Retiring Without Income Taxes in Nevada
Austin Carroll is a financial advisor at Cornerstone based in Reno, NV. Austin has passed his Series 65 Securities Registration Examination. He helps clients create customized financial plans based on their unique financial goals by addressing topics such as income, investments, and taxes.
RETIRING WITHOUT INCOME TAXES IN NEVADA
When you read the title of this blog, the first question should be, is that really possible? Well, if you are lucky enough to live in one of the states that do not have a state income tax, and you have invested in the appropriate investments, the answer is that it certainly is possible. I will explain how this is feasible and what you should be talking with your financial advisor about to possibly get these benefits.
TAXABLE AND NON-TAXABLE INVESTMENTS
If you are not already aware, not all investments nor are all investment accounts taxed the same, and to make things even more complicated, depending on how long you held those investments, that can also change how much you pay in taxes. So, remember, if you have questions, please consult your financial or tax professional.
CREATING TAX-FREE INCOME
Let’s say that you and your spouse have worked hard your whole life and want to create income from the money you have saved in your taxable account. The problem is, it’s a taxable account and no one wants to pay taxes that they don’t have to. For the sake of simplicity, let’s say that the taxable account is worth $1 million. Also, because you both worked so hard and paid your share of taxes all your life, you are entitled to a Social Security benefit. Let’s pretend that the benefits are worth $2,500 per month for each of you. That comes up to $60k per year from your Social Security benefit.
That’s a pretty good sum of money to retire on, but let’s say you wanted an additional $40k per year or $100k total. That means we need about 4% from our $1 million taxable account. But if we sell investments, won’t we pay taxes? Yes. That’s why it’s important to know which investments to hold.
This is where some people use municipal bonds to make up the difference. If you have $1million in municipal bonds that are paying 4%, congratulations, you just created an additional $40k. The tax-free part comes from which state the bond was issued and which state you reside in. For Nevada, it’s tax-free income because there is not a state income tax.
But wait a minute, isn’t all interest counted towards our income limit for taxable income before our Social Security gets taxed? Yes. However, you forgot to account for the standard deduction. And since our couple is married and over 65, their deduction is currently $30,750. And because we only created an income of $40k, that would trigger a taxable event of up to 50% of our Social Security benefit being taxed, or $30k, below our standard deduction.
So yes, you can create $100k of tax-free income in retirement, if you have the correct accounts and you and your financial advisor have set things up correctly.
WHERE TO GO FROM HERE
If you would like to discuss your options, please don’t hesitate to reach out to our team at Cornerstone to schedule a meeting. Call us today at 775.853.9033 or click here to see how one of our financial advisors could help you minimize taxes.
Based in Reno, NV, Cornerstone is for individuals and families looking to grow wealth, protect and preserve their life savings, and plan for the distribution of their estate in a tax-efficient manner through a tailored strategy. Schedule a time to discuss your financial goals with us.