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Time for another cautionary tale!
A client sent me this video last week, along with the question: “Is this legit – or fake news?“
If you don’t have time to watch it, the creator (John) suggests that a retired couple can have $3.23 million in their portfolio, withdraw exactly 4% per year (~$130K), and never pay taxes on it.
My response to my client:
He is making a major tax law mistake. There is a kernel of truth to what he’s saying. But it’s mostly bad advice.
Online financial content is a “buyer beware” landscape.
John’s Major Tax Error
Why is John wrong?
First – yes, 0% capital gains tax is a real thing. Here’s some of my previous work on the topic:
But John makes, frankly, a terrible assumption in his analysis:
That capital gains are the ONLY income source you have in retirement (!!!)
He is assuming no Social Security. No interest income. No dividend income. No pension income. No withdrawals from Traditional 401(k) or Traditional IRA accounts (and therefore no required minimum distributions). No Roth conversions. No other income!!!
The only income he’s thinking about is capital gains income.
So – why is this such a big error?
Because all of those income types I listed above can be taxable, reducing the remaining space to realize 0% tax on capital gains.
I work with $3M retirees who have more than $100,000 in “unavoidable” taxable income annually. Interest, dividends, capital gains, IRA withdrawals, etc. That income fills space in their tax return that can no longer be used for 0% capital gains harvesting.
The idea of realizing $130,000 in 0% capital gains in one year – let alone every year – is not even “questionable.” It’s purely misleading.
Duh, Jesse…
I hear people saying, “C’mon, Jesse, of course we’re not going to believe some random influencer.”
Fair enough.
But this guy has over 1 million followers (!!) across TikTok, Instagram, and other channels.
He’s speaking authoritatively. He’s “showing you the math” in the video. People are drinking this Kool-Aid.
And to be fair to John, he’s far from the only influencer of this ilk. The online finance creatorsphere is rife with bad advice.
The blind are leading the blind.
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We’ll talk to you soon!
