Is it possible to pay no income tax in retirement?

My wife and I are both 60 years old. We have taxable investments valued at $900,000, 401k and IRAs valued at $1,200,000, and a Roth valued at $23,000. We would like to retire in about 8 years. A co-worker said he heard that it is possible to pay no income tax in retirement, even on Social Security benefits. With my situation how is that possible?

Retirement, Taxes
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November 2016
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If you find out, please let all of us know! LOL

The IRS considers any "increase in wealth" as income broadly defined which will be taxed. So, it is pretty hard to escape that broad definition. I suppose you could own a investment portfolio of all municipal bonds in a state that has no tax, and hold until they mature. Although you would have tax on the potential capital gains, it would be fairly negligible (assuming you buy them at par). But say for instance you received SSI benefits, your annual income would have to be less than $32,000 (married filing joint) in order to not have any of your SSI benefits taxed. So the short answer is that this is probably not possible.

A more effective strategy would be to draw down your asset base in a more tax-efficient manner. That is to say, since ordinary income rates are currently the highest, seek to live off long-term capital gains (taxed at lower rates) and/or cash reserves first. Based on your progress, you may or may not need all of your RMDs at 70 1/2, so you may consider holding tax-free investments in your IRAs and distributing those to taxable accounts and/or donating your RMD to charity. So suffice to say, you should focus on tax efficiency vs. tax "avoidance".

I hope this helps!

November 2016
November 2016
November 2016
November 2016