Tax strategy should be top of mind when it comes to drawing down your retirement account.
If you’ve held stocks in your retirement portfolio for a long time, you may be looking at significant gains.
Those long-term capital gains could play a big role in your retirement finances — and a positive one.
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But it’s important to balance your various income streams and cash out your gains strategically.
The benefits of long-term capital gains
Long-term capital gains are earnings on investments held for at least a year and a day. Any earnings on investments held for a shorter time are classified as short-term capital gains.
There’s a major difference between them when it comes to taxes. Long-term capital gains are taxed at lower rates than short-term capital gains, which are taxed as ordinary income.
You can leverage the tax-advantageous aspect of long-term capital gains when it comes to drawing on your nest egg for income.
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The amount of tax you pay on long-term capital gains depends on your tax-filing status and your overall income. Here’s a rundown of long-term capital gains tax rates as of 2025.
If you’re single, your long-term capital gains tax rate will be:
- 0% if your income is $48,230 or less
- 15% if your income is between $48,351 and $533,400
- and 20% if your income is more than $533,400.
If you’re married and filing jointly, your long-term capital gains tax rate will be:
- 0% if your combined income is $96,700 or less
- 15% if your income is between $96,701 and $600,050
- and 20% if your income is more than $600,500.
These are significantly better rates than the taxes levied on short-term capital gains.
For example, if you’re single with an annual income of $45,000, you’ll pay a 12% tax on short-term capital gains versus no taxes at all on long-term capital gains.
If you’re married and file jointly with an annual retirement income of $240,000, you’ll pay a 24% tax rate on short-term capital gains but almost 10% less (15%) tax on long-term capital gains.
This tax advantage may be one reason to start withdrawing long-term capital gains as retirement income before you claim Social Security. The longer you wait to claim Social Security, the larger those monthly benefits will be — for life.
Leveraging long-term capital gains
It’s important to consider all your retirement income sources — including 401(k)s and Social Security benefits — as you plot out your tax strategy.
Let’s say most years your retirement income is low enough for you to pay 0% taxes on long-term capital gains, but you get a windfall that bumps you into the 15% range in that year.
If you have a Roth IRA, you could tap it for income in the year you get the windfall because Roth IRA withdrawals are tax-free.
Then if your income shrinks the following year, you could return to cashing out long-term gains in a taxable account.
It’s a good idea to talk to a financial advisor or tax professional about the best ways to minimize your tax burden in retirement.
This could include doing a Roth conversion ahead of retirement so you have some tax-free income at your disposal later on.
You may end up having to pay taxes on retirement savings if you have money in a traditional IRA or 401(k). At a certain point, you’ll be forced to take required minimum distributions (RMDs), which are a taxable event.
That said, there are strategies to minimize the tax-related impact of RMDs. One option is to make qualified charitable distributions (QCDs) directly out of your traditional IRA or 401(k), although there is a limit to how much money you can donate.
If your retirement income isn’t low enough to qualify for a 0% tax rate on long-term capital gains, you can try selling other investments strategically at a loss to offset those gains.
For example, say you’re looking at a $10,000 long-term gain that’s subject to a 15% tax rate. If you’re able to take a $10,000 loss in a taxable account, that negates your tax obligation.
Overall, long-term capital gains can be one of your greatest tax advantages in retirement.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
