6-Figure Income in Retirement & No Taxes!

There's no question about it that when it comes to saving for retirement, the financial mass media pounds the table with all things retirement accounts like IRAs and 401(k)s. But there's a vastly underutilized investment vehicle that can help retirees enjoy a potential six-figure retirement income entirely tax-free.

Hello, and welcome to the Retired-ish podcast, where we discuss topics and strategies to help you save taxes, simplify investing, and create a fruitful retirement income stream. I hope you've been relaxing a little more, destressing, and taking extra time this season to be around family and friends since, at the end of the day, that's what all of this money and planning stuff boils down to. Alright. Today's episode is actually going to be one giant response to a listener question we received. It was a pretty lengthy one, but also a great question. So, let me just summarize what the listener was asking.

I saw an article online that said you can make over $100,000 in income in retirement without using a Roth IRA and pay no taxes. Now, this sounded too good to be true, so I read into it as much as I could, but I still couldn't really understand how it worked. Can you clarify whether or not it is actually too good to be true, or if it is possible, can you break it down using examples?
Thanks.

First, I want to say thank you for the question, as I think a lot of listeners are going to like this one. I absolutely love this whole topic. The answer is yes. However, it does depend on some things. I know I hate saying it depends, but it really does.

[00:02:06]:
And I agree that the best way to explain this is by using some examples. So I'll tell you what. I'll give you two different examples, one very basic and one hypothetical, that closely match situations I actually see in practice. Before we get to those, let's get into how this is actually possible. What this article or author is referring to is what is called a good old brokerage account.

A brokerage account is simply an investment account that you open where you deposit money from your own bank account, and then you can use that cash to invest in various investments held inside that brokerage account. Most commonly, people will invest in things like stocks, bonds, mutual funds, ETFs, things of that nature. These are not “retirement accounts” per se, meaning they don't have all of the special and unique rules that retirement accounts have.

However, you can still earmark the money in a brokerage account for retirement if you please. There are no rules on what the money needs to be used for. Brokerage accounts are flexible. You can put money in and take it back out, buy or sell the investments inside at any time. The world is pretty much your oyster in these accounts. I will tell you that a large majority of pre-retirees and retirees do not have brokerage accounts that they plan on using to help them through retirement. Instead, they primarily have your run-of-the-mill retirement accounts like IRAs and 401(k)s, and maybe a rental property or two. In these cases, the strategy I am going to discuss won't really work so well.

[00:03:44]:
So this pertains to those who either have a brokerage account at some point in retirement, or maybe they start to build one up before retirement. In fact, there are many situations in which you can end up with a pretty sizable brokerage account by the time you are nearing retirement. You might start to build one by simply taking some of the extra earnings that you have that are maybe currently getting spent instead of saved because you didn't know what else to do with the money. This extra income could be directed to the brokerage account after any potential employer match that you might be taking advantage of in a 401(k) plan, for instance, after your annual Roth IRA contributions, and, of course, after some spending money to enjoy life a little bit.

You could actually go back to the pretax401(k) and max it out after you fund your Roth IRA and get your employer match, but you would be trading tax savings today for taxation in the future. So, if you wanna build a brokerage account up for flexibility and tax strategy down the road, you might avoid maxing out the pretax 401(k) each year. If you have access to a Roth 401(k) on the other hand, I would consider maxing that out first, then direct any additional monies, if you have any, to the brokerage account. You will also likely have aging parents, and in some circumstances, you may receive or be due to receive an inheritance, which might include a brokerage account with investments in it already, or maybe life insurance proceeds from a parent or in the unfortunate event of your spouse passing prematurely.

[00:05:20]:
Some of the life insurance proceeds can be invested in a brokerage account as well. Maybe you sell your business and take some of the money and reinvest it in the brokerage account. Maybe you get a divorce and negotiate for more of the nonretirement account money or cash rather than splitting every asset down the middle. Then, you can reinvest some of that cash or nonretirement money into a brokerage account. Another common situation is when you are fortunate enough to have employer stock awards, such as restricted stock units or stock options. In these cases, you will likely have multiple liquidity events over time and may have significant amounts held in a brokerage account by the time you get to retirement. Again, these are just some of the more common ways someone might end up in a situation where they can utilize the strategy we will get into a little bit later.

The major difference between a brokerage account and a retirement account like an IRA or a 401(k) is the taxation. With a brokerage account, as you invest, you may earn dividends or interest from the stocks, or bonds, or funds that you hold inside of the account. And if you buy an investment, such as a stock, and it goes up in value, then you later sell it, the gains, which are the amount above and beyond what you bought the stock for, will be subject to what is called capital gains taxes.

