For many retirees, taxes can be one of the largest expenses in retirement. The idea of paying zero federal income taxes on $100,000 of annual retirement income might sound too good to be true, but with the right planning, it’s entirely possible.
This isn’t about exploiting tax loopholes—it’s about understanding the tax code and making smart, strategic decisions about where to pull income from in retirement. By structuring your withdrawals effectively, you can stay within favorable tax brackets and, in some cases, eliminate your tax liability entirely.
Let’s walk through a step-by-step example of how retirees can generate $100,000 in income while legally paying nothing in federal taxes.
Why Tax-Efficient Planning Matters in Retirement
Tax efficiency is crucial for retirees. Unlike during your working years—when payroll taxes, Social Security taxes, and income taxes take a steady bite out of your paycheck—retirement income comes from multiple sources that are taxed differently.
By carefully planning where you withdraw money from, you can take full advantage of the tax code, ensuring that more of your money stays in your pocket rather than going to the IRS.
Meet Joe and Sally: A Hypothetical Example
To illustrate this strategy, let’s consider Joe and Sally, a retired couple who want to live on $100,000 per year in retirement. Here’s a snapshot of their financial situation:
- Age: Both are 67 and fully retired.
- Social Security Income: Joe receives $3,200 per month ($38,400 per year), and Sally receives $2,000 per month ($24,000 per year), for a total of $62,400 in annual Social Security benefits.
- Investment Accounts: They have:
- $500,000 in a brokerage account (with $250,000 in cost basis and $250,000 in gains).
- $650,000 in traditional IRAs.
- $150,000 in Roth IRAs.
- Dividend Income: Their brokerage account has a 2% dividend yield, generating $10,000 per year.
Now, let’s walk through how they can structure their withdrawals to achieve $100,000 of annual income while paying $0 in federal taxes.
Step 1: Start with Social Security
Joe and Sally’s Social Security benefits provide them with $62,400 per year. However, not all of this is taxable.
The IRS uses something called provisional income to determine how much of Social Security is subject to tax. Provisional income includes:
- 50% of Social Security benefits
- Taxable withdrawals from traditional IRAs
- Dividends and interest from brokerage accounts
- Capital gains from investments
Because of their income sources, only a portion of their Social Security is considered taxable. Initially, with no other income, $0 of their Social Security is taxable.
Step 2: Add Dividend Income
Since Joe and Sally have $500,000 in a brokerage account generating a 2% dividend yield, they receive $10,000 in qualified dividends annually.
After factoring in these dividends, their provisional income increases, causing a portion of their Social Security to become taxable. Now, $4,600 of their Social Security benefits are taxable, bringing their total taxable income to $14,600.
However, because of the standard deduction ($33,200 for married couples over 65 in 2025), they still owe $0 in taxes at this stage.
Step 3: Utilize IRA Withdrawals Wisely
At this point, Joe and Sally have $72,400 in total income but need to reach $100,000.
To cover the difference, they need $27,600 more. They could withdraw this amount from their traditional IRA, but doing so would pull more of their Social Security into taxable income, pushing them into a higher tax bracket.
Instead, they only withdraw $11,600 from their IRA—just enough to keep their taxable income within their standard deduction. This keeps them at a $0 tax liability while still increasing their annual income.
Step 4: Sell Investments with Long-Term Capital Gains
With $84,000 in income, they still need $16,000 more to reach their target.
Rather than withdrawing from their IRA (which would trigger ordinary income taxes), they sell $16,000 worth of stocks from their brokerage account. Because half of this amount is cost basis (which they already paid taxes on), only $8,000 is considered a long-term capital gain.
Since long-term capital gains are taxed at 0% for married couples with taxable income below $96,700 (in 2025), they still owe nothing in federal taxes.
The Final Result: $100,000 in Tax-Free Income
By carefully structuring their withdrawals, Joe and Sally successfully generate $100,000 per year in income while paying $0 in federal income taxes.
Here’s a breakdown of where their income came from:
- $62,400 – Social Security
- $10,000 – Qualified dividends from their brokerage account
- $11,600 – Traditional IRA withdrawals (staying within the standard deduction)
- $16,000 – Stock sales ($8,000 of which is a tax-free long-term capital gain)
- Total: $100,000
Why This Strategy Works
This approach works because it takes advantage of the tax code’s layered tax treatment of different income sources:
- Social Security: With proper planning, much of it can remain untaxed.
- Dividends and Capital Gains: Qualified dividends and long-term capital gains are taxed at 0% if total taxable income is below a certain threshold.
- IRA Withdrawals: Staying within the standard deduction ensures no taxes are owed.
Final Thoughts: The Importance of Long-Term Tax Planning
While achieving a $0 tax bill in a single year is possible, the more important goal is long-term tax efficiency. Strategic planning—such as Roth conversions, tax-efficient withdrawals, and proper investment placement—can minimize lifetime taxes, not just annual taxes.
At the end of the day, your financial plan should focus on maximizing your income while minimizing taxes—not just in one year, but over the course of your entire retirement.
By understanding how different types of income are taxed and implementing a well-thought-out withdrawal strategy, you can keep more of your hard-earned money and enjoy a financially secure retirement.