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As a financial advisor, I've often heard the phrase, "If it sounds too good to be true, it probably is." However, in the case of creating tax-free income in retirement, this adage doesn't necessarily hold up. In today’s video, I share a real-life case study of our clients, John and Jane, who we helped generate $100,000 of tax-free income in retirement.

A Common Misconception: Many think that funneling all their savings into Roth IRAs during their working years is the key to tax-free income in retirement. While Roth IRAs can be a valuable tool, they're not always the best strategy for everyone, especially for those nearing retirement age.

John and Jane Doe came to us with a solid retirement plan, including $500,000 in a joint investment account, $650,000 in traditional IRAs, and $150,000 in Roth IRAs. They also had reliable Social Security benefits, with John receiving $3,200 per month and Jane receiving $2,000 per month, totaling $62,400 annually.

Our challenge was to help them maximize their income while minimizing their tax liability. Here's how we did it:

Utilizing Social Security and Dividends: We started by leveraging their Social Security benefits and dividends from their investment account. By strategically combining these income sources, we were able to generate $72,400 annually, tax-free.

Strategic IRA Distributions: We carefully calculated IRA distributions to ensure they remained within a tax-efficient range. By withdrawing $11,600 from their IRA, we brought their total tax-free income to $84,000.

Optimizing Brokerage Account Withdrawals: To reach the desired $100,000 tax-free income, we withdrew $16,000 from their brokerage account. Importantly, half of this withdrawal represented a return of principal and was not subject to taxation, while the other half was non-taxable long-term gains.

John and Jane achieved their goal of $100,000 in tax-free income without incurring any federal tax liability. Even though they had a substantial portfolio and reliable Social Security benefits, careful planning allowed them to minimize their taxes effectively.

We also emphasized the importance of long-term tax planning, encouraging John and Jane to consider strategies such as tax gain harvesting and Roth conversions. These approaches can further optimize their tax situation and reduce their lifetime tax liability.

Creating tax-free income in retirement is indeed possible with careful planning and strategic decision-making. By understanding the nuances of tax law and optimizing income sources, retirees can enjoy a comfortable retirement without the burden of excessive taxes.

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⏱Timestamps:⏱
0:00 - 100k in wages pre-retirement
3:41 - Tax bracket choices in retirement
7:09 - Dividends
8:57 - IRA
11:44 - Brokerage accounts
14:34 - Minimize lifetime tax liability

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