I think one of the most understood concepts other than 4% rule in this community is taxes and how an early retiree can pay next to nothing in taxes with careful planning
Below is an example of a 45 year old couple that has saved $2.5M (500K in a taxable brokerage account, $1.8M in an IRA/401k and $200K in a Roth) would manage their withdrawals to have a low tax burden. For simplicity we will assume 50% of their 500K in their brokerage account is LTCG and is invested in a low dividend paying fund like VTSAX/FKSAX. This couple has 2 dependents and need 125K net in income . Below is how they could net that amount while paying very little in taxes.
This couple decided to take 700K our their IRA and start a 72t that will net them 40K/year penalty free.
They will withdraw 60K out their taxable accounts resulting in 30K in long term capital gains.
They will get 5500 in dividends from their taxable accounts.
This couple will have side income from various jobs that pays them about $30K a year.
Their total income for 2026 would 40K+60K+5K+30K=135 K
For 2026, this couple with this set up would pay $346 in federal taxes on $135K income. This gives them a 10K wiggle room from their annual cash needs.
This couple gets 30K from employment income, 40K from their 72T and 5K from dividend income. All of these are taxed at ordinary income tax rates.
- The first 31500 of income is not taxed. (Standard deduction)
- The next 23850 is taxed at 10% = 2385
- The next 19650 is taxed at 12% = 2358
- On 75K income this couple would pay 4743 in taxes.
- They have 2 dependents and get a child tax credit of 4400 (2200×2).
- They owe 373 dollars in taxes on 75K income that is taxed at ordinary income taxes.
- Their LTCG is taxed at 0%. so they can get 60K out of their brokerage account and not pay any taxes.
In order to get the same after tax income from W2 wages, this couple would have to make 168K a year.
Once you can control how you get income from various investments sources, federal taxes become a non-issue. The big caveat here is ACA credits and health insurance but that is a separate discussion.
Taxes during early retirement
byu/Mre1905 infinancialindependence
Posted by Mre1905
6 Comments
Would you be interested in breaking down the details for us mouth breathers?
So they get 40k/year from through rule 72t. This makes sense that they’d not be paying federal interest. They then somehow do a side job or 30k but somehow combined with the 40k/year would still not result in taxes? Then they have 30k in capital gains and this somehow also doesn’t have federal tax associated with it?
I really, really want this to be true…
>!But it probably isn’t.!<
I don’t think the math works. First $54k of income(not cap gains) will be taxed at 10% less standard deduction so let’s say $2,385.
Plus whatever is over that will be taxed at 12% (again not cap gains) assuming married filing jointly.
I’m not landing on the same taxable income. The IRA is penalty free, but not tax free. How does a couple with at least $75k income only pay $400?
I must be missing something. (and yeah healthcare is the big issue)
The OP math is incorrect.
72t on a traditional IRA requires federal taxes taken. Yes, 72t exempts the 10% penalty, but not taxes. Unless…. The OP thought this was a Roth IRA.
The side hustle requires taxes taken out, unless they are cash hustles.
The dividends are taxed as Income.
Yes, any LT gain will have a 15% rate.
The AGI will be high…. And ACA is going to be full price.
Here’s what I come up with, using 2025 tax info…
Regular income:
40,000 SEPP + 30,000 wages = 70,000 minus std ded 31,500 = **$38,500**
Long term income:
30,000 cap gain + 5,500 div = **$35,500**
Taxable income = **$74,000**
Tax due on reg income = 2,385 (10%) + 1,758 (12%) = **$4,143**
No LTCG tax as total income is under the 0% ceiling of $96,700.
This calculation ignores any FICA tax due on the wage income, and also ignores any eligible tax credits. Clearly with 2 dependents, something would be applicable there.