You retire at age 60 so you can now make penalty-free withdrawals from your retirement accounts. You file as married filing jointly and for the 2025 tax year, you are allowed to claim $31,500 as standard deduction.
That is, on your first $31,500 of income, you pay zero taxes. So you’ll take that much of the required income out from your retirement account. The money in that account went in pre-tax, grew tax-free and you are taking it out tax-free assuming you only take as much of it out that keeps you under the standard deduction limit.
You also own a brokerage account in which you’ve owned investments for years with sizable embedded gains. You pay no tax on gains as long as your taxable income stays below $96,700.
The $31,500 you withdrew from your 401(k) is considered income but that gets offseted by the standard deduction in the same amount so your taxable income remains at zero. But you need another $68,500 to meet your $100,000 income goal which you can now withdraw from your brokerage account by selling appreciated investments.
All in all, you generated $100,000 of spending cash and paid zero taxes.
This is of course a simplistic view on how you can systematically draw down your accounts without paying much taxes before mandatory incomes like Social Security and Required Minimum Distributions kick in. In fact, early retirement years are some of the best years to actively and strategically draw down your pre-tax and taxable accounts through Roth conversions and opportunistic selling to help fill in the lower rungs of your tax brackets with the goal being minimizing your lifetime taxes.
This is another reason why you’d want to be intentional about building in tax diversification in your plans even if it sometimes comes at the cost of paying taxes now versus deferring to later. Because you don’t want all your money tied up in pre-tax accounts like a 401(k) as that may put you in a higher tax bracket in your retirement years than in your working years. You ideally want to build up to a mix of pre-tax, tax-free and taxable accounts so when the time comes, you can generate the necessary income while staying under the taxman’s radar. And all legally.
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