• Managing Tax Cost Ratios
• Understanding the Tax Efficiency of ETFs
• The One Big Beautiful Bill: Everything You Need to Know
• Tax Gain Harvesting: What Is It and When To Use It
• A Look at Nursing Facility Characteristics Between 2015 and 2024
• Qualified Dividend Income 2025
  • Vanguard
  • Fidelity
• Capital Gains Tax Rate 2025
• IRS Publication 502

As we approach the end of the year, many retirement savers use this window to review their tax situation.

It’s a natural time to look for smart, practical moves that might help you avoid leaving the IRS a tip and lower your lifetime taxes Beyond any last-minute tactics, year-end is also a useful checkpoint to revisit how taxes fit into your broader retirement strategy—confirming what’s working, what needs updating, and where potential pitfalls might be hiding.

So, in today’s episode, I’m sharing three often-overlooked tax planning strategies worth having on your radar as we close out the year. I’ll also highlight a few common traps that catch retirees off guard so you can avoid surprises and decide what, if anything, makes sense for your situation.

But really quick—two important announcements before we dive in.

1. First, for the financial advisors tuning in—or for retirement savers who might know an advisor in their life looking to make a career change—I’m excited to share that my firm is currently searching for a rockstar Financial Planner to join our team. This role is ideal for a CFP® professional who has spent the last few years in an Associate Planner position and is craving more challenge, more collaboration, and a clear career path inside a true team environment. If you or someone you know has a strong interest in tax and retirement planning and is looking for a new home, we’d love to chat. You can learn more about the opportunity by following the link in the episode description or by visiting definefinancial.com/careers.
2. Second, I’m excited to share that my freshly updated, two-page tax cheat sheet for 2026 is now available. And it pairs perfectly with today’s episode because it gives you all the key tax numbers and thresholds you’ll want handy as you evaluate which strategies—or potential pitfalls—apply to your situation. One listener recently told me he does a ton of annual planning around taxes, Medicare, and other retirement topics, and this cheat sheet is the only resource he keeps on his desk year-round, saying that it saves him hours of searching the web every time he needs to look up a number. This year’s version includes all the major updates from the One Big Beautiful Bill—new federal income tax brackets, revised IRMAA surcharges, updated standard deduction amounts, and more—all packed into two clean, easy-to-read pages.

If you already subscribe to my weekly Retirement Email Newsletter, you’ll find your updated version ready to download in this morning’s email.

If you’re not currently receiving the Stay Wealthy newsletter, well, let’s just say my kids know of a guy in a red suit who is likely very disappointed in you.

But you can get yourself back on the ‘Nice List’ and grab the updated cheat sheet by following the link in the episode description right there in your podcast app, or by visiting youstaywealthy.com/cheatsheet.

With all of that out of the way, let’s shift gears and get into today’s year-end tax planning discussion.

3 Tax Planning Strategies Most Investors Overlook

Strategy #1: The IRA Medical Offset

The first tax planning strategy I want to share is one I’ve discussed a few times over the years, but it’s worth resurfacing because it consistently gets overlooked and can touch multiple areas of a financial plan. We’ll call this the IRA medical offset strategy because it allows you to use your pre-tax IRA to pay for medical expenses at a remarkably low tax rate—sometimes close to zero.

Here’s how it works. As most are loosely aware of the IRS allows you to deduct qualified medical expenses on schedule A of your tax return. What many overlook though, is that eligible long-term care costs meeting certain criteria can also be deducted.

The full-length IRS publication, which I’ll provide a link to in the show notes, has a clear definition of what it considers to be qualified long-term care services, inclusive of a section dedicated to nursing homes.

Specifically, the publication states that “you can include the cost of medical care in a nursing home, home for the aged, or similar institution, for yourself, your spouse, or your dependents. This includes the cost of meals and lodging in the home if the principal reason for being there is to get medical care.”

It continues by saying that “you can also include the cost of lodging not provided in a hospital or similar institution if it meets certain criteria.” Simple things like the lodging must be primarily for medical care, there has to be a licensed doctor there, lodging isn’t extravagant, and so on.

Now, there’s one important rule to remind you of here: you can only deduct the portion of your total medical expenses that exceed 7.5% of your Adjusted Gross Income (or AGI). So, for example, if your AGI is $100,000, only qualified expenses above $7,500 would be deductible. If it’s $200,000, only qualified expenses above $15,000 would be deductible.

