No, Taxes Won’t Derail Your FIRE: Here’s What You’ll Really Pay in Retirement

Summary

BiggerPockets Money Podcast: Summary of "No, Taxes Won’t Derail Your FIRE: Here’s What You’ll Really Pay in Retirement"

Podcast Information:

• Title: BiggerPockets Money Podcast
• Hosts: Mindy Jensen and Scott Trench
• Episode Title: No, Taxes Won’t Derail Your FIRE: Here’s What You’ll Really Pay in Retirement
• Release Date: May 20, 2025

---

Introduction: Demystifying Taxes in Early Retirement

In this illuminating episode, hosts Mindy Jensen and Scott Trench address a prevalent concern within the Financial Independence, Retire Early (FIRE) community: the impact of taxes on retirement withdrawals. Contrary to popular belief, the duo, with the expert assistance