Taxes in early retirement: lower than you'd think, unless your state disagrees

One of the quiet perks of retiring early is how little tax you can end up paying. The federal system is genuinely kind to people living off investments with modest incomes. Then a few states show up and undo most of it. Here's how the pieces fit, and how the calculator runs the real numbers.

A guide from Zero Risk Retirement · 2026 tax figures

Why investment income is taxed gently

When you sell an investment you've held longer than a year, the profit is a long-term capital gain, and the federal government taxes it at lower rates than a paycheck: 0% or 15% for most people, versus the 10% to 37% ordinary brackets that apply to wages. Qualified stock dividends get the same favorable treatment. For someone retired early and living off a brokerage account, that's the whole ballgame, and it's why selling shares to fund your life is so much cheaper than it sounds.

The 0% bracket is bigger than people realize

The 0% rate isn't a rounding error. In 2026 it runs up to about $49,450 of taxable income for a single filer and $98,900 for a married couple filing jointly. And that's after the standard deduction, which is $16,100 single and $32,200 joint this year. Stack those together and, if capital gains are your only income, you can realize somewhere around $65,550 as a single filer or $131,100 as a couple and owe the IRS nothing on those gains.

A couple spending $100k a year, pulling it all from a brokerage account, can plausibly owe $0 in federal tax on those gains. That's not a loophole, it's just how the brackets work for people with low ordinary income. It's also why the federal piece of an early-retirement tax bill is often tiny.

How the stacking works

Order matters here, and the calculator follows the real rules. Your ordinary income (mostly 401k or traditional IRA withdrawals) gets counted first, and the standard deduction comes off of that. Then your long-term capital gains stack on top. So if you pull from a traditional account, that income fills up the lower brackets and pushes your gains higher in the stack, where more of them can spill into the 15% range. Spend purely from a brokerage and you stay in capital-gains land the whole way. The tool computes the gross withdrawal you'd need, applies the deduction once, taxes 401k money as ordinary income, taxes brokerage gains at the capital-gains rates on top, and shows you what's actually left.

Then your state walks in

Here's where it gets uneven. Plenty of states either have no income tax or follow the federal capital-gains logic. A few don't, and they tax your long-term gains as plain old income with no break at all. The two that catch the most early retirees:

StateHow it treats long-term gains
CaliforniaOrdinary income, roughly 1%–12.3%. No capital-gains break.
New YorkOrdinary income, roughly 3.9%–10.9%. No capital-gains break.
No-income-tax states$0 on gains (Texas, Florida, Washington, and others).
Most other statesVary; the calculator uses a flat estimate of about 5%.

The practical upshot is blunt: where you live can swing the size of the portfolio you need to retire. The exact same plan that costs a Floridian nothing in gains tax can hand a Californian a five-figure annual bill, which means a bigger nest egg to net the same spending. I'm not telling anyone to move. But if you're flexible on geography, it's one of the few levers that genuinely moves your number.

One thing that can spoil the 0% bracket

If you're running a Roth conversion ladder, remember that each conversion is ordinary income for that year. That income fills the brackets first and eats into the room you had for 0% capital gains. There's a real balancing act between converting enough to build your ladder and not converting so much that you push your gains into the taxable range. The calculator accounts for the interaction so you can see the net effect rather than guess at it. Those conversions also lift your MAGI, which can shrink your ACA health-insurance subsidy, so the real trade-off is bigger than income tax alone.

See your after-tax retirement number

Common questions

How are capital gains taxed in early retirement?
Long-term gains, on investments held over a year, get preferential federal rates of 0% or 15% for most retirees, which is far lower than ordinary income rates. Because your income in early retirement is usually low, a lot of your gains can land in the 0% bracket. The catch is your state: a handful, including California and New York, ignore the federal break and tax gains as ordinary income.
How much can I realize in capital gains tax-free?
In 2026 the 0% federal long-term capital gains bracket reaches about $49,450 of taxable income for single filers and $98,900 for married filing jointly. Add the standard deduction of $16,100 single or $32,200 joint and, if gains are your only income, you can realize roughly $65,550 single or $131,100 joint before owing any federal tax on them. State tax may still apply.
Do California and New York tax capital gains differently?
Yes. Both treat long-term capital gains as ordinary income with no preferential rate. California taxes them on its regular brackets, roughly 1% to 12.3%, and New York at roughly 3.9% to 10.9%. States with no income tax charge nothing on gains. This is why the same portfolio can require noticeably more money to retire on in a high-tax state.
How are 401k and traditional IRA withdrawals taxed?
Withdrawals from a traditional 401k or IRA are taxed as ordinary income at the regular federal brackets of 10% to 37%, plus any state income tax. That is different from brokerage gains, which get the lower capital-gains rates. The standard deduction is applied to ordinary income first, and capital gains stack on top of it, which is how the calculator models your total bill.

Sources

Not financial advice, and definitely not tax advice. State rules and brackets change; confirm specifics with a CPA or a fee-only fiduciary CFP. Tax figures use 2026 brackets.