This is the best hack that only a few know. One of the best reasons to invest in the stock market.
First, the standard deduction in 2025 is $30,000 for married couples.
So, the first $30,000 you pull out of your investments or salary is tax-free from a federal tax standpoint.
— The Money Cruncher, CPA (@money_cruncher) January 29, 2025
Now, when you sell your stocks or investments in a brokerage account, you pay capital gains taxes.
If you hold investments for less than a year, you will pay taxes at a maximum rate of 37%.
But if you hold them for more than a year, they are taxed at preferential tax rates.
— The Money Cruncher, CPA (@money_cruncher) January 29, 2025
So, say you invested $15,000 in $VOO (the S&P 500) back in early 2000.
You would have roughly $100,000 now.
Your long-term capital gains if you sold would be $85,000 ($100,000 – $15,000).
— The Money Cruncher, CPA (@money_cruncher) January 29, 2025
401(k) distribution = $30,000
Capital gain (schedule D) = $85,000 (net)
Total AGI = $115,000
-Standard Deduction = $30,000
Taxable Income = $85,000
Tax Due = $0— The Money Cruncher, CPA (@money_cruncher) January 29, 2025
The main thing this shows is the power of investment account diversification.
Investing in a 401(k), taxable brokerage, and Roth IRA can all provide you with strategic options for tax withdrawals and minimize your tax liability.
— The Money Cruncher, CPA (@money_cruncher) January 29, 2025
In our example, you might be subject to state income tax, though (as you would with a W-2 job too), but that can be minimized depending on your location during withdrawals (i.e. FL, TX, TN, etc)
— The Money Cruncher, CPA (@money_cruncher) January 29, 2025