Case Study: How A Professional Engineer Saved On Taxes

Case Study: How A Professional Engineer Saved On Taxes

December 14, 2020

You’ve worked hard your entire life, and now you are so close to retirement you can taste it. You’re thinking of retiring early. Good for you for being diligent and committed to saving for your retirement future. You’ve reached a milestone that will make you the envy of your neighborhood. But when is the best time to retire, and have you thought about all the scenarios of retiring early? There are so many details that need to fall into place, and a thorough analysis of your portfolio and financial plan is in order.

Capital Gains Tax

At CWM, we’ve helped many pre-retirees make big decisions about when to retire. One such example is of a client whom we helped retire at age 62. This client, a successful engineer, had built a nest egg of over $1 million in retirement accounts as well as a $200k non-qualified investment portfolio with $50k in capital gains. He came to us looking for clarity on whether he was prepared to retire, and what his options were for meeting his income needs once he stopped receiving a paycheck.

Our client needed $75k in income each year and planned to live off his qualified (pre-tax) retirement money as well as collecting his Social Security early. Had he done so, he would have missed out on a few key opportunities to maximize his retirement resources. 

Because the client planned to retire at the beginning of the year, it presented a distinct opportunity. With no other income, he would have the ability to realize all of his capital gains in the year of retirement and pay 0% in taxes on the entire amount! If your income is less than $78,750 in 2020, the top of the 12% marginal income tax bracket, capital gains are taxed at zero percent. That’s right, 0%! This worked out exceedingly well for our client and saved him $7,500 in federal income taxes. By selling those investments and realizing the gains, he could then also live off of the proceeds for a few years, allowing him to leave his tax-deferred money and Social Security benefits to continue to grow.

Affordable Care Act

Retiring does have some drawbacks—namely health insurance. Bridging the gap between early retirement and Medicare can be a problem if you are not prepared. The options available for most typically come down to COBRA from your employer, or a plan through the Affordable Care Act in most cases. For some there may be some sort of retirement healthcare offered by the employer, but that is often not the case. 

For this particular client, his best option was an Affordable Care Act plan. The problem with the Affordable Care Act, however, is that it is not that affordable in many cases, though there are subsidies available that can help if you qualify. To do so, your income must remain under certain thresholds. In this case, by keeping his income to $50k (the capital gain amount realized), our client qualified for subsidies on his health insurance through the Affordable Care Act, saving him additional money that he would not have realized had he stuck to his original plan. In Michigan, the Affordable Care Act’s health insurance plans can be as high as $700 for a single person his age for a mid-level program. So, subsidies can be significant savings, and because our clienthe lived off of the proceeds for a few years, he was able to receive those subsidies each year until he reached eligibility for Medicare.

We’re Here To Help

Your plan may be different than our client’s, but our strength at Center for Wealth Management is finding the best option for you. We’ll take a deep dive into your qualified and non-qualified portfolio and see which spending choices are best for you. We also look at your debt ratio and build strategies around paying off high-interest credit cards or loans. If you retire early, we’ll help you make the most of your accomplishments and walk you through various plans that will save you taxes and give you the financial freedom you’ve worked so hard for. To get on the road to retirement, call us at 248-220-4321 or email us at info@cwmfinancial.net today! 

This is a case study and is for illustrative purposes only. Actual performance and results will vary. This case study does not constitute a recommendation as to the suitability of any investment for any person or persons having circumstances similar to those portrayed, and a financial advisor should be consulted. This case study does not represent actual clients but a hypothetical composite of various client experiences and issues. Any resemblance to actual people or situations is purely coincidental.

About Justin

Justin Williamson is senior partner, financial planner, investment advisor representative, and co-owner of Center for Wealth Management, an independent, fee-based wealth management company based in Troy, MI. Justin has been serving clients in the financial services industry since 2001 and spends his days helping his clients achieve their financial goals and make the best decisions for their family so they can spend time on what they love and experience financial peace of mind. Justin is known for his dedication, integrity, personal touch, and ability to simplify complex issues. Justin specializes in serving engineers who are close to retirement or recently retired, helping them maximize their benefits and create a retirement plan they can rely on. He is a seasoned public speaker, presenting at numerous corporate events each year on retirement planning, Medicare, Social Security, and other financial topics. Justin has a bachelor’s degree in business administration with a minor in personal financial planning from Central Michigan University and is a CERTIFIED FINANCIAL PLANNER® (CFP®) professional. 

Outside of work, Justin enjoys spending time with his family. He lost his wife of eighteen years, Heather, to brain cancer in 2020. He and his son, Carter, and their twin daughters, Jaden and Kelsey work to honor her each day. You can often find him coaching baseball, softball, and basketball, and spending time with his family at their cabin at Higgins Lake. Learn more about Justin by connecting with him on LinkedIn.