Each and every year, these dividends, interest, and any potential capital gains are subject to taxes, even if you don't take any of that money out of the account itself or even if the account value ends up lower at the end of the year than it was at the beginning. It doesn't matter. This is opposed to a retirement account or something like a deferred annuity, where the income generated and or any gains are deferred until the day you withdraw the funds from the account.

So in other words, you aren't responsible for any taxes each year that goes by, only when money comes out. Brokerage accounts are not tax-deferred. When you earn income from an investment inside the account or generate a gain from selling one of the investments, it's subject to taxation.

[00:07:35]:
The other key difference here is that in something like a traditional IRA that has pretax money, you pay what we call ordinary income tax rates on the amount of any of those withdrawals of the pretax funds. These ordinary rates are just the standard income tax rates you see when looking at the tax tables and doing your taxes, and filing your return. With a brokerage account, on the other hand, depending on the type of investment or dividend and how long you have held the particular investments, you can be subject to capital gains taxes instead of ordinary income taxes, and the capital gains tax rates are lower. And to get these lower capital gains tax rates, you need to hold on to your investment for over 12 months. This will mean that they are subject to long-term capital gains, and long-term capital gains get taxed at these lower rates.

If you sell an investment that you haven't held for at least 12 months, it's considered a short-term capital gain and will be subject to the higher ordinary income tax rates, not the lower capital gains rates. The lower capital gains tax rates for long-term capital gains are 0%, so in other words, no federal taxes owed, or 15%, or 20% for those in the highest ordinary income tax brackets. In addition, there can also be an additional tax of 3.8% added to those known as the net investment income tax.

[00:09:10]:
However, that will be irrelevant for the rest of today's discussion. Naturally, as you might already be wondering, how do we get that 0% tax rate? I like that one. Well, that's, of course, the trick to all of this. You need to understand the difference between being subject to taxation and owing taxes. Although you may have qualified dividends and long-term capital gains from selling investments in any given year, it doesn't necessarily mean that you will actually owe any taxes on those dividends or the profits from selling the investment at a gain. Think of it this way: the dividends and long-term capital gains will be subject to taxation, but you will only owe the taxes depending on your entire financial situation represented on a tax return. This is because it will depend on where you land on the tax tables and what bracket you're in.

So here it is. The 0% long-term capital gains tax bracket in 2025 is $96,700 if you are married and file married filing jointly. If you file single and you're not married, it's $48,350. So this means that if you had no other income from a day job, a side hustle, rental properties, pension, retirement account withdrawals, etcetera, and your only taxable income was from long-term capital gains and or qualified dividends from a brokerage account, you can stay at or below those numbers I just gave you and pay $0 in federal taxes.

But there's one more key to this equation. Everyone is also entitled to what is called the standard deduction when they file their taxes. And in 2025, this will be $30,000 for a married couple under age 65. And if you're over age 65, you just add on another $1600 per spouse who is actually over 65 during the year. And it's half of that, 15,000, if you're filing single. And if you are filing single, but you are maybe head of household, so actually you're filing head of household, you can add another 2,000, so it would be $17,000 in that case.

[00:11:29]:
Now, this deduction reduces your total income to help you get to what is called your taxable income. And it's your taxable income that hits the tax tables and that your tax owed is calculated on. This means that a married couple can actually have more than that $96,700 in long-term capital gains and qualified dividends and still not pay any federal taxes because they also will get that standard deduction at a minimum.

Alright. Now, let's take it a step further and move on to our basic example. Then, after that, we will follow it up with a more real world scenario. So we have Jessica and Mark. They are married, both in their late fifties and live in a tax-free state. Pick your favorite one. They have a good old brokerage account where they began diverting their extra income over the last 10 years. Plus, along the lines, they had an additional cash lump sum from a partial inheritance from Mark's parents that they added to the account.

Since then, it has doubled compared to what they have put into the account themselves. So, half of it is made up of gains subject to long-term capital gains taxes if they ever sell some of those investments. And today, it is worth around $2,500,000. In 2025, they can have up to $126,700 in long-term capital gains or qualified dividends. Now, just so you understand where I'm getting that number from, that is the 96,700, which is the top of the 0% long-term capital gains bracket, plus the standard deduction for a married couple under 65, which is 30,000.

