The Bensons, having paid a little over $1 million in federal income tax alone, don’t want to pay that anymore. Like, not at all. Zero. Zilch.
Can we get them $80,000 to spend without incurring federal income tax? Sure. Why not aim for $100,000? Plugging some reasonable numbers into Intuit’s TaxCaster
using 2015 tax rates gives us the following results.
In this example, the Bensons get their spending money from the following sources:
They receive $1000 in interest from the emergency account where they keep ready cash.
They set up the 457(b) to deliver $1500 a month, or $18,000 for the year.
Since they know that they can remove Roth contributions without penalty, they plan on taking out $11,000 a year for the next 20 years.
They sold $48,000 worth of index funds which had doubled in value, creating $24,000 in capital gains.
Their $1.1 million dollar taxable fund distributed $22,000 in qualified dividends.
They owe 0 federal income tax. In fact, with only $44,400 in taxable income, they could have had a much higher taxable income and still paid no income tax. This could be considered a wasted opportunity. Nice going, Bensons. Way to go.
How much more capital gains could they have taken without owing federal income tax?