But here’s where things get interesting for retirement savers with healthy pre-tax IRA balances. Let’s say you have $100,000 of long-term care expenses in a single year. Instead of paying that bill from a checking account, after-tax brokerage account, or Roth IRA, you withdraw the money from your pre-tax IRA.

Yes, that $100,000 withdrawal is technically taxable income and gets added to your AGI. But because of your qualified medical expense, you can immediately turn around and deduct the bulk of it on Schedule A—everything above that 7.5% threshold.

In addition to withdrawing six figures from your pre-tax IRA at an extremely low effective tax rate, this strategy can also help lower future RMDs since the IRA balance is now smaller as a result of the large withdrawal you made to pay for the medical event. You’ve also allowed your more tax-favorable accounts—like your brokerage and Roth—to remain invested and keep growing.

With nursing home costs now averaging over $112,000 per year nationally—and projected to climb close to $200,000 in 20 years—this strategy could potentially save someone tens of thousands of dollars (or more) over the course of a long-term care event.

But there’s another important caveat to call out. To use this strategy and claim the deduction, you do have to itemize on Schedule A—in other words, your total itemized deductions in a given year would need to exceed the standard deduction. For married couples over 65, the standard deduction this year is $34,700. For single individuals over 65, it’s $17,750. And yes, the One Big Beautiful Bill introduces an additional “Senior Bonus Deduction” of $6,000/person for those aged 65 and older. However, that deduction begins to phase out if modified adjusted gross income exceeds $150,000 for married couples and $75,000 for individuals. 

So, to summarize, this strategy typically works best when you have a significant medical expense year, not when you’re just paying for routine costs. The silver lining is that long-term care expenses aren’t always small and, if this strategy is even being considered in the first place, it’s likely that you’ll be able to clear the standard deduction hurdle pretty quickly.

This strategy also tends to work best for retirees who 1) have substantial pre-tax IRA balances, 2) expect they might self-fund a long-term care event, and 3) want to preserve their Roth and after-tax dollars for other purposes (maybe future flexibility or to leave for their children). If you’ve already converted most of your IRAs to Roth, or you’re planning to rely heavily on long-term care insurance, this strategy may not move the needle as much for you.

So, with all of that in mind, how might you actually implement this if it sounds potentially fitting for your situation? Well, one approach is to carve out a portion of your pre-tax IRA and move it into a separate IRA account, earmarked specifically for a future long-term care event or major medical expense.

Since it’s a lateral transfer from one pre-tax IRA to another, there are no tax consequences. You’re simply creating a dedicated bucket—setting aside dollars for a potential event down the road.

By keeping these funds in their own dedicated account, you prevent all of your savings and investments from getting commingled, and can hopefully, sleep better at night knowing you have a plan in place for a potential future medical long term care event.

In other words, you’re not just saying you’ll self-fund and hoping nothing happens. You’re proactively taking action— planning for the worst while hoping for the best.

Now, I mentioned earlier that this strategy touches multiple areas of planning, and here’s one example.

If you’re pursuing Roth conversions during your gap years, a common concern is whether you’ll be able to tax-efficiently convert all of your pre-tax dollars before income spikes from RMDs, a pension, and/or Social Security, and bumps you into a higher tax bracket.

But knowing that any remaining pre-tax IRA dollars can be used to tax-efficiently cover a future long-term care event often helps people feel better about keeping some IRA assets intact. It can also prevent someone from doing overly aggressive Roth conversions just to empty the account and squash the tax bills—which could mean unnecessarily overpaying the IRS.

And there’s another layer of flexibility here: remember that any excess dollars left in that pre-tax IRA that aren’t needed for retirement or medical expenses can also be used for charitable giving through Qualified Charitable Distributions.

So, you’re not necessarily locking yourself into anything by setting aside and earmarking some pre-tax IRA dollars—you’re just introducing more optionality and flexibility into your retirement plan.

But wait, there’s more! Many people forget that the IRS also allows you to deduct medical expenses for dependents, and apply the same strategy I just walked through. So even if you never have a long-term care event yourself, you might end up caring for an aging parent who does. Please consult with your trusted professionals, but even if your parent doesn’t fully qualify as a dependent on your return, per IRS publication 502, you may still be able to deduct medical expenses you paid for on their behalf if they would otherwise meet the dependent criteria under IRS rules. We’ve implemented this approach a number of times for clients, working closely with their CPAs to ensure everything is filed and documented correctly, and for the right families, it’s been an incredibly valuable and well received planning opportunity.

