• Nice post.
    It is important to plan on tax strategies during accumulation, based on how you plan to spend/distribute in retirement. I personally am hoping to have little to no tax while converting 401(k) to Roth. Granted there is no guarantee that the tax laws will stay the same, but you have to plan based on current laws.

  • outdoorgirls

    I am really enjoying your blog. Very useful at this point in my life (contemplating ER). In any case what are the tax cutoff in the above scenarios if you are single?

    • Thanks, and good luck in your decision and future! Filing single does change the equation significantly. Whereas the 15% tax bracket goes up to $74,900 for married joint filers, it only goes half as high ($37,450) for single filers. If you want to play around with numbers, plug some in to taxcaster, which is how I came up with the different scenarios. People like to talk about the “marriage penalty” and some couples do indeed see their tax situation worsen with marriage, but for many, marriage will improve their standing when it comes to paying taxes.

  • Ross

    Thanks for the great article. So if a single person is in the 15% tax bracket for anything under $37,650, what happens if they (theoretically) earn $37,650 and have $100 in capital gains? Is their $100 over the $37,650 taxed at 25% or at the capital gains rate? (i.e. does the government benevolently try to take as little as possible by saying that your income above the last bracket was that of capital gains rather than the capital gains being part of your “first $1,000” of the year and the rest of your earnings being your earnings). I’ve always had trouble finding clear answers about this “ordering” stuff on the internet.

    • Excellent question, Ross. I’m no CPA, but my understanding is that the capital gains tax rate of 15% (plus state income tax) would apply to the $100 in capital gains. Taxcaster can be a useful tool to investigate the effect of different income and deductions on your federal income taxes.

  • If your capital gains push your taxable income above $37,450 for single taxpayers or $74,900 for married taxpayers, the overage will be taxed at the 15% rate (or worse).

    Assume you are married, have a long-term capital gain of $50,000 and your adjusted gross income is $275,000. You will pay a capital gain rate of 15% on the $50,000 gain and a 3.8% Medicare surtax on $25,000 of the gain (the amount in excess of $250,000 of adjusted gross income).

  • Anonymous

    So I went to the tax rates.org and put in the following:

    90000 in income plus 3% from an all taxable account of 3300000.

    I kept my deductions as standard.

    My state and federal tax rates was just over 40K. over 21%. This includes state but if you take state our it’s still well over 30K.

    I’m not sure how you came up with zero taxes.

    Can you please shed some light on this. Perhaps I’m missing a big part of this.

    • With $90,000 in earned income, PLUS another $99,000 in dividends, you’re going to owe some taxes. You’ve also got $189,000 to spend.

      In my examples, there was no EARNED income. The spending money comes from a combination of dividends and capital gains, Roth withdrawals, and distributions from a tax-deferred account.

      It’s important to keep TAXABLE income below about $75,000 so that the dividends and capital gains will not be taxed.

      I hope that makes sense. I typically use Taxcaster, but I’ve used tax-rates.org, which is nice for the state tax calculation.


      • Anonymous

        So you are saying if I take 70K out of a taxable account it should not be taxed but the earned income will be taxed at regular income taxes.

        So if I took out 90 K from a taxable account, then 15K will be taxed at capital gain. Then if on top of that I make another 90K it will be taxed are regular state and federal taxes.

        Did I understand that correctly?

        • The best way to test different scenarios is to run them through TaxCaster. I have lost faith in tax-rates.org, but will be interested to see their response.

          If you have enough earned income to bump you out of the 15% tax bracket, you can’t capture any capital gains at 0% unfortunately.

          • Anonymous

            The problem is social security. Because I’m a physician I haven’t worked enough years to get full SS at 65. So by working part time I can achieve that. I’ll have to see if 90K per year hits a 15% tax rate.

          • Gotcha. As long as you’ve got 10 years of contributions (40 quarters technically) and preferably are past the first bend point, you’ll be in decent shape.

  • Anonymous

    So I tried to put some numbers into the tax calc. tax rates.org. I placed a 3% withdrawl from 3500000. The outcome was still 15% in capital gains. It did not adjust for 74900. It taxed the whole thing. Am I missing something?

    • That’s strange. TaxCaster seems to give a more accurate number. I’ll have to run a side-by-side and figure out what’s going on. I got the same result @ tax-rates, but the result is not consistent with the tax code.

      To be continued…

      • Message sent to Tax-rates.org:

        Plugging in Married Filing Jointly, standard deduction / exemption, with $95,499 capital gains, I come up with $0 in taxes owed, as all of my capital gains fall in the 15% federal income tax bracket, where gains are not taxed.

        Adding ONE dollar gives me a tax owed of $14,325. As in every dollar of gains would be taxed at 15%. My understanding is that only the additional dollar would be taxed at 15%. Am I missing something or is it a software glitch?

        -Physician on FIRE

        • Anonymous

          That’s what I was wondering. If it goes over by one dollar it should tax 15cents just like the marginal vs. effective tax rate.

          Perhaps it is a glitch. I hope so because it makes a huge difference in my taxes and my FI.

  • Steve

    First, great post. Recently discovered your site. All spot on! Not sure if you’ve resolved the $1 over issue, but… The 0% qualified capital gains / dividends rate only applies if you’re in the 15% bracket. If you’re over, even by $1, the rate jumps to 15% on all of it. This can complicate partial roth conversions. It’s a tricky balancing act. You want to convert the maximum amount while still retaining the 0% rate on all the qualified dividend income. Convert too much, even by $1 and opps, your taxes owe jump substantially. The sneaky solution – rough ballpark it, converting more than enough then once you know you’re exact numbers when filing, re-characterize any excess, ensuring you’re at the absolute top of the 15% bracket (not $1 over into the 25% bracket). For example, if you think you can covert about $5K, convert $10K. When filing, you discover you really only had $4K left in the 15% bracket. Re-characterize $6K of the $10K conversion and you’re golden.

    • That’s a great strategy to ensure you can be in that desirable 15% tax bracket. Glad you found the site!

      I’ve read a number of times that the 15% LTCG rate would only apply to the dollars that spilled over into the 25% federal income tax bracket. And I think Taxcaster bears that out when plugging in numbers.

      See answers here, here, and here.


  • Sean Grand

    How would you avoid paying taxes on the 457 b distributions?

    • Just don’t take too much at a time. Tax owed can be offset by exemptions and tax credits. The income will be taxed (or not) the same as 401(k) withdrawals. I recommend Turbotax Taxcaster to play around with different scenarios.

      Of course, the tax code could change dramatically before you or I retire.


Leave a Reply

Your email address will not be published. Required fields are marked *