Chapters

00:00 Introduction to Taxable Brokerage Account Options at Retirement for Mississippi PERS Retirees

00:37 Two Major Options for Taxable Brokerage Accounts in Retirement

01:13 Option 1: Leave Money in Taxable Brokerage Account and Pass to Heirs

03:29 Option 2: Take Distributions from Taxable Brokerage Account to Supplement PERS Pension

06:02 Case Study 1: Taking Distributions from Taxable Brokerage Account to Fund Early Retirement

09:13 Case Study 2: Taking Small Distributions from Taxable Brokerage Account to Fund Travel in Go-go Year

12:07 Case Study 3: High-Income Estate Passing Taxable Brokerage Account to Heirs

16:35 Action Items for PERS Retirees

17:21 Preview of Next Video and Offer for Assistance

18:22 Legal Disclaimer

Transcript

Hi everyone, I'm Ryan Earley, vested PERS member and financial planning firm owner. Today we are breaking down the two major options a Mississippi PERS retiree has with their or their spouse's taxable brokerage account, the pros and cons of each option, and the critical IRS and Mississippi tax rules you need to know. We will also walk through three real-world PERS retirement case studies with easy-to-follow tax calculations to tie everything together. Let's get started.

When transitioning into retirement, a PERS member with a taxable brokerage account has two primary options. Option one is to leave the underlying funds invested in the brokerage account, allowing the investments to grow while potentially receiving dividends and interest along the way with the intention of passing the portfolio to heirs who will then receive a step up in basis upon your death. 

Option two is to systematically take distributions by selling shares or withdrawing cash to supplement your PERS pension during your retirement. Let's examine the specific tax rules, benefits, and drawbacks of both pathways.

Let's look closely at option one: holding investments in your brokerage account throughout retirement and eventually passing them to your heirs. Under IRS rules, taxable brokerage accounts are completely free from required minimum distributions or RMDs. Unlike tax-deferred 403(b) and 457(b) plans, or tax-free Roth IRAs, taxable brokerage accounts are unique in that they are governed by separate capital gain, dividend, and cost basis rules. 

The most significant feature of option one is linked to Internal Revenue Code Section 1014, which grants a full step up and basis upon the brokerage account owner's death. What this means is that decades of unrealized capital gains can be completely avoided for income tax purposes if and when the original account owner dies.

Mississippi fully conforms to the federal step-up provisions and levies zero state income or estate taxes. The ultimate benefit of holding taxable brokerage accounts until death is the elimination of deferred capital gains taxed through the step up and basis. 

Furthermore, unlike inherited IRAs that must be withdrawn within 10 years, heirs can hold or sell inherited brokerage assets whenever they desire.  And if the heir sells the inherited brokerage account immediately upon the original account owner's death, the heir may even pay zero income taxes on the full amount sold. 

On the negative side, brokerage accounts generate ongoing annual taxes from interest, dividends, and capital gains. Another con is that holding assets purely for heirs might mean underspending during your own retirement.

From a tax perspective, ongoing holding of brokerage accounts creates annual tax drag from interest, dividends, and capital gains distributions. On the positive side, the federal tax rates can be at lower preferential rates if the income is from qualified dividends or long-term capital gains. 

However, things are a little different for Mississippi income taxes since all dividend and long-term capital gain income is taxed at the same flat rate.  Both the IRS and the state of Mississippi allow airs to receive the entire brokerage account portfolio with a fully stepped-up basis completely tax-free. 

Now let's analyze option two: actively selling holdings or withdrawing cash from your brokerage account to supplement your PERS retirement income. When taking distributions from a brokerage account, every dollar withdrawn is broken into cost basis and investment return. 

Returns of principal are 100% tax-free under both the IRS and Mississippi Department of Revenue rules. However, gains on investments held for longer than one year, called long-term capital gains, qualify for federal preferential tax rates of zero, fifteen, or twenty percent depending on your taxable income.  

Dividends issued by a U.S. corporation that meets holding period requirements, called qualified dividends, qualify for the same preferential tax rates of 0%, 15%, or 20% depending on taxable income.

Other income generated from the brokerage account, including ordinary interest (other than from municipal bonds), and short-term capital gains are taxed at ordinary federal income tax rates, which can range from 10 to 37%. 

Mississippi Department of Revenue rules differ substantially from the IRS as Mississippi treats long-term capital gains, short-term capital gains, qualified dividends, non-qualified dividends, and interest (except for U.S. Treasury bonds), all as ordinary income with the first ten thousand dollars of taxable income exempt from state income tax and the remainder taxed as ordinary income at a flat rate of four percent in 2026. 

A huge planning opportunity for PERS retirees with brokerage accounts is the 0% federal long-term capital gain tax bracket. If your total taxable income, including pension income after deductions, remains below $48,350 for single filers or 96,700 for married couples filing jointly, you would pay 0% in federal income taxes on long-term realized gains and qualified dividends. 