If this strategy resonates with you, talk to your financial advisor or CPA if applicable about whether it makes sense to open a separate IRA and earmark a portion of your pre-tax dollars specifically for future medical expenses. Even if you never use it for that purpose, those dollars can always go to charity through QCDs or simply be withdrawn as part of your normal retirement income.

And if you don’t currently work with an advisor or your current advisor doesn’t specialize in retirement tax planning, you can learn more about our services and schedule a call with us by following the link in today’s episode description.

Strategy #2 – The Tax-Cost Ratio

Ok, let’s now move on to the second tax planning strategy, which can help you evaluate and improve the tax efficiency of your investment portfolio. 

In my experience, most investors spend a bulk of their time and energy hunting for funds with the lowest costs, the lowest possible expense ratios. And that makes sense. Fees absolutely matter. But there’s another cost beyond fund expense ratios that can take an even bigger bite out of your returns, and it doesn’t show up in any prospectus. I’m talking about taxes on fund distributions.

To help investors measure the effect of this hidden expense, there’s a little-known metric called the Tax-Cost Ratio. In simple terms, the tax-cost ratio tells you the percentage of your investment’s annual return that gets lost to taxes on forced distributions from a fund.

For example, let’s say a fund has a 2% tax-cost ratio over a three-year period. That means investors in that fund lost an average of 2% of their returns every single year to taxes. So if the fund delivered a 10% pre-tax return, you’d really only take home about 8% after the IRS gets their cut.

Tax cost ratios typically fall within the range of 0-5%. A 0% tax cost ratio means the fund had no taxable distributions – which would be ideal for taxable brokerage accounts. Meanwhile, a 5% ratio suggests the fund was extremely tax-inefficient and should likely only be held in tax advantaged accounts or be aligned with a broader tax planning strategy to help offset the extra income.

So, how and why exactly does this happen? Why do funds dish out forced, taxable distributions? Well, unlike 401ks and IRAs, when you buy mutual funds and Exchange Traded Funds (aka ETFs) in a taxable brokerage account, you’re on the hook for taxes whenever your investment funds distribute dividends or realize capital gains due to active trading or to fulfill redemptions from other investors in the fund. In other words, even if you don’t personally sell any shares of the fund and realize capital gains, someone else who is invested in the fund might, and those gains can get passed down to you

Now, not all income receives the same tax treatment, different types of income get taxed at different rates. For example, interest income and short-term capital gains get hit with ordinary income tax rates, which can be as high as 40.8% when including the 3.8% Net Investment Income Tax for high earners. On the other hand, qualified dividends and long-term capital gains get more favorable treatment, anywhere between 0% and 23.8%. And municipal bond interest, as most know, would be exempt from federal income tax altogether.

The tax-cost ratio, that little known metric I referenced a couple of minutes ago, factors in all of these different distribution types to give you one single number that estimates how much of your investment return is being eaten up by taxes. And what’s eye-opening is that, according to recent data from Morningstar, over 80% of all U.S. equity mutual funds distributed capital gains to its investors in 2024, compared with only 5% of ETFs. It’s possible that number is even higher in 2025 due to another strong year in the market. 

But that’s a massive difference, and it largely comes down to how ETFs are structured differently than mutual funds. Put simply, the way ETFs are able to handle redemptions from investors in the fund allows them to avoid triggering as many taxable events as mutual funds do. And over time, this tax drag can have a profound impact on your wealth. 

For example, according to Morningstar data, U.S. large-cap equity strategies logged an average annual return of 11.46% for the 10 years ending December 31, 2024. A $100,000 initial investment would have grown to nearly $300,000 over that 10 year period, however, taxes would have reduced those earnings for investments held in taxable accounts. According to Morningstar, for U.S. large cap mutual fund investors, taxes consumed an average 1.9% of returns annually over that period, while equity ETFs fared better, with taxes consuming an average of 0.7%. 

With a smaller tax burden, the ETF portfolio measured in the study ended the 10-year period with almost $30,000 more than the mutual fund portfolio. That’s $30,000 that could have funded part of your retirement… or helped pay for a grandchild’s education… or it could have been earmarked and invested for something like a future long term care event. It’s real money that many investors unknowingly leave on the table.

Really quick, before we go any further, I just want to quickly highlight that the ‘tax cost ratio’ is different from the after-tax return, which is another metric you might see when doing mutual fund and ETF research. In short, the After-Tax Return is a performance number—it tells you what the fund earned after taxes and sometimes other costs like sales loads and commissions. On the other hand, the Tax-Cost Ratio tells you the percentage of growth you lost specifically to taxes on forced distributions, isolating that one variable so you can more accurately or fairly compare the tax efficiency of different funds, style categories, or portfolio managers.

