Tax-free. It sounds so good. If someone told you right now that you could sell some of your assets without paying taxes on the gains, your ears would perk up. In this article, I will think of as many ways as I can to produce tax-free income in retirement.

Then, I want to propose an idea that could be extremely valuable if you enter retirement with multiple tax registrations. Specifically, a mixture of pre-tax investments (401k/IRA/pension) and brokerage investments (employer stock plan, employer stock after NUA election, brokerage account with embedded capital gains).

For most people, completely tax-free should not be your goal. Why? Well, your greatest tax opportunities are often found in your first $105,000 of income if you file married. If you file an individual tax return, your first ~$53,000 of income is where your greatest impact can be made.

In other words, yes–you could enjoy no tax bill one individual year (assuming your assets are structured in some of the ways I list below). But your greatest advantage over the IRS is when you analyze 10 and 20 year stretches. You don’t want to enjoy low taxes now if it costs you more in taxes later. You don’t want to trade massive tax opportunities in the coming decades for one (small) tax-free year now.

Our YouTube video talks through this in detail.

But let’s talk tax-free first.

Tax-Free Income Ideas

  • Removing Roth IRA contributions (really valuable if you’re under 59.5)
    • Remember, what you put into a Roth IRA can be taken out anytime–without penalty or taxes. 
    • Example: You put $50,000 into a Roth over ten years. It’s now worth $200,000. The $50,000 you contributed can come out penalty and tax-free.
  • Capital gains harvested at the 0% tax rate.
    • Example: you have $100,000 in an S&P 500 fund. Your purchase price or cost basis in that fund is $50,000. You can harvest this gain at the 0% capital gains tax rate.
  • Qualified dividends at the 0% LTCG rate.
  • Roth IRA distributions
    • If you meet the IRS criteria (59.5, five-year rule, etc.), distributions from your Roth are tax-free.
  • Social Security
    • Social Security is either 50% taxable, 85% taxable, or tax-free.
    • If you keep all other income extremely low, your Social Security can be tax-free.
  • Municipal Bond Income
    • Unfortunately, interest rates are quite low at the moment. Still, income from municipal bonds is tax-free.
  • Cash
    • Pretty self-explanatory. You’ve already been taxed on the cash in your checking account.
  • Potentially, a small distribution from your 401k/IRA.
    • The standard deduction ($12,600 single; $25,200 married) would offset that amount distributed from your retirement account.
    • Have an investment loss carried over from a prior year? An additional $3,000 can be used to offset income.
  • More on tax losses–if you have a substantial loss, it may be eligible to offset a substantial amount of income.

I want to make a special note that combining some of these ideas can be powerful. For example, if you have significant Roth assets and embedded capital gains in a brokerage account, you probably don’t want to take 100% of your necessary income from the Roth.

Instead, take a small portion from the Roth. Take the bulk of what you need from the nonretirement brokerage account. Harvesting capital gains at the 0% tax rate is a fantastic opportunity–especially if it allows your Roth assets to continue compounding tax-free.

Your First $105,000: Where Most of Your Tax Reduction Opportunity Exists

I mentioned that the first part of our tax brackets (~$105,000 if you’re married filing a joint return; ~$53,000 if you’re single) offer the most attractive tax opportunities. This video explains why.

Kitces Picture

The picture above is a few years old, but it’s extremely helpful because it gives you a side-by-side view. The first column is income tax brackets. The next column shows capital gains tax rates.

To adjust for 2021 rates, the 12% income bracket now goes to about $81,000. The 0% capital gains bracket goes to just over $80,000. Adding the standard deduction ($25,100 of your income is not taxed) is how we arrive at the ~$105,000 (it’s technically closer to $106,000).


  • Your first $25,100 of income is not taxed (standard deduction).
  • Your next ~$20,000 of income is taxed at just 10%.
  • Your next ~$61,000 of income is taxed at 12%.
    • Note: Income tax rates almost double above this level (22%!)
    • Further note: Despite the sharp increase, many Oil & Gas retirees should still use the 22% & 24% brackets for Roth conversions as part of their tax reduction plan.
  • These brackets are close, but not exactly the same, as capital gains. Including the standard deduction, you can have income & capital gains up to ~$105,000 and not be taxed on your capital gains.*

Note: If you file an individual tax return, you can divide the above numbers in half.

I mentioned above that it’s a bad idea to go an entire year without paying any tax. Understanding how your assets interact with these tax brackets over time is why.

It makes no sense to enjoy a zero tax year if you have a large 401k/IRA and/or significant embedded capital gains in a brokerage account.

If this is your situation, you will likely face the 22-24% rates on a lot of your 401k/IRA assets. Even worse, some of your 401k/IRA will be subject to 32%+. And that’s not even taking into account that tax rates could be higher in twenty years.

So, if you can pay zero (standard deduction), 10%, and 12% on Roth conversions, it’s likely a HUGE win. And it’s far better than paying zero tax. If part of your 401k/IRA will be subject to 30%-50% tax rates at some point over the next thirty years, you would be crazy to not fill up the 10% and 12% brackets (and for some of you, the same can be said for 22/24% brackets).

Critical Note: This is why it can be beneficial to delay Social Security (and any other income) in the early years of retirement. If you’re already collecting SS and a pension totaling $70,000 each year, you’ve already filled up a huge portion of these brackets that offer massive tax planning opportunities.

Strategy to Minimize Income Tax AND Capital Gains

How do you decide between Roth conversions (income tax rates) and harvesting gains at the 0% rate (capital gains rates)?

If you have significant 401k/IRA assets as well as significant nonretirement brokerage assets, you should probably do both.

effective tax harvesting for tax free retirement

As the picture above shows, you can convert $45,000 every year to a Roth IRA. Thanks to the standard deduction and the 10% tax bracket, your average tax rate on this conversion is about 4.4%. 4.4%!

Again, some of your 401k/IRA assets may be taxed at a rate nearly 10x that amount. So, converting some of your 401k/IRA at this rate can make a substantial impact on your future taxes.

Let’s take a look at the nonretirement assets now. You only converted $45,000. So you still have $60,000 remaining in the 0% capital gains bracket.

If we were managing your account, this would give us the ability to harvest that amount each year without incurring a tax bill. 

Example: Let’s say you have $2M in a nonretirement brokerage portfolio. We could sell $120,000 of your brokerage assets. Of that $120,000, $60,000 is the cost basis and $60,000 is subject to capital gains–at a 0% rate.

This would give you $10,000/month. And it wouldn’t increase your tax bill at all. Now imagine how impactful this becomes when you do it over a ten-year period.

If you retire at 59.5, this could be an option from age 60-70. But that’s just the beginning.

If we were managing assets in a situation like this, we would load the Roth IRA up with our highest potential growth funds. The pre-tax IRA would hold our bonds (lower growth).

If we fast forward another decade or two, you will likely see compound interest taking your tax-free Roth assets well into the seven figures.

But the clock is ticking. Once you start taking Social Security (or other pensions) or take 401k/IRA distributions (required at age 72), you lose the freedom to use these low tax brackets to your advantage.

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*Interesting fact: Technically, you are still “taxed” on your capital gains at the 0% rate. You still file your tax return with the capital gains, and they are “taxed”–at the 0% rate!