Here’s How to Pay $0 Taxes on $100k Retirement Income: A Strategic Approach

The idea of paying zero dollars in taxes during retirement might sound too good to be true. And while skepticism is healthy—especially when something seems too perfect—it’s not only possible but achievable with careful planning. This isn’t about stuffing all your money into a Roth IRA during your working years (which, for most people, is either too late or not the best advice anyway). Instead, it’s about strategically structuring your retirement income using Social Security benefits, qualified dividends, and tax-efficient withdrawals from retirement accounts.

In this article, we’ll walk through a sample case study that demonstrates how one couple created $100,000 of tax-free income in retirement. You’ll learn how to apply these strategies to your own financial situation and minimize your lifetime tax liability.

Part 1: Understanding Your Current Tax Situation

Before diving into retirement strategies, let’s first understand what $100,000 of income would cost you in taxes during your working years.

Breakdown of $100k Wages in 2024

For simplicity, assume John and Jane earn $100,000 annually with no other sources of income. Here’s how their taxes break down:

• Standard Deduction: For married couples filing jointly in 2024, the standard deduction is $29,200. If both spouses are 65 or older, they each get an additional $1,550 deduction, bringing the total to $32,300.
• Taxable Income: After applying the deduction, their taxable income drops to $67,700.
• Federal Income Tax Brackets:
  • The first $23,200 is taxed at 10% federally.
  • The remaining $44,500 falls into the 12% bracket.
• FICA Taxes: An additional 7.65% ($7,650) goes toward payroll taxes.

Total Federal Tax Liability

Adding it up, John and Jane owe approximately $7,660 in federal income taxes and $7,650 in FICA taxes, resulting in an effective tax rate of around 15.3%.

This example serves as a baseline comparison to illustrate how retirement income can be structured more efficiently.

Part 2: The Retirement Income Strategy

Now let’s shift gears to retirement planning. Meet John and Jane, who came to us assuming they’d pay significant taxes on their retirement income. Their financial picture includes:

• Social Security Benefits: Combined monthly benefit of $5,200 ($62,400 annually).
• Investment Portfolio:
  • $500,000 in a joint investment account (cost basis of $250,000) invested in a global total stock market fund with a 2% dividend yield.
  • $650,000 in traditional IRAs.
  • $150,000 in Roth IRAs.
  • Cost basis of $250,000 in the taxable account.

They wanted to generate $100,000 in annual income without paying taxes. Spoiler alert: It’s possible. Here’s how.

Part 3: Building the Tax-Free Income Strategy

Step 1: Start with Social Security as Your Income Floor

Why Social Security is Key:

Social Security benefits are often the foundation of retirement income because they provide predictable, guaranteed payments. However, how much of these benefits are taxed depends on your provisional income, which is calculated as:

• Provisional Income Formula:
  [ {Provisional Income} = {(50% of Social Security Benefits)} + {Other Taxable Income} ]

How It Works for John and Jane:

• Combined monthly Social Security benefit: $5,200 ($62,400 annually).
• Provisional income threshold: For married couples filing jointly, if provisional income is below $32,000, none of their Social Security benefits are taxable.

By starting with Social Security as their base income, John and Jane ensure that no taxes are triggered at this stage. Their provisional income remains below the taxable threshold because they haven’t yet added other income sources.

Key Takeaway:

Social Security acts as a “tax shield” when combined strategically with other income streams. Use it as your starting point before layering in additional income.

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Step 2: Add Qualified Dividends Strategically

What Are Qualified Dividends?

Qualified dividends are dividends paid by U.S. corporations or qualified foreign corporations that meet specific holding period requirements. These dividends are taxed at long-term capital gains rates, which are significantly lower than ordinary income tax rates—and potentially 0% if your taxable income stays below certain thresholds.

How It Works for John and Jane:

• Investment portfolio: $500,000 in a taxable brokerage account invested in a global total stock market fund.
• Dividend yield: 2%, generating $10,000 annually in qualified dividends.

When John and Jane add $10,000 in qualified dividends to their $62,400 in Social Security benefits, their provisional income increases slightly but remains below the taxable threshold for Social Security. Additionally, their total taxable income (after deductions) stays within the 0% long-term capital gains bracket.

Strategic Considerations:

• Understand the impact of dividends on provisional income. Each dollar of dividend income can pull more Social Security into taxable income, so monitor this carefully.
• Ensure your taxable income remains below the threshold for the 0% long-term capital gains rate ($94,050 for married couples filing jointly in 2024).

