is possible, rather than paying the required regular income tax rates on IRA Distributions.
It should be noted that the rate doesn’t apply on all retirement savings. Those types of savings include…
1 – Interest
2 – Pensions
3 – Net Short-Term Cap Gains
4 – Taxable Social Security Payments
5 – Regular IRA Distributions
6 – 401K Distributions
Let me leave you with this.
Retirement planners are constantly pushing “tax advantaged” accounts. It should be noted that these accounts are always a taxable event in the long run.
Oftentimes, as in the case of a 0% Cap Gains Rate, they can be an expensive choice.
Before every CFP on the planet starts sending me hate emails, I should note that in many cases, “tax advantaged” retirement accounts are better. Most are a part of salary, which makes them an easy way to save. The money is deducted before the check gets to you, so you have no choice but to fund your retirement.
Why are they so good? Because most people aren’t good savers. Many Entrepreneurs find a way to think of saving for their retirement needs last.
Life gets in the way. Jimmy needs braces, your spouse needs a new car, and you always need a vacation.
And the IRS is happy to give you a break today, so they can charge you a higher tax, on even more money tomorrow.
Let’s also realize that the amount one can put away as “tax advantaged” savings annually is in most cases rather small. If you normally live off of $300K annually, how are you going to fund that type of lifestyle with a $6K annual IRA Contribution?
Unless you get really lucky in the stock market, you won’t. Even with a hefty Social Security check additional savings will be necessary to maintain your way of life.
And taking into account the 0% rate, many times you’ll pay even less tax on a regular investment account.
We’re all going to get through this. Let’s get through it together.
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