By: William Hinder, EA | October 17th, 2025
If you want to retire early, you need income — but more importantly, you need tax-efficient income. One of the biggest mistakes aspiring early retirees make is focusing only on saving and investing, without a clear plan for how withdrawals will be taxed.
With the right strategy, it’s possible to withdraw six figures from your portfolio while paying little to no federal capital gains tax. In this article, we’ll break down how capital gains tax works, why taxable brokerage accounts are a powerful early retirement tool, and how to legally minimize taxes using current IRS rules.
For most people, early retirement isn’t blocked by a lack of savings — it’s blocked by access. Specifically:
Retirement accounts often trigger penalties before age 59½
Withdrawals can be taxed as ordinary income
Poor planning can push you into higher tax brackets
This is where tax planning becomes critical. Understanding how and when capital gains are taxed allows early retirees to create income without unnecessary penalties or high tax bills.
Capital gains are the tax you pay when you sell an investment for more than you paid for it.
Short-term capital gains (assets held one year or less) are taxed at ordinary income tax rates
Long-term capital gains (assets held longer than one year) receive preferential tax rates: 0%, 15%, or 20%
For early retirees, the goal is to generate income using long-term capital gains, which are taxed far more favorably than wages or short-term gains.
One of the most underrated tools in early retirement is a taxable brokerage account.
Unlike retirement accounts:
There are no age restrictions
There are no early withdrawal penalties
You control when and how gains are realized
This makes taxable accounts ideal for bridging the gap between early retirement and traditional retirement age.
A key concept many investors overlook is how the standard deduction interacts with capital gains tax.
If you have little or no other income (common in early retirement):
The standard deduction reduces your taxable income to zero
Long-term capital gains then “fill up” the lower tax brackets
Gains that fall within the 0% capital gains tax bracket are taxed at 0%
In effect, you can stack the standard deduction and the 0% long-term capital gains bracket to realize a significant amount of gains tax-free.
Recent IRS inflation adjustments increased both the standard deduction and the 0% LTCG thresholds, creating more opportunity for tax-free withdrawals.
Married Filing Jointly
2025
Standard deduction: $31,500
0% long-term capital gains bracket: taxable income under $96,700
Potential long-term gains with $0 federal tax: $128,200
2026
Standard deduction: $32,200
0% long-term capital gains bracket: taxable income under $98,900
Potential long-term gains with $0 federal tax: $131,100
That’s an additional $2,900 of income sheltered from capital gains in 2026.
Single Filers
2026
Standard deduction: $16,100
0% long-term capital gains bracket: taxable income under $49,450
Potential long-term gains with $0 federal tax: $65,550
This represents an increase of $1,450 in tax-free income compared to 2025.
A common concern is: “I can’t just sell only the gains in my brokerage account.”
In practice, you can get very close by using specific lot identification.
Most brokerage platforms allow you to choose which shares you sell. This lets you:
Sell shares held longer than one year
Target shares with the lowest cost basis
Realize the largest possible long-term capital gains within the 0% bracket
By doing this, you maximize income while minimizing capital gains tax — and preserve higher-cost shares for future planning opportunities.
At the same time, you avoid selling:
Short-term holdings
Shares that would be taxed at ordinary income rates
Successful early retirement planning relies on having a mix of:
Taxable accounts (capital gains flexibility)
Pre-tax accounts (401(k), Traditional IRA)
Tax-free accounts (Roth IRA, HSA)
Each account type plays a different role. Taxable accounts often fund the early years, while retirement accounts are preserved for later — reducing lifetime taxes and overall tax exposure.
Capital gains tax planning is essential for early retirement
LTCGs receive preferential tax treatment
The standard deduction and 0% capital gains bracket work together
Married couples may realize over $130,000 with no federal capital gains tax
Single filers may realize over $65,000 tax-free
Tax-lot selection is critical to executing the strategy
Taxes don’t have to derail your early retirement plans. With proper planning, taxable brokerage accounts can provide flexible, penalty-free income while keeping taxes remarkably low.
The key is understanding how capital gains work — and planning years in advance to take advantage of it. When done correctly, you can create income, reduce taxes, and move closer to making work optional.
If you want a complete road map to early retirement that includes tax planning, investment strategy, safe withdrawal modeling, and pre-59½ income design—I can help.
📊 Let’s create a retirement plan that helps you invest smarter, lower taxes, and make work optional.
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