Ok, so now that we have a general understanding of tax-cost ratios, how can you use this information to build a more tax-efficient portfolio?

First, don’t just look at expense ratios when reviewing your portfolio and evaluating different funds – take a few extra minutes to check the tax-cost ratio as well. To find the tax-cost ratio of an ETF or mutual fund, you can head to a free website like Morningstar.com, enter the ticker symbol of the fund in question at the top, click on the tab that says price (or, in some cases, it says performance), and under the “Taxes” section you’ll find the 3-year tax cost ratio displayed. 

Second, consider ETFs over mutual funds, especially for taxable brokerage accounts and tax-sensitive investments. The primary reason for this is that the structure of an ETF, like I briefly mentioned earlier, offers built-in tax advantages that can lead to fewer capital gains distributions than traditional mutual funds. But here’s where it gets more nuanced. With more and more actively managed ETFs hitting the market, it’s not as simple as just swapping mutual funds for ETFs and calling it a day. And it’s definitely not safe to assume that the lowest-cost ETF is automatically the best solution and the most tax-efficient. Let me give you a quick example. Fidelity’s Enhanced Large Cap Value ETF has a reasonable expense ratio of 0.18%, but it has a tax-cost ratio of 1.18%. Compare that to Dimensional’s US Targeted Value ETF, which has a higher expense ratio of 0.28%, but a tax-cost ratio of only 0.52%. So if you chose the Fidelity fund purely based on the expense ratio, you’d actually be paying more in total costs once taxes are factored in, assuming it’s held in a taxable account and you’re in a high tax bracket. It’s important to note that when you compare tax cost ratios, you’ll need to evaluate products within the same categories or asset classes to ensure you’re comparing apples to apples. For example, it wouldn’t be fair to compare a bond fund to an equity growth fund because bonds pay regular interest and a bond fund would typically have a higher tax cost ratio than a low-dividend growth fund. 

Next, think about asset LOCation—not just asset allocation. This means being strategic about which investments you hold in which accounts. And here’s a simple “rule of thumb” framework to consider starting with if your nest egg is somewhat evenly split between different account types. Investments that generate regular taxable distributions—like taxable bonds, dividend-focused strategies, and actively managed funds—are often better suited for tax-deferred accounts like traditional IRAs and 401(k)s because distributions don’t trigger an annual tax bill in those account types. On the other hand, more tax-efficient investments—like broad-based equity index ETFs and municipal bonds—are often better off in your taxable brokerage account, where their lower tax-cost ratios can work in your favor. In short, the goal is to let the tax-friendly investments live where they’ll be taxed, and shelter the tax-inefficient ones where they won’t.

Lastly, now that you know how to find the tax-cost ratio, you can use it to monitor a fund’s tax efficiency over time.This matters because tax efficiency isn’t static—it can improve or deteriorate based on changes in management, strategy, or market conditions. To quickly evaluate a fund, you can compare its short-term tax-cost ratios—say, one and three years—to its longer-term ratios. If the short-term numbers are lower than the long-term numbers, that’s a good sign, and suggests the fund manager has gotten better at managing tax exposure over time. But if the short-term ratios are climbing higher than the historical averages, it might be worth reconsidering that fund’s place in your taxable accounts.

Before we move on to the final strategy, it’s important to share that the tax-cost ratio calculation assumes that the investor is in the highest tax bracket at all times. Given this assumption, the tax cost ratio isn’t necessarily a good estimate of exactly how much you would have paid in taxes, unless you really did happen to be in the top tax bracket for each of the years in question. The tax-cost ratio is really the most useful for comparing two different funds or two groups of funds to see which tends to be more or less tax-efficient when held in a taxable account. 

Strategy #3 – Tax Gain Harvesting Traps

Okay, for our third and final tax planning strategy today, I want to highlight a couple of hidden traps inside Tax Gain Harvesting—because while tax gain harvesting is a popular and smart tax move, especially at the end of the year, it’s also one of the easiest to accidentally get wrong.

As a quick refresher: tax-gain harvesting is the practice of intentionally selling appreciated investments in a year when your income is low enough to qualify for the highly coveted 0% long-term capital gains bracket. This strategy, when done correctly, lets you “reset” your cost basis higher and pay zero federal tax on those gains. And remember, that 0% bracket sits on top of your standard deduction, which means your actual room for harvesting can often be larger than those bracket numbers alone, especially this year if you’re over age 65..