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Step 3: Strategic IRA Withdrawals

Why IRA Withdrawals Matter:

Traditional IRAs are funded with pre-tax dollars, meaning withdrawals are taxed as ordinary income. However, you can control when and how much you withdraw to stay within favorable tax brackets.

How It Works for John and Jane:

• Traditional IRA balance: $650,000.
• Withdrawal amount: $11,600 strategically calculated to keep taxable income under the standard deduction ($32,300 for married couples over 65 in 2024).

By withdrawing $11,600 from their traditional IRA, John and Jane increase their provisional income and taxable Social Security benefits slightly. However, their total taxable income still falls below the standard deduction, meaning no federal income tax is owed.

Strategic Considerations:

• Monitor how IRA withdrawals affect provisional income and Social Security taxation.
• Aim to fill up the 0% tax bracket (up to the standard deduction) with IRA withdrawals to avoid higher taxes later due to Required Minimum Distributions (RMDs).

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Step 4: Utilizing Capital Gains Efficiently

Understanding Long-Term Capital Gains:

Long-term capital gains are taxed at preferential rates (0%, 15%, or 20%) based on your taxable income. If your taxable income stays below the 0% threshold, you can realize significant gains without paying taxes.

How It Works for John and Jane:

• Brokerage account balance: $500,000 with a cost basis of $250,000.
• Withdrawal strategy: Sell $16,000 worth of investments.
  • $8,000 is return of principal (not taxed).
  • $8,000 is long-term capital gains (taxed at 0% because their taxable income remains below the threshold).

By selling $16,000 from their brokerage account, John and Jane bring their total income to $100,000 without exceeding the 0% long-term capital gains rate.

Strategic Considerations:

• Use cost basis information to calculate gains vs. principal.
• Harvest gains strategically to take advantage of the 0% rate.
• Reinvest proceeds if needed to maintain your portfolio’s growth potential.

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Step 5: Putting It All Together

Final Breakdown of $100,000 Tax-Free Income:

1. Social Security Benefits: $62,400
   • Provisional income keeps Social Security mostly non-taxable.
2. Qualified Dividends: $10,000
   • Taxed at 0% long-term capital gains rate.
3. IRA Withdrawals: $11,600
   • Stays below the standard deduction, avoiding taxes.
4. Brokerage Account Sales: $16,000
   • $8,000 in long-term gains taxed at 0%.

Final Tax Calculation:

• Total income: $100,000.
• Standard deduction: $32,365.
• Taxable income: $17,580 (all taxed at 0% long-term capital gains rate).

Result: $0 federal income tax liability.

Part 4: Putting It All Together

Here’s the final breakdown of John and Jane’s $100,000 tax-free income:

1. $62,400 from Social Security
2. $10,000 from qualified dividends
3. $11,600 from IRA distributions
4. $16,000 from the brokerage account (with $8,000 in long-term gains)

After applying the standard deduction ($32,300) and leveraging the 0% long-term capital gains rate, their taxable income remains at $0.

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Part 5: Beyond Zero Taxes – Optimizing Your Lifetime Tax Strategy

While achieving $0 taxes in a single year is impressive, the ultimate goal is to minimize lifetime taxes. Here are additional strategies to consider:

1. Tax-Gain Harvesting

• Realize capital gains strategically during years when your taxable income is low.
• Example: If your taxable income is below $94,050 (married filing jointly), you can harvest gains at the 0% rate and reinvest them without tax consequences.

2. Roth Conversions

• Convert portions of your traditional IRA to a Roth IRA during low-income years to reduce future RMDs and taxes.
• Example: Convert just enough to stay within the 12% marginal tax bracket.

3. Required Minimum Distribution (RMD) Planning

• Project future RMDs and adjust withdrawal strategies to avoid large tax spikes.
• Example: Begin taking partial distributions before age 73 to smooth out income and stay in lower tax brackets.

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Conclusion

Paying zero taxes on $100,000 of retirement income isn’t magic—it’s math. By strategically layering Social Security benefits, qualified dividends, IRA withdrawals, and capital gains, retirees can create substantial tax-free income streams. However, remember that personalized planning is essential. Every retiree’s situation is unique, so work with a financial advisor to optimize your strategy for both today and tomorrow.

Ready to evaluate your own retirement tax strategy? Check out our FREE retirement blueprint course, including a guide to common retirement tax mistakes and tools to help you plan effectively.

By taking control of your retirement income strategy, you can enjoy the freedom of tax-efficient living—and keep more of what you’ve worked so hard to save.