9 Ways to Manage Capital Gains in Retirement (Updated for 2026)

Posted On April 7, 2018 By Scott Stratton, CFP(R), CFA In Tax Strategies /  

Capital gains taxes can significantly reduce your after-tax retirement income if left unmanaged, especially for investors with $500,000–$5 million in investable assets. This article explains nine effective strategies to manage capital gains — with a focus on long-term planning, tax efficiency, and coordination with broader retirement income goals.

1. Know the 2026 Capital Gains Tax Brackets

Capital gains are taxed differently based on how long you hold an investment:

  • Short-term gains (assets held ≤ 1 year): taxed as ordinary income
  • Long-term gains (assets held > 1 year): taxed at preferential rates

For 2026, long-term capital gains rates are:

RateSingleMarried Filing Jointly
0%Up to ~$49,450Up to ~$98,900
15%~$49,451–$545,500~$98,901–$613,700
20%Over ~$545,500Over ~$613,700

These thresholds are adjusted annually for inflation. Keep in mind state capital gains taxes may apply as well.

2. Match Asset Types to Account Types (Asset Location)

Asset location places investments in accounts based on how they’re taxed:

  • Tax-inefficient assets (high turnover, dividends) → tax-deferred or tax-free accounts
  • Tax-efficient assets (broad index funds, ETFs) → taxable accounts
  • High-growth assets → Roth IRAs (tax-free growth)

This strategy reduces taxable events and works well when combined with tax-loss harvesting and Roth conversion planning.

Capital gains decisions affect more than just your tax bill this year. They often interact with Medicare premiums, Social Security taxation, and withdrawal strategy, which is why they should be considered within a broader tax planning for retirees framework.

3. Harvest Tax Losses When Appropriate

Tax-loss harvesting means selling investments at a loss to offset realized gains, reducing your tax bill.

Key points:

  • Capital losses offset capital gains dollar-for-dollar
  • Excess losses can offset up to $3,000 of ordinary income annually
  • Unused losses carry forward indefinitely

Avoid the wash sale rule by waiting 31 days before rebuying the same security.

For more on how distributions can affect taxable events even without sales, see: Do You Receive Mutual Fund Capital Gains Distributions?

4. Time Sales in Low-Income Years

Realizing gains in years where your income is lower — such as early retirement years before Social Security and RMDs — can reduce how much you pay in capital gains tax. Lower taxable income may also open up the 0% capital gains bracket, which applies at lower income levels.

This kind of income sequencing works hand-in-glove with:

5. Use Qualified Charitable Distributions (QCDs)

If you are over age 70½ and have an IRA, Qualified Charitable Distributions let you transfer up to $105,000 annually directly to charity without including the amount in taxable income — effectively offsetting gains without increasing MAGI.

QCDs count toward RMDs and can help manage:

  • Taxable income spikes
  • Medicare IRMAA brackets
  • Social Security taxation

This strategy is most impactful when planned with your overall tax and income sequencing.

6. Coordinate Roth Conversions and Capital Gains

Roth conversions increase Modified Adjusted Gross Income (MAGI) in the conversion year, which can unintentionally raise your capital gains tax rate, trigger Medicare IRMAA, or push other income items into higher brackets.

To minimize unintended tax consequences:

  • Stage Roth conversions during low-income years
  • Avoid year-end lump conversions that push MAGI too high
  • Coordinate with RMD planning and Social Security timing

Learn more about timing and tradeoffs in Roth Conversions After 60 — When They Make Sense and When They Don’t.

7. Mitigate the Net Investment Income Tax (NIIT)

Investors with MAGI above $250,000 (individual) or $320,000 (married filing jointly) generally pay a 3.8% Net Investment Income Tax (NIIT) on net investment income, including capital gains.

Ways to manage NIIT exposure include:

  • Holding tax-efficient assets in tax-advantaged accounts
  • Reducing MAGI through deductions or income sequencing
  • Strategically timing capital gains realizations

NIIT is one of the less understood drivers of tax drag for high-net-worth retirees; planning ahead can avoid unnecessary surtaxes.

8. Consider Partial Sales and Installment Sales

Instead of selling a large position all at once, consider:

  • Partial sales over multiple years to spread tax impact
  • Installment sales for privately held business interests to defer gain recognition

These techniques help manage annual taxable income and can make gains fit within lower tax brackets, especially when tied to retirement income flows.

