Spend $200K in Retirement and Pay $0 Income Tax Story

Spend $200K in Retirement and Pay $0 Income Tax

With the usual tax day that normally occurs in mid-April coming up, it’s a great time to remind your wage-earning self that taxes most likely won’t always be so burdensome for you.

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In some cases, an early retiree with a net worth in the millions can actually be “paying negative income taxes” or getting a refund despite paying nothing in.

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In order to take advantage of an opportunity like this, you want to plan well in advance and have a portfolio with adequate tax diversification.

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What is their tax bill? Well, it depends, but there are a number of ways to make it $0.

Method #1 Take all $200K out of the Roth IRA. Voila, no taxes due!

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Have the $1M invested completely in municipal bonds. Perhaps it spits out $30K in income and you sell another $170K of them and the basis is the value. Again, no tax due.

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Take out a $200K home equity line of credit against the house. Spend it. No tax due. Not realistic? Okay, fair enough. Those are all a little extreme.

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This 60-year-old couple didn’t qualify for Social Security, but what if we turned the clock ahead a decade.

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Now they’re 70, junior is a couple of years out of his own residency, they’re required to start taking RMDs, and they’re collecting $30K a year in Social Security benefits.

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Well, the RMD at 70 is 3.6%, so on a $2M IRA, $72K/year. Social Security is paying them $30K, 85% of which is taxable as ordinary income.

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Those munis are still kicking out $15K a year in tax-free income and the index funds are kicking out $10K/year of qualified dividends.

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