The main benefit of withdrawing from a brokerage account is accessibility. There are zero early withdrawal penalties at any age. Another major benefit is the federal tax rates can be lower and tax loss harvesting can be executed, unlike traditional tax-deferred retirement accounts. 

However, taking distributions from a brokerage account by selling shares that result in a capital gain, we'll increase your adjusted gross income, or AGI, which can also trigger unwanted Medicare IRMAA surcharges, reduce your marketplace healthcare premium tax credits, and increase the percentage of your Social Security benefits that are subject to federal income taxes.

Let's examine our first real-world case study: an early PERS retiree liquidating brokerage assets to bridge her income before taking another job.

Ashley is a 46-year-old single retiree who earned $125,000 before retiring early after $5 years of service credit with a $55,000 annual PERS pension. She holds a $100,000 brokerage account with $40,000 in unrealized gains. She liquidates $25,000 per year over four years. Each year, $15,000 of the $25,000 is tax-free return of principal and $10,000 is realized long-term capital gains. Ashley buys health insurance on the ACA marketplace and plans to claim Social Security at age 67. 

Looking at Ashley's federal taxes, her AGI or adjusted gross income is calculated by combining her $55,000 PERS pension and $10,000 capital gain for a total of $65,000 of AGI. Her total deductions would simply be her $16,000 one hundred standard deduction for single filers.  Her taxable income is calculated by taking her $65,000 AGI and subtracting her $16,100 total deductions for a net taxable income of $48,900. 

Because her total taxable income is below $49,450, which is the threshold for single filers, her entire $10,000 capital gains is taxed at 0%. To calculate her taxes on her ordinary income, we simply multiply her $38,900 of ordinary income against the 10 and 12% federal tax brackets, resulting in her total federal income tax of $4,420.

Special note here on how the brokerage account income impacts Ashley's ACA premium tax credit. The upper income limit for Ashley to qualify for an Affordable Care Act premium tax credit as a single person is 400% of the poverty level or $63,840 for 2026. Since the $10,000 from the long-term capital gain from selling $25,000 from her brokerage account pushed Ashley's modified adjusted gross income from $55,000 to $65,000, she is now disqualified from taking the ACA premium tax credit in 2026. This is why it's so important to plan ahead.

Now looking at Ashley's Mississippi State income taxes, her AGI starts with $10,000 in state income because her PERS pension is completely exempt, having met the PERS plan retirement requirements. Her total state deduction is calculated, combining her standard deduction of $2,300 with her personal exemption of $6,000, resulting in total deductions of $8,300. 

Her taxable income is calculated by taking her $10,000 AGI and subtracting her $8,300 total deductions for net taxable income of $1,700. Under Mississippi Department of Revenue rules, because the first $10,000 of taxable income is taxed at 0%, her total state income tax is amazingly $0.

Our second case study looks at a married PERS couple taking partial brokerage withdrawals for travel during their go-go years while holding the balance for their heirs. Mark, age 64, and Susan, age 62, earn $250,000 prior to retirement. Mark retires with a $100,000 annual PERS pension.  They hold a $350,000 joint taxable brokerage account. 

To fund travel, they withdraw $20,000 per year, consisting of $10,000 in qualified dividends and realized gains and $10,000 in principal. They use Mark's state retiree health plan for health insurance. Mark plans to claim Social Security at 65 while Susan will wait until 75.

Reviewing Mark and Susan's federal taxes, their AGI or adjusted gross income is calculated by combining Mark's $100,000 pension plus $5,000 in brokerage dividends plus $5,000 brokerage long-term capital gains, resulting in $110,000 of income. Their total deductions will simply be their $32,200 standard deduction for married filing jointly. Their taxable income is calculated by taking their $110,000 AGI and subtracting their $32,200 total deductions for net taxable income of $77,800. 

Because $77,800 is safely below the $98,900 threshold for married couples, their capital gains and dividends are taxed at a 0% federal income tax rate. To calculate their taxes on their ordinary income, we simply multiply their $67,800 of ordinary income against the 10 and 12% federal tax brackets for married filing jointly resulting in $7,640 in total federal income taxes due.

Special note here on how the brokerage account income impacts Mark and Susan's future Social Security benefits. Because brokerage distributions represent passive investment income, they do not trigger Social Security earning test limits if Mark chooses to work part-time. 

However, the brokerage income from long-term capital gains and dividends would be included in provisional income, which is what determines what percentage of Social Security benefits are taxed. So Mark and Susan need to at least be aware of this when Mark begins claiming Social Security at age 65.

Now, looking at Mark and Susan's Mississippi State Income Taxes, their AGI starts with $10,000 in state income because Mark's PERS pension is completely exempt. Their total state deductions are calculated, combining their standard deduction of $4,600 with their personal joint exemption of $12,000, resulting in a total of $16,600 in deductions.  Since their total deductions exceed their AGI, the result is $0 Mississippi taxable income and $0 of Mississippi income tax.