[00:13:17]:
So this is the amount of income they can have from this brokerage account and still pay no taxes. Let's ignore dividends for a moment. Remember that only the capital gain portion is subject to taxes or reported for taxation, depending on your financial situation. So, what you put into the investment is your cost basis or principal in the investment. And if you sell that investment, that amount comes back out and is not subject to taxation at all. Also, remember that I said one-half of the account in this scenario is comprised of long-term capital gains, and the other half was principal. This means that if Jessica and Mark sell their investments in the correct manner, they can actually have up to $253,400 in total proceeds to withdraw from the account and pay no taxes. That is a $126,700 in capital gains and the other half, the $126,700 in principal.

Again, we are assuming there are no dividends right now for simplicity's sake. As you can see, that's actually well into the six figures. So, to answer the question at hand here, the answer is an astounding yes. This is possible. But in this basic scenario, we have the perfect setup, which likely won't be your reality. So, this example shouldn't be looked at in a vacuum since this exact scenario, while definitely possible, isn't the most realistic. Even in this example, Mark and Jessica's situation will eventually change, such as if one of them gets bored and goes back to work and is now earning an income, Jessica receives some sort of inheritance, they start collecting Social Security, maybe they have retirement accounts on the side, and they start taking required minimum distributions when they're older, the list goes on. I just wanted you to understand the concept first to see how the mechanics work.

[00:15:24]:
Now, let's dive into a much more realistic example. And again, we'll use Mark and Jessica. So Jessica is age 57. Mark is age 59. They did a retirement income plan based on what they've saved so far and decided they could retire in 2025. Jessica currently has an inherited IRA of $200,000 from her mother. She will have to take required minimum distributions or RMDs from the account under what is called the 10-year rule. So she decides to take 28 to $29,000 a year over the next 10 years to spread out and reduce the tax bill on that money. And she will assume an 8% average annual rate of return on her investments in the account.

She also has a Roth IRA, which she doesn't plan on taking any money from at any time in the near future of $50,000. Mark currently has a Roth IRA of $100,000 and, again, doesn't plan on taking any money out in the near future. Same as our previous example, together, they have a good old brokerage account where they began diverting their extra income to over the last 10 years, plus the additional cash lump sum from a partial inheritance from Mark's parents that he decided to share with Jessica. So, they added it to their joint brokerage account. Since then, it has doubled compared to what they put in themselves. So, again, half of it is made up of gains subject to long-term capital gains taxes if they sell. And currently, it is worth around $2,500,000.

[00:17:03]:
They could potentially take up to the same $253,400 in a given year from that brokerage account and not pay the IRS a dime, just like our last example. However, the other assets that they have, how they invest in those accounts, and their other income sources will actually change this number a little bit. They have this account invested in very tax-efficient investments that are primarily stocks, and it produces about $15,000 a year in qualified dividends from some of those stocks.

And some additional financial information: both of them plan on delaying their Social Security benefits to age 70 to maximize their benefits and allow more time for other tax planning strategies. Neither of them will receive a pension from their employers. They will have no other income other than Jessica's required inherited IRA distributions starting with $29,000 in 2025, and assume they live in a tax free state again since they are utilizing this strategy and absolutely hate paying any amount of taxes. They will cut back on withdrawals from this brokerage account once they each start Social Security, and in that case, they don't need to have a balance so large that they will need this high a level of income from the brokerage account alone for a potential 20 to 30-year retirement. This is why retirement income planning is so important.

We don't want to drastically over or under-save. All of that being said, here are our hypothetical 2025 results using this real-world scenario. So in this scenario, if they sell some stock and realize a max of $82,700 in long-term capital gains from their investments in the brokerage account, and they withdraw the $15,000 in dividends, as well as take the $29,000 from the inherited IRA in 2025, they would owe the IRS nothing. So if they can realize, again, $82,700 in capital gains and 50% of their account is principal, that means that if they make their stock sales correctly, they would also have another $82,700 in principal. So again, in other words, if they invested a total of $82,700 in a few stocks or stock index funds, and they're worth $165,400 now, and they sell $165,400 worth of those investments, they will have $82,700 in principle to which they will never pay tax on, and the other $82,700 subject to taxation depending on the other financials and the tax return.

Including the $15,000 of dividends, the stocks, or stock funds produced, this brings them to a $180,400 total withdrawal from the brokerage account. Now, we add the 29,000 in ordinary income from the inherited IRA, which gives them a total of $209,400 in total income. However, the income that hits the tax return is only 15,000 in qualified dividends, the $29,000 inherited IRA distribution, and the capital gains of 82,700, which gives them $126,700 in taxable income.