On the surface, this strategy sounds great—and it can be—but there are two common pitfalls that often catch people off guard.

The first pitfall involves qualified dividends…here’s how it works. Most people accurately start the tax gain harvesting analysis by calculating how much room they have left under the 0% capital gains income ceiling. For 2025, that’s $48,350 for single filers and $96,700 for married couples filing jointly.

But what many people miss is that qualified dividends also fill up that same bucket. Qualified dividends get the same favorable tax treatment as long-term capital gains—but they also take up the same space in your 0% bracket . Think of it like a measuring cup—capital gains fill it, qualified dividends fill it, and if you don’t account for both, it overflows and the excess gets taxed.

If you calculate your room for capital gains and forget to account for qualified dividends you’ve already received or will receive before year-end, you could accidentally push yourself out of the 0% zone and trigger a tax bill you weren’t expecting.

And here’s perhaps the most frustrating part: Your brokerage statements often don’t help. Throughout the year, most financial institutions show dividends as “non-qualified,” even if some or all will later be reclassified as “qualified” on your official 1099 document that you receive in January of the next year. So, if you want accurate numbers, you’ll need to work closely with your trusted advisors or go straight to the fund company’s website for each investment you own and look for their Qualified Dividend Income estimates. As a rule of thumb: equity and balanced funds tend to distribute qualified dividends, however, money market and bond funds generally do not, or pay very little.

And don’t forget—any increase in income, even inside the 0% gains bracket, can still cause more of your Social Security benefits to become taxable once you cross certain income thresholds. This is another “hidden” tax people miss you’ll want to take note of when evaluating different strategies.

The second tax gain harvesting trap to share involves ACA subsidies, and this one is especially important for anyone on an Affordable Care Act health insurance plan who is receiving a premium subsidy. A premium subsidy, also known as a premium tax credit, is basically financial assistance from the government that helps to lower the cost of insurance purchased through the health insurance marketplace. If you qualify, it’s applied directly to your premium, reducing what you pay each month, and it’s reconciled when you file taxes.

And here’s what you need to understand: intentionally triggering income to fill up your 0% tax bracket does not mean that additional income is invisible. For example, even if your capital gains are taxed at 0%, they still count toward your Modified Adjusted Gross Income—aka your MAGI. And your MAGI is the number the ACA uses to calculate your Premium Tax Credit.

So while you might sell a stock and owe nothing to the IRS on those long‑term capital gains, that extra income can still reduce your ACA Premium Tax Credit. Within common Federal Poverty Level ranges, each additional dollar of income cuts your subsidy by roughly 10 to 20 cents, which can create a meaningful “hidden” 10 – 20% marginal tax on a transaction you may have assumed was completely tax‑free.

And for listeners already on Medicare instead of the ACA, be aware that too much tax-gain harvesting can also push your income high enough to trigger IRMAA surcharges—yet another form of unintended, backdoor or “shadow” taxation.

As a rule of thumb, tax-gain harvesting tends to be most valuable in low-income years—often the early-retirement “gap years” after you stop working but before Social Security or required minimum distributions begin. Those windows usually provide the cleanest opportunity to raise your cost basis at a true 0% federal tax rate. And remember, your room in the 0% bracket resets every single year—this isn’t a one-time decision, it’s an annual planning opportunity to evaluate.

To summarize, tax gain harvesting is a valuable strategy—but only if you’re looking at the whole picture. Don’t just focus on the capital gains bracket… factor in your dividends, factor in your health care credits, consider Social Security taxation, and keep an eye on Medicare IRMAA if you’re in that stage of life. The mistakes that cost people money are usually the ones they didn’t think to check for.

Bottom Line

As we wrap up today’s episode, I hope these three year-end strategies give you a clearer view of where the real tax-planning opportunities—and potential pitfalls—might be hiding in your retirement plan. Remember, small, thoughtful adjustments made now can meaningfully improve your long-term outlook, especially when it comes to managing withdrawals, minimizing lifetime taxes, and preserving flexibility. 

And before you go, don’t forget to download the freshly updated 2026 Tax Cheat Sheet—it’s the perfect companion to everything we covered today and will make it easier to spot which strategies might apply to your situation. Once again, you can grab it by following the link in the episode description right there in your podcast app or by visiting youstaywealthy.com/cheatsheet. You can also view today’s show notes and research supporting this episode by going to youstaywealthy.com/262.

Thank you, as always for listening, and happy tax planning!

Disclaimer

This podcast is for informational and entertainment purposes only, and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.