Capital Gains in Retirement: Managing RMDs, Taxes, Social Security and Medicare

One of the last things you want to worry about in retirement is taxes. However, since taxes affect how much hard-earned money you keep, a key area, sometimes overlooked by retirees, deserves some attention: capital gains tax.

Maybe you're considering selling a stock you've held for many years or downsizing your longtime family home. Though seemingly straightforward for some, these kinds of decisions can have significant tax implications. 

In addition to the personal and potentially emotional aspects of those and similar financial moves, capital gains tax can help preserve or unexpectedly reduce your retirement nest egg. Here’s more of what you need to know.

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Capital gains considerations in retirement

Capital gains can intersect with everything from tax brackets, Social Security benefits, and Medicare premiums to required minimum distributions (RMDs) and home sales. (There are also state capital gains taxes to think about.)

So, appreciating the connections can help you optimize your retirement tax strategies. Let's consider each of these areas.

Tax brackets

Some retirees end up in a lower federal income tax bracket, which can be helpful when it comes to capital gains. 

However, it should be noted that being in a lower bracket in retirement may not be as common as you might expect. Some retirees will end up in the same or higher bracket in retirement due to multiple income sources, fewer tax deductions, large withdrawals from pre-tax retirement savings accounts, etc.

If you are a retiree in a lower tax bracket than when you were working, you may benefit from those favorable tax brackets while realizing long-term capital gains.

• Single filers with taxable income up to $47,025 can realize long-term capital gains at a 0% rate for 2024.
• Married couples filing jointly can realize gains at 0% up to $94,050 of taxable income.
• The lower tax bracket advantage allows retirees to potentially sell appreciated assets while minimizing tax impact. 

Timing asset sales strategically helps you take advantage of retirement years with lower income and realize gains at preferential rates.

Social Security and capital gains

Capital gains can also affect tax on your Social Security benefits. Keep in mind that up to 85% of Social Security benefits can be subject to tax depending on your overall income, including capital gains. 

• The calculation that determines how much of your Social Security benefits are taxable includes realized gains.
• So, significant capital gains in a single year can push more of a retiree's Social Security benefits into taxable territory.

To manage this, consider spreading capital gains realizations over multiple years. Or, you might offset gains with losses through tax-loss harvesting. The goal is to maintain a lower overall taxable income and reduce the impact of taxes on Social Security benefits.

Also, remember that there is no specific age at which you can avoid paying taxes on Social Security benefits. Though proposals are floating around Congress to eliminate federal tax on Social Security, how much of your benefits are subject to tax depends primarily on your “combined income.”

Medicare premiums

Capital gains can also affect Medicare premiums through Income-Related Monthly Adjustment Amounts (IRMAA). High income from capital gains could increase your Medicare Part B and Part D premiums.

• IRMAA is based on modified adjusted gross income (MAGI) from two years prior.
• So, significant capital gains in one year could lead to higher Medicare costs two years later.

Because of this, you should factor in potential IRMAA increases when you plan large asset sales or realize a substantial capital gain. 

Also, strategies like Roth conversions or charitable giving can help you manage your overall taxable income and potentially avoid Medicare premium increases.

Required minimum distributions (RMDs) 

RMDs from traditional retirement accounts add another layer of complexity to capital gains planning. That’s because required minimum distributions are taxed as ordinary income and can push retirees into higher tax brackets. (RMDs are generally required once retirees reach age 73.)

To help mitigate this, you might consider strategies like:

• Realizing capital gains in years with lower RMDs to spread out the tax impact
• Using Qualified Charitable Distributions (QCDs) to satisfy RMD requirements without increasing taxable income
• Exploring Roth conversions in lower-income years to reduce future RMDs

Honorable mention: Capital gains on home sales

Don't forget that the capital gains tax exclusion enables homeowners who meet specific requirements to exclude up to $250,000 (or up to $500,000 for married couples filing jointly) of capital gains from the sale of their primary residence. 

So, generally, if you sell your home for a gain of less than those thresholds, you will not be obligated to pay capital gains tax on that amount.

However, as Kiplinger has reported, there are certain criteria you must meet to qualify for the home sale exclusion. There are also several exceptions to the exclusion rules.

It's good to consult a tax professional if you anticipate selling your primary residence at a gain that exceeds the exclusion limit. They should be able to help you identify strategies to mitigate the tax impact.

State capital gains taxes

Don’t forget that state capital gains taxes can also impact retirement finances. However, several states have no state income tax, which means they generally don’t tax capital gains. (Washington state is an exception.)

But, as Kiplinger has reported, keep in mind that states with no income tax aren’t necessarily better for your budget.

• Some states don’t tax retirement income, which can include capital gains from retirement accounts. 
• Colorado, for example, allows a retirement income deduction of up to $24,000 for taxpayers 65 and older, which can offset capital gains. (If you’re 55 to 64, you can deduct up to $20,000.)
• Some states have unique capital gains approaches, like Washington’s controversial 7% tax on long-term capital gains exceeding $250,000 in a year. 

For more information: See How All 50 States Tax Retirement Income.

Capital gains retirement taxes: What you can do

Whether you’re a recent retiree or still planning, capital gains tax considerations can be key to maximizing your retirement funds. 

So project your income, including RMDs, Social Security benefits, etc. Try to pinpoint years with lower projected income as potential opportunities for realizing capital gains. Also, don’t forget about state taxes when planning where to retire.

Of course, work with trusted financial advisors and tax professionals to develop strategies that fit your situation. With potential changes looming from the Tax Cuts and Jobs Act (TCJA) at the end of 2025, taxes will be center stage following the 2024 election.

Related

• Unrealized Gains: One Important Thing to Know Now
• How the IRS taxes Retirement Income
• Capital Gains Tax Exclusion for Home Sales
• Capital Gains Tax Rates for 2024