9. Leverage Estate and Legacy Planning

Holding assets until death often results in a step-up in basis for beneficiaries, eliminating capital gains tax on appreciation during your lifetime. Work with estate planning professionals to consider:

  • Gifting strategies
  • Trust structures
  • Timing of transfers

Legacy planning intertwined with tax planning can preserve more wealth for heirs while reducing lifetime taxes.

For related guidance, see 7 Missed IRA Opportunities and Tax Strategies Under the OBBBA.

How a Fiduciary Advisor Helps With Capital Gains

Managing capital gains is not simply about minimizing a tax bill in isolation. A fiduciary advisor integrates tax planning into retirement income, distribution sequencing, healthcare costs, and legacy goals.

A coordinated plan can help you:

  • Time asset sales for tax efficiency
  • Model outcomes across multiple years
  • Balance tax, cash flow, and longevity risk
  • Align capital gains decisions with IRA/Roth strategy

You don’t have to navigate these decisions alone. Many retirees find fiduciary guidance valuable — whether for complex planning or even just an annual review. This topic is often part of a broader retirement or tax planning conversation. If you’d like help applying these ideas to your own situation, you can request an introductory conversation here.

Learn more in:

Frequently Asked Questions

What is the difference between long-term and short-term capital gains?
Long-term gains (assets held > 1 year) are taxed at preferential rates (0%, 15%, 20%), while short-term gains are taxed as ordinary income.

How does capital gains recognition affect Medicare premiums?
Capital gains increase MAGI, which can trigger higher Medicare IRMAA premiums. Strategic timing can help manage both taxes and healthcare costs.

What is tax-loss harvesting?
Tax-loss harvesting sells investments at a loss to offset capital gains and up to $3,000 of ordinary income annually, with excess losses carried forward.

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Beware: 2017 Fund Capital Gains Distributions

Posted On October 8, 2017 By Scott Stratton, CFP(R), CFA In Portfolio Management, Tax Strategies /  

We are starting to receive estimates for year-end 2017 Capital Gains distributions from Mutual Funds, and no surprise, many funds are having large distributions to their shareholders this year. As a refresher, when a mutual fund sells a stock within its portfolio, the gain on that sale is passed through to the fund owners at the end of the year as a taxable event.

When you invest in a 401(k), IRA, or other qualified account, these capital gains distributions don’t create any additional taxes for you. If you reinvest your distributions, your dollar value of the fund remains the same, and you are unaffected by the capital gain. However, if you are investing in a taxable account, these distributions will cost you money in the form of increased taxes.

A quick look at estimates from American Funds, Columbia, and Franklin-Templeton shows that many equity funds are having capital gains distributions of 3-10% this year. A few are even higher, such as the Columbia Acorn (17-21%) and Acorn USA (23-28%). Imagine if you made a $100,000 investment at the beginning of the year, your fund is up 16% and then you get a distribution for $28,000 in capital gains! Yes, capital gains distributions can exceed what a fund made in a year, when the fund sells positions which it owned for longer.

Capital Gains Distributions create a number of problems:

  • Even if you are a long-term shareholder, when the fund distributes short-term gains, you are taxed at the higher short-term tax rate.
  • If you didn’t sell any of your shares, you will need to find other money to pay the tax bill, which can run into the thousands each year if you have even just a $50,000 taxable portfolio.
  • If you are thinking of buying mutual fund shares in Q4 of this year, you could end up buying into a big December tax bill and paying for gains the fund had 6-12 months ago.
  • In addition to paying capital gains on fund distributions, you will still have to pay tax when you sell your shares.
  • Capital gains distributions are in addition to any dividends and interest a fund pays. In general, we want dividends and interest income as additions to our total return. Capital gains distributions, however, do not increase our return and are an unwelcome tax liability.

If you have a taxable account, or both taxable and retirement accounts, we may be able to save you a substantial amount of money on taxes. We can use tax-efficient investments like Exchange Traded Funds (ETFs), which typically have little or ZERO capital gains distributions at the end of the year. This puts us in control of when you want to sell and harvest your gains. When you have multiple types of accounts, we can place the investments into the best account to minimize your tax bill.

