This is such a good deal for early retirement that few people even are aware of it! It’s basically a way to retire early using a regular brokerage account and have a ZERO DOLLAR tax bill. Here’s how it works.
Traditionally to have a $0 tax bill on your investment growth, you would need to use a Roth IRA. But that growth can only be accessed (tax/penalty free) after age 59.5. So if you want to retire early, you can just invest in a regular brokerage account.
When you do retire and quit your job, assuming your income goes to zero, that gives you an opportunity to take advantage of this 0% tax bracket. For capital gains (investments going up in value) in 2023 there is a 0% tax rate for individuals with income up to $44,625 or a married couple with income up to $89,250.
That means you can sell the investments in your taxable brokerage account and live off the proceeds and still pay $0 in tax! On the face it looks like you can only live on $44K as an individual or $89K as a couple, but it’s even better than that for a couple reasons!
1.) Principal. SOME of the proceeds from what you sell is money you put in. i.e. if you Invest $30,000 and it increases in value to $119,000 you would only be taxed on the $89,000 gain. The $30,000 is your original money to use tax free. So like in the example in this post, you can spend all $119K and still be under the 0% tax bracket.
2.) Deductions. That $89K limit is AFTER deductions. The standard deduction for married filing jointly in 2023 was $27,700. That further increases how much capital gains you can sell and still be under the $89K limit. Although, to be fair, if you have a bunch of investments in a taxable brokerage, they’re likely kicking off dividends which will be counted as taxable income each year, so the deduction would be offset by that.
Anyway, don’t be afraid of a regular brokerage acount. They’re great!
As always, reminding you to build wealth by following the two PFC rules: 1.) Live below your means and 2.) Invest early and often.
-Jeremy
