Here’s how a Massachusetts couple did it — and when the window closes.
Every year, the IRS gives retirees a powerful starting point: the standard deduction. Thanks to the new One Big Beautiful Bill (OBBB), the standard deduction for a married couple filing jointly in 2025 is $31,500. That means the first $31,500 of ordinary income — from IRA withdrawals, pensions, or even part-time work — is completely sheltered from federal tax.
And that’s just the beginning. When you understand how the tax code layers different types of income, you can often reach six figures of income while keeping your federal tax bill at zero.
Let’s break it down.
The Two Buckets of Income
Bucket 1: Ordinary Income
Examples:
- IRA or 401(k) withdrawals
- Wages or self-employment income
- Rental profits
- Taxable bond interest
- Short-term capital gains
- Non-qualified dividends
Ordinary income is taxed at the regular brackets (10%, 12%, 22%, etc.). The standard deduction shields this bucket first. For 2025, a couple can take $31,500 of ordinary income tax-free.
Bucket 2: Qualified Dividends & Long-Term Capital Gains
Examples:
- Dividends from most U.S. companies, ETFs, and mutual funds
- Gains from selling stocks or funds held more than one year
These are taxed separately, at preferential rates:
- 0% if taxable income (buckets combined) is under $94,050 (MFJ, 2025)
- 15% up to about $583,000
- 20% above that
Here’s the catch: this bucket stacks on top of ordinary income. The more ordinary income you generate, the less room you have left in the 0% zone.
An Example: Mark & Susan
Mark and Susan, both in their early 60s from Reading, Massachusetts, just retired. They need about $125,000 to cover their lifestyle. Here’s how they structure it:
- $31,500 from IRA withdrawals (ordinary income)
- Fully covered by the $31,500 standard deduction.
- Result: $0 taxable ordinary income.
- $62,000 qualified dividends + $31,500 long-term capital gains
- These stack on top. Total taxable income = $93,500.
- That’s still under the $94,050 threshold.
- Result: all taxed at 0% federally.
✅ Gross Income: $125,000
✅ Federal Tax Bill: $0
What If They’re Over 65?
If Mark and Susan were both 65 or older in 2025, the OBBB adds a new senior bonus deduction of $6,000 per person (phasing out at higher incomes). That’s up to an extra $12,000 of federal shelter.
That means instead of shielding $31,500, they could shield $43,500 of ordinary income. The math works like this:
- $43,500 ordinary income → all sheltered by deductions
- $62,000 dividends + $31,500 gains → $93,500 taxable income
- Still under the $94,050 threshold
✅ Gross Income: $137,000
✅ Federal Tax Bill: $0
So crossing age 65 can increase their tax-free income potential by more than $10,000 per year.
What About Massachusetts?
Even though they pay nothing to the IRS, Massachusetts taxes dividends and capital gains at 5%.
- $62,000 dividends × 5% = $3,100
- $31,500 gains × 5% = $1,575
- Total MA Tax = $4,675
On $125,000 of income, that’s just a 3.7% average state rate.
If over 65, their gross income could rise to $137,000 with the same $4,675 state tax, dropping their effective rate closer to 3.4%.
Why This Window Matters
Many retirees default to cash withdrawals for “extra” needs — it feels simple and safe. But that can be a missed opportunity.
If you hold appreciated stock or funds, selling during this early retirement window could mean realizing gains at zero federal tax (and just 5% state). Wait until Social Security or RMDs kick in, and ordinary income will quickly crowd out this opportunity.
Most retirees also say they’d like to diversify concentrated stock positions. Doing it now, strategically, allows for portfolio flexibility later — without taking a tax hit today.
Who Benefits Most?
This approach is most powerful if:
- You’re retired or semi-retired with modest ordinary income.
- You haven’t started Social Security yet.
- You’re pre-RMD age, with flexibility in how much ordinary income to generate.
This “sweet spot” often happens in the gap years between retirement and when Social Security or RMDs begin.
The Takeaway
Mark and Susan’s story shows how retirees can live on six figures while paying no federal income tax — and only a modest state tax bill.
By coordinating IRA withdrawals, dividends, and capital gains, they avoid federal taxes today, diversify their portfolio, and set up future flexibility.
If you’re in your early retirement years, don’t default to cash withdrawals without a plan. This could be your best window to harvest gains, rebalance, and diversify — all at one of the lowest effective tax rates you’ll ever see.
Disclosure: This material is for informational and educational purposes only and should not be considered financial, investment, or tax advice. Evergreen Wealth Management does not guarantee outcomes. Nick Stevens, CFP®, is not a tax professional; please consult a qualified CPA or attorney regarding your specific tax or legal situation before making any decisions.