[00:20:46]:
But remember, then we take the standard deduction for a married couple under 65 of $30,000, and now that leaves them with $96,700, which is right on the mark for the 0% capital gains bracket. Meaning that in this hypothetical scenario, they will pay no taxes even though they will get to live on roughly $210,000 of income from that brokerage account in 2025. And notice that these numbers aren't exactly identical to the basic example because, in this scenario, we had income from other sources. So like I said, the numbers change a little bit. They can't quite live on as much tax-free money as the other scenario I gave you. However, given the much more realistic scenario, this is still very close and is a very generous six-figure retirement income.

Now, one additional thing I want to note here is that if they were to take the entire $180,400 each year from the brokerage account alone to live on, that's over a 7% withdrawal rate from that $2,500,000 account. And based on how they invest this money moving forward, this likely will not be able to last them for an entire 20 to 30-year retirement and will eventually run out.

[00:22:07]:
However, in a little over 10 years, they will start collecting their maximum Social Security benefits at age 70, which will allow them to decrease these withdrawals substantially. They also, of course, have the future values of their respective Roth IRAs growing tax-free as well. Therefore, in this situation, they may not need this brokerage account to last them throughout their entire retirement. And with that expectation ahead of time, they will be able to give themselves full permission to spend that money and live their lives, or they can decide to back it down and spend a little bit less later. This is why retirement income planning is so important because it can allow you to make decisions with confidence and reduce the risk of under or over-saving and under or overspending. Avoiding those things as best as possible can lead to a life well lived with fewer financial regrets.

Before I wrap this up, I have a few key points to note. Number one is that when trying to utilize a strategy like this, how you invest matters, and it matters a lot. Tax efficient investments inside of a brokerage account are key. Holding a lot of investments that kick out ordinary income, subject to those ordinary income tax rates can be a major detractor here. In addition, you'll want to avoid pesky, what we call capital gains distributions that happen with certain funds, like mutual funds and even certain exchange-traded funds, to avoid potentially blowing up the strategy in any given year. We've talked about these in previous episodes numerous times. So if you're unfamiliar, refer back to some of our previous episodes about capital gains distributions.

You will also want to manage the taxation of the brokerage account every year. Realize gains and losses when it makes sense per your financial situation, and assess any changes in your income and your finances each and every year and how that might affect what you do with the brokerage account. Using a brokerage account as part of your financial plan can make it easier to build a more tax-efficient retirement plan than just using something like a Roth account by itself since there are no income limitations or contribution limits for a brokerage account, as there are with some of those Roth accounts.

[00:24:30]:
And the last one is that far too many people focus on saving for retirement using run-of-the-mill retirement accounts, and they overlook the fact that something like a basic brokerage account can do wonders in retirement. It's just not sexy and doesn't necessarily give you any tax benefits today, which is why I think they're pretty easily glossed over.

So, there's my long-winded way of answering our listener's question. Hopefully, I was able to break it down in a way that's somewhat digestible. Obviously, you can go back and relisten to the episode as many times as you need to, and just remember to start some sort of long-term planning today. If these types of strategies interest you, don't procrastinate. If you wait too long, you may find yourself unable to take advantage of these opportunities for wealth creation and tax savings for you and your family.

If you find the strategies and information I provided in today's show actionable, insightful, and valuable, please subscribe to or follow the show on your podcast app. Also, be sure to check out the Retired-ish video newsletter to get more useful information on retirement planning, investing, and taxes once a month straight to your inbox. And, of course, if you want to learn more about the topic I went over in today's show or you want to ask a question to be answered on a future episode, you can find the links to the resources we have provided in the show notes right there on your podcast app, or you can head over to retiredishpodcast.com/60. Thanks again for tuning in and following along. See you next time on Retired-ish.

Disclosure [00:26:20]:
Securities and advisory services are offered through LPL Financial, a registered investment adviser, member FINRA SIPC.

Tax and accounting-related services offered through Planet Business Services DBA Planable Wealth. Planet Business Services is a separate legal entity and not affiliated with LPL Financial.

LPL Financial does not offer tax advice or tax and accounting-related services.

The opinions voiced in this podcast are for general information only and are not intended to provide specific advice or recommendations for any individual.

To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax adviser.

Neither LPL Financial nor its registered representatives offer tax or legal advice. Always consult a qualified tax adviser for information as to how taxes may affect your particular situation.

Contributions to a traditional Roth IRA may be tax deductible in the contribution year with current income tax due at withdrawal. Withdrawals prior to age 59a half may result in a 10% IRS penalty tax in addition to current income tax.

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59a half or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.