If you do presently have mutual funds in a taxable account, it may be a good idea to take a look at your potential exposure before the end of the year so you are not surprised. If you sell before the distribution is paid, you can avoid that distribution. Now that will mean paying capital gains based on the profit you have when you sell. But you definitely want to be planning ahead. When you’re ready to create a tax-managed portfolio that looks at all your accounts together, we can help you do that.

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Are Investment Advisory Fees Tax Deductible?

Posted On April 25, 2016 By Admin In Financial Planning /   1 Comment

 

It surprises me how few questions I receive about the tax deductibility of Investment Advisory fees. I hope that your CPA asks this question as they prepare your tax return, but I fear that some people miss this potential tax deduction. As with many tax rules, this one has quite a number of caveats. Here are three things you need to know:

1. First, we need to distinguish between Investment Advisory Fees (also called Investment Management Fees), Financial Planning Fees, and Commissions. Only Investment Advisory Fees are tax deductible. If you are a client, note that the fees charged by Good Life Wealth Management are Investment Advisory Fees.

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Our Investment Process

Posted On April 1, 2015 By Scott Stratton, CFP(R), CFA In Portfolio Management /   1 Comment

Investment Process

An investment approach designed to support retirement income planning, tax considerations, and long-term decision-making.

Request an Introductory Conversation 👉 /appointment/
A brief introductory call to see if working together may be appropriate.

How We Think About Investing in Retirement

For retirees and pre-retirees, investing often serves a different purpose than it did during the accumulation years. Rather than focusing solely on growth, investment decisions are typically made in the context of income needs, taxes, time horizons, and long-term flexibility.

Our investment process is designed to support broader financial planning conversations — particularly retirement income planning and tax planning — rather than operate as a standalone strategy.

Our Investment Process in Practice

Step 1: Understand the Planning Context

Investment decisions begin with an understanding of your broader financial situation, including retirement timing, income needs, tax considerations, and existing accounts.

Step 2: Establish an Appropriate Investment Strategy

Based on the planning context, we develop an investment strategy aligned with time horizons, cash flow needs, and long-term objectives — rather than short-term market movements.

Step 3: Portfolio Construction

Portfolios are constructed using diversified investments intended to reflect the agreed-upon strategy, account types, and planning considerations.

Step 4: Ongoing Monitoring and Adjustment

As circumstances, markets, and planning needs evolve, portfolios are monitored and adjusted as part of an ongoing planning relationship.

How Investment Decisions Are Coordinated With Planning

Investment management does not exist in isolation. Portfolio structure influences how retirement income is generated and how taxes are experienced over time. For this reason, investment decisions are coordinated with retirement income planning and tax planning considerations whenever appropriate.

This integrated approach helps ensure that investment decisions are informed by the broader financial picture rather than disconnected objectives.

Retirement Income Planning → /retirement-income-planning/

Tax Planning → /tax-planning/

Who This Investment Approach May Be a Good Fit For

Our investment process is typically appropriate for individuals who:

  • Are approaching retirement or already retired
  • Want investment decisions informed by income and tax planning
  • Prefer an ongoing advisory relationship
  • Value a fiduciary, planning-centered approach

We work with retirees and pre-retirees nationwide through a virtual advisory relationship.

Next Step

If you are considering how investment management fits into your broader retirement and tax planning, an introductory conversation can help determine whether working together makes sense.

Request an Introductory Conversation 👉 /appointment/
No obligation. Designed for retirees and pre-retirees.

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6 Steps to Save on Investment Taxes

Posted On June 17, 2014 By Admin In Portfolio Management /   1 Comment

For new investors, taxes are often an afterthought.  Chances are good that your initial investments were in an IRA or 401(k) account that is tax deferred.  If you had a “taxable” account, the gains and dividends were likely small and had a negligible impact on your income taxes.  Over time, as your portfolio grows and you have more assets outside of your retirement accounts, taxes become a bigger and bigger problem.  Eventually, you may find yourself paying $10,000 a year or more in taxes on your interest, dividends, and capital gains.

A high level of portfolio income may be a good problem to have, but taxes can become a real drag on the performance of your portfolio and eat up cash flow that you could use for better purposes.  Luckily, there are a number of ways to reduce the taxes generated from your investment portfolio and we make this a special focus of our process at Good Life Wealth Management.  We will discuss six of the ways that we work with each of our clients to create a portfolio that is tax optimized for their personal situation.