Our final case study evaluates a high-income widowed PERS retiree who inherited a brokerage account and is holding 100% of the portfolio to pass to her daughter with a second step-up in basis.

Patricia is a 67-year-old widowed PERS retiree with a fixed annual income of $210,000 from her pension and Social Security Survivor Benefits. She holds a $600,000 brokerage account inherited from her late husband. The account generates $15,000 per year in qualified dividends. 

Because her pension fully covers her lifestyle, she doesn't need to withdraw anything, including the dividends received from the inherited brokerage account allowing the dividend, cash flow, and capital growth to accumulate for her daughter. Patricia is on Medicare and claims Social Security survivor benefits, though she plans to switch to her own retirement benefits at age 70. 

Looking at Patricia's federal taxes, her AGI is calculated by combining her $150,000 purse pension plus her $51,000 survivor benefits, which is simply 85% of her $60,000 gross benefits plus her $15,000 in qualified dividends for a total of $216,000 of total income. Her total deductions would be calculated, adding her $16,100 standard deduction for single filers, plus her $2,050 additional standard deduction for seniors, resulting in $18,150 of total deductions. 

Note that Patricia would not be eligible for the $6,000 enhanced senior deduction due to her modified adjusted gross income exceeding the phase-out maximum of $175,000 for single filers. 

Her taxable income is calculated by taking her $216,000 AGI and subtracting her $18,150 of total deductions for a net taxable income of $197,850. Because her total taxable income is between $49,451 and $545,500, her entire $15,000 of qualified dividends are taxed at $15% resulting in taxes on qualified dividends of $2,250. 

To calculate her taxes on her ordinary income, we simply multiply her $182,850 of ordinary income against the 10%, 12%, 22%, and 24% federal tax brackets, resulting in her total ordinary income tax of $36,482. Combining the $2,250 of taxes on qualified dividends with the $36,482 of taxes on ordinary income, this results in a total federal income tax bill of $38,732. 

Special note on how the brokerage account dividend income impacts Patricia's Medicare premiums. Patricia's $15,000 in qualified dividends pushes her modified adjusted gross income from the third IRMAA bracket into the fourth IRMAA bracket, resulting in additional annual Medicare premiums of over $1,500. 

Even if Patricia goes just $1 over the maximum for the third bracket, it will still cost her the full $1,500 in additional premiums. Medicare IRMAA surcharges operate on a cliff schedule rather than a marginal schedule like income taxes. 

Special note on legacy impact: when Patricia passes away, her daughter will receive a second full step up and basis under Internal Revenue Code 1014, completely wiping out all capital gains Patricia accumulated during her lifetime since her husband passed away.

Now looking at Patricia's Mississippi State income taxes, her AGI starts with $15,000 in state income because both her PERS pension and survivor benefits are completely exempt from state income taxes. Her total state deductions are calculated, combining her standard deduction of $2,300 with her personal exemption of $6,000 plus the age $65 plus senior exemption of $1,500, resulting in total deductions of $9,800. 

Her taxable income is calculated by taking her $15,000 AGI and subtracting her $9,800 of total deductions, resulting in a net taxable income of $5,200. Under Mississippi Department of Revenue rules, because the first $10,000 of taxable income is taxed at 0% her total state income tax is amazingly $0.

If you or your spouse hold a taxable brokerage account and are nearing retirement, here are your action items for today. One, review account ownership and beneficiaries. Confirm whether the brokerage account is in your name, your spouse's name, or held jointly, and ensure beneficiary designations reflect your current intentions. Two, identify your cost basis. Review your individual holdings to identify current unrealized capital gains, unrealized losses, annual interest payments, and annual dividend payments. Three, coordinate your distributions.  Coordinate distributions you receive from your PERS pension, tax-deferred retirement accounts like your 457(b) and tax-free retirement accounts like your Roth IRA, along with your taxable brokerage account distributions and income to minimize taxes and healthcare premiums. 

I hope this video helps PERS members confidently navigate their choices regarding their or their spouse's brokerage account as they approach retirement. In our next video, we will switch gears slightly to answer the question: “What should a PERS retiree do with their health savings account?"

Please make sure you subscribe so you don't miss this and other videos in our new retirement series. If you found this video helpful, you can thank me by hitting the thumbs up button and sharing it with other PERS members. 

And finally, if you're looking for a financial planner who specializes in helping PERS members plan for retirement, including building tax-efficient retirement plans utilizing taxable brokerage accounts, please visit our website at perspro.ms to learn more about how we help PERS members like you.

Thank you for your valuable public service to the state of Mississippi. We'll see you next time.

Disclaimer: this video is for educational and informational purposes only. Neither the host nor this YouTube channel are officially affiliated with, endorsed by, or sponsored by the Public Employees Retirement System of Mississippi. Always consult a qualified professional for personal tax, legal, or financial advice specific to your situation.