Having a robust retirement income can provide significant peace of mind in your golden years. However, the more the IRS takes in taxes, the less you have for your needs and pleasures. Fortunately, it’s entirely possible to maintain a retirement income of around $100,000 and pay zero federal taxes. Here’s how you can achieve this.
Utilize Long-Term Capital Gains Tax Rules
When you sell investments from a taxable brokerage account, you are only taxed on the gains, which is the difference between the sale price and the original cost. If you hold your investments for more than a year, they are taxed at the long-term capital gains tax rate, which is lower than ordinary income tax rates. This rate also applies to qualified dividends, which are dividends from stocks held for more than 60 days within a specified period around the ex-dividend date.
Long-term capital gains tax rates are 0%, 15%, or 20%, depending on your income. In 2024, married couples with a taxable income below $94,050 will pay no taxes on long-term capital gains. By keeping your taxable income below this threshold, you can enjoy a 0% tax rate on income from qualified dividends or the sale of long-held assets in a taxable brokerage account.
Maximize Your Social Security Benefits
Social Security benefits can be taxable, but this depends on your provisional income, which includes your adjusted gross income (AGI), tax-exempt interest, and half of your Social Security benefits. For single filers, if your provisional income is above $25,000, or $32,000 for married joint filers, part of your Social Security benefits may be taxed.
Without other taxable income and no tax-exempt interest, a married couple could potentially bring home up to $64,000 in Social Security benefits annually without paying federal tax. This means strategic planning can help maximize your Social Security benefits while minimizing taxes.
Keep Income Below the Standard Deduction
You are not required to pay taxes on all of your income, thanks to deductions. For 2024, the standard deduction is $14,600 for single taxpayers and $29,200 for married joint filers. There’s an additional standard deduction for seniors 65 and older: $1,950 for single filers, or $1,550 per person for married filers. This means a retired couple aged 65 or older can earn up to $32,300 without being taxed.
Be Strategic About Withdrawals
The key to paying zero taxes in retirement is to strategically plan your income sources. This involves:
- Keeping your taxable income below the standard deduction.
- Relying on income taxed at the long-term capital gains rate.
- Maximizing Social Security benefits.
Here’s a practical example based on estimates from Moneywise:
- $50,000 from Social Security Benefits: Half of this amount is considered provisional income.
- $20,000 from Qualified Dividends or Long-Term Capital Gains: This income is taxed at the long-term capital gains rate.
- $20,000 in Roth IRA Distributions: Withdrawals from a Roth IRA are tax-free after age 59½.
- $10,000 from a 401(k) or Traditional IRA: This amount is added to your taxable income.
With this setup, your total income is $100,000. Your provisional income will be around $55,000, meaning approximately $15,300 of your Social Security benefits are taxable. Your total taxable income will then be around $45,300. The standard deduction will eliminate $32,300 of this amount, leaving your taxable income well below the $94,050 threshold for the 0% long-term capital gains tax rate.
By adhering to these strategies, your federal tax bill could effectively be $0, despite having an income of $100,000. This is just one of many scenarios where careful planning can result in paying no federal taxes, allowing you to fully enjoy your retirement savings.