1) Maximize contributions to tax-favored accounts.  While the 401(k) is the obvious starting place, investors may miss other opportunities for investing in a tax advantaged account.  Since these have annual contribution limits, every year you don’t participate is a lost opportunity you cannot get back later.  In addition to your 401(k) account, you may be eligible to contribute to a:

  • Roth or Traditional IRA;
  • SEP-IRA if you have self-employment or 1099 income;
  • “Back-door” Roth IRA;
  • Health Savings Account (HSA).

Also, don’t forget that investors over age 50 are eligible for a catch-up contribution to their retirement accounts.  For 2014, the catch-up provision increases your maximum 401(k) contribution from $17,500 to $23,000.

2) Use tax-efficient vehicles.  Actively managed mutual funds create capital gains distributions as managers buy and sell securities.  These capital gains are taxable to fund shareholders, even if you just bought the fund one day before the distribution occurs.  These distributions are irrelevant in a retirement account, but can be sizable when the fund is held in a taxable account.

To reduce these capital gains distributions, we use Exchange Traded Funds (ETFs) as a core component of our equity holdings.  ETFs typically use passive strategies which are low-turnover and they may be able to avoid capital gains distributions altogether.  It used to be difficult to estimate the after-tax returns of mutual funds, but thankfully, Morningstar now has a tool to evaluate both pre-tax and after-tax returns.  Go to Morningstar.com to get a quote on your mutual fund, then click on the “Tax” tab to compare any ETF or fund to your fund.  I find that even when a fund and ETF have similar pre-tax returns, the ETF often has a clear advantage when we compare after-tax returns.

One last factor to consider: many mutual funds had loss carry-forwards from 2008 and 2009.  So you may not have seen a lot of capital gains distributions in the 2010-2012 time period.  By 2013, however, most funds had used up their losses and resumed distributing gains, some of which were substantial.

3) Avoid Short-Term Capital Gains.  Short-term gains, from positions held less than one year, are taxed as ordinary income, whereas long-term gains receive a lower tax rate of 15% (or 20% if you are in the top bracket).  We try to avoid creating short-term capital gains whenever possible, and for this reason, we rebalance only once per year.  We do our rebalancing on a client-by-client basis to avoid realizing short-term gains.

4) Harvest Losses Annually.  From time to time, a category will have a down year.  We will selectively harvest those losses and replace the position with a different ETF or mutual fund in the same category.  The losses may be used to offset any gains harvested that year.  Additionally, with any unused losses, you may offset $3,000 of ordinary income, and the rest will carry forward to future years.

A benefit of using the loss against other income is the tax arbitrage of the difference between capital gains and ordinary income.  For example, if you pay 33% ordinary tax and 15% capital gains, using a $3,000 long-term capital loss to offset $3,000 of ordinary income is a $540 benefit ($3,000 X (.33-.15)).

5) Consider Municipal Bonds.  We calculate the tax-equivalent rates of return on tax-free municipal bonds versus taxable bonds (i.e. corporate bonds, treasuries, etc.) for your income tax bracket.  With the new 3.8% Medicare tax on families making over $250,000, tax-free munis are now even more attractive for investors with mid to high incomes.

6) Asset Location.  This is a key step.  Not to be confused with Asset Allocation, Asset Location refers to placing investments that generate interest or ordinary income into tax-deferred accounts and placing investments that do not have taxable distributions into taxable accounts.  For example, we would place high yield bonds or REITs into an IRA, and place equity ETFs and municipal bonds into taxable accounts.  This means that each account does not have identical holdings, so performance will vary from account to account.  However, we are concerned about the performance of the entire portfolio and reducing the taxes due on your annual return.

If these six steps seem like a lot of work to reduce taxes, that may be, but for us it is second-nature to look for opportunities to help clients keep more of their hard-earned dollars.  The actual benefits of our portfolio tax optimization process will vary based on your individual situation and can be difficult to predict.  However, a 2010 study by Parametric Portfolio Associates calculates that a tax-managed portfolio process can improve net performance by an average of 1.25% per year.

Tax management is a valuable part of our process.  And even if, today, your portfolio doesn’t generate significant taxes, I’d encourage you to think ahead.  Prepare for having a large portfolio, and take the steps now to create a tax-efficient investment process.

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