 Retiring Early? ThisStrategy Cuts Your Income Tax to Zero |
Source |
American Shipper |
Post Date |
07/07/2025 |
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When retiring early, married couples can use thislittle-known (and legitimate) strategy to take a six-figure income every year ?ax-free.
Many Americans dream of early retirement ?anda growing number are making it happen. But too often, those who retire before65 discover they are needlessly overpaying taxes on their income.
The good news: With smart planning, marriedcouples can legally access up to $126,700 of income each year completelytax-free.
Lets explore how this works and offer astep-by-step blueprint for families aiming to retire between ages 55 and 65.
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Two key numbers for 2025
To unlock this "zero-tax" strategy,retirees must understand two important thresholds for 2025:
? $30,000: The standard deduction for married couples filingjointly
? $96,700: The top of the 0% federal long-term capital gains bracket
In combination, this allows a couple to receive$126,700 of taxable‐income cashflows ?via divids, interest and capital gains ?without owing a dime offederal income tax.
Why taxable accountsmatter
Most retirees focus on tax-deferred (401(k),403(b) and IRA) accounts ?but the real engine of the zero-tax strategy istaxable brokerage accounts invested in low-cost, tax-efficient funds. Hereswhy:
? Divids and interest from these accountscount as ordinary income
? Long-term capital gains (on investments held atleast one year) enjoy a 0% tax rate up to the threshold mentioned above
Over the six to eight years before retirement,consider focusing on the following three steps:
? Max out retirement accounts first, focusing on Roth accounts for an additional source of tax‐free distributions
? Build taxable brokerage accounts, holding primarily low-cost ETFs (for diversification and taxefficiency)
? Hold securities for more than one year, except when harvesting losses strategically
This approach s maximum flexibility inretirement. By strategically timing withdrawals from Roth, taxable andtax-deferred accounts, investors can fill up the 0% capital gains bracket andstandard deduction, effectively zeroing ones federal tax bill each year.
A case study
To illustrate, consider Bob (62) and Mary Jones(62), who retired at the of 2024. Their balance sheet:
? Checking/savings: $80,000
? Taxable brokerage: $1.4million
? Roth IRAs: $530,000
? Traditional 401(k) accounts: $2.3 million
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They need $120,000 per year (net of federaltax) to cover living expenses. Their Social Security strategy calls for Mary (thelower-earning spouse) to benefits at age 67 for $30,000 annually, and Bobto claim at age 70 for $45,000.
In the meantime, they will rely on savings andinvestments to meet their cash-flow needs.
Heres how Bob and Mary can take $120,000 in2025 without paying federal income tax:
? $25,000 from Roth IRAs, completelytax-free
? $30,000 in divids/interest from their taxable and checking accounts: ordinaryincome, of which theyll use $25,000 for living expenses
? $90,000 in long-term capital gains, realized by selling a portion of their ETFs in thetaxable account. Of that $90,000, they will distribute $70,000 as needed forexpenses.
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The combined taxable income is $30,000(ordinary) + $90,000 (long-term gains) = $120,000. By staying within the 0%capital gains bracket and the $30,000 standard deduction, Bob and Mary owe zerofederal income tax for 2025.
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Meanwhile, their Roth IRAs ?invested for growth ?should continueearning returns sufficient to preserve principal over time.
Variations on this strategy
Couples with larger portfolios, differentaccount mixes or higher ordinary income can push this framework further.
For instance, filling the 12% ordinary-incomebracket (currently $96,950 for married couples), you can augment your cash flowwhile still keeping overall taxes extremely low. Customized projections canshow how much additional capital gains are permissible before triggering ahigher tax rate.
The action plan
If youd like to retire early ?or simplyreduce your retirement tax bill ?consider these guidelines:
? Dollar-cost average into tax-efficient ETFs in a taxable account
? Optimize Roth contributions each year, both within 401(k) plans and IRAs ifpossible
? Rebalance strategically, harvestingtax losses to offset gains when markets dip is another way to keep youreffective capital gains rate at or near zero
? Work with an adviser who offers tax planning or a tax professional who can help you navigate thisstrategy, taking into account changing tax rules
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Most retirees overpay on federal (and state)income taxes simply because they lack a roadmap for taxable withdrawals.
By leveraging the 0% capital gains bracket andthe standard deduction, you can legally funnel six figures of yearly cash flowinto your pocket ?completely tax-free ?and stretchyour retirement savings much further.
Retirement planning doesnt start at age 65.Whether youre considering semi-retirement at 55 or aiming to walk away fromthe workplace at 62, the sooner you build your taxable account and map out awithdrawal plan, the more years youll have to compound wealth with minimal taxfriction.
If early retirement is on your horizon, now isthe time to review account allocations, fund Roth accounts, and set up atax-efficient withdrawal strategy.
With the right framework and ongoing taxplanning, you might retire years earlier ?and enjoy a tax-free incomestream that most Americans never even know exists.
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