Many Americans dream of early retirement — and a growing number are making it happen. But too often, those who retire before 65 discover they are needlessly overpaying taxes on their income.
The good news: With smart planning, married couples can legally access up to $126,700 of income each year completely tax-free. Let's explore how this works and offer a step-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 filing jointly
- $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 cash flows — via dividends, interest and capital gains — without owing a dime of federal income tax.
Why taxable accounts matter
Most retirees focus on tax-deferred (401(k), 403(b) and IRA) accounts — but the real engine of the zero-tax strategy is taxable brokerage accounts invested in low-cost, tax-efficient funds. Here's why:
- Dividends and interest from these accounts count as ordinary income
- Long-term capital gains (on investments held at least 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 tax efficiency)
- Hold securities for more than one year, except when harvesting losses strategically
This approach creates maximum flexibility in retirement. By strategically timing withdrawals from Roth, taxable and tax-deferred accounts, investors can fill up the 0% capital gains bracket and standard deduction, effectively zeroing one's federal tax bill each year.
A case study
To illustrate, consider Bob (62) and Mary Jones (62), who retired at the end of 2024. Their balance sheet:
- Checking/savings: $80,000
- Taxable brokerage: $1.4 million
- Roth IRAs: $530,000
- Traditional 401(k) accounts: $2.3 million
They need $120,000 per year (net of federal tax) to cover living expenses. Their Social Security strategy calls for Mary (the lower-earning spouse) to begin benefits at age 67 for $30,000 annually, and Bob to claim at age 70 for $45,000.
In the meantime, they will rely on savings and investments to meet their cash-flow needs.
Here's how Bob and Mary can take $120,000 in 2025 without paying federal income tax:
- $25,000 from Roth IRAs, completely tax-free
- $30,000 in dividends/interest from their taxable and checking accounts: ordinary income, of which they'll use $25,000 for living expenses
- $90,000 in long-term capital gains, realized by selling a portion of their ETFs in the taxable account. Of that $90,000, they will distribute $70,000 as needed for expenses.
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 zero federal income tax for 2025.
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Meanwhile, their Roth IRAs — invested for growth — should continue earning returns sufficient to preserve principal over time.
Variations on this strategy
Couples with larger portfolios, different account mixes or higher ordinary income can push this framework further.
For instance, filling the 12% ordinary-income bracket (currently $96,950 for married couples), you can augment your cash flow while still keeping overall taxes extremely low. Customized projections can show how much additional capital gains are permissible before triggering a higher tax rate.
The action plan
If you'd like to retire early — or simply reduce 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 if possible
- Rebalance strategically, harvesting tax losses to offset gains when markets dip is another way to keep your effective capital gains rate at or near zero
- Work with an adviser who offers tax planning or a tax professional who can help you navigate this strategy, taking into account changing tax rules
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 and the standard deduction, you can legally funnel six figures of yearly cash flow into your pocket — completely tax-free — and stretch your retirement savings much further.
Retirement planning doesn't start at age 65. Whether you're considering semi-retirement at 55 or aiming to walk away from the workplace at 62, the sooner you build your taxable account and map out a withdrawal plan, the more years you'll have to compound wealth with minimal tax friction.
If early retirement is on your horizon, now is the time to review account allocations, fund Roth accounts, and set up a tax-efficient withdrawal strategy.
With the right framework and ongoing tax planning, you might retire years earlier — and enjoy a tax-free income stream that most Americans never even know exists.
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