Are you aware of the zero percent income tax bracket and how you can take advantage of it when you retire?

If you are in a 10 or 15 percent income tax bracket, guess what your tax bracket is on long-term capital gains? Zero. So, being in a 10 or 15 percent tax bracket can be very powerful. You may be thinking, “Well, Jim, I have a high income. That is not going to happen.” I beg to differ. If you have a big, fat pension when you first retire, it might be tough to get in the 15 percent tax bracket, but many people who retire in their 60s can keep their income tax bracket at 10 or 15 percent.

The critical thing here is that when you are in retirement, you have a great deal of control of your income tax bracket. You can decide where to draw income from and whether or not that triggers an income-taxable event. Does it generate a 1099 that you have to report or not? There are many places to go and get income that don’t generate a 1099.

You also have control over how you invest your money and how those investments impact your tax return. In your 60s you do not have to take money out of a retirement account. Remember that any time you take money out of a retirement account, except for a Roth IRA or Roth 401K, you must pay income taxes on most, if not all, that money. Once you are 70-and-a-half you will lose a lot of that flexibility. You’re still going to have a lot of flexibility with where you take other income, how you invest your money and create income on your tax return, but in your 60s you have a great deal of control because you do not have those required minimum distributions.

If you have a decent amount of money on both the IRA/401K side and the non-IRA side of the equation (the non-retirement account investments) you have a great deal of control of your income tax bracket. That means many retirees with wealthy investment accounts have the ability to have a zero-percent tax rate on long-term capital gains. This is a tremendous thing to be able to take advantage of.

The new Department of Labor rule goes into effect June 9 that requires an advisor working for you in a retirement account to be a fiduciary. A lot of the focus in the industry is on reducing costs of investment. What are the fees that you are paying? What is the mutual fund expense ratio? What’s the fee to the advisors? Is it a commission, percentage or an annual fee?

Reducing the fees of investment is important, but when you compare the fees that you will pay on your investments (even if you get investment advice from a professional) to the tax consequences you pay throughout your lifetime, it is not even a comparison. The income tax dwarfs any other fees or costs you have to your investments. It’s not just the taxes you pay now, it’s the taxes you pay tomorrow, 10, 15 years and 20 years from now.

Taking advantage of a zero-percent capital gains tax bracket is a tremendous benefit that you do not want to overlook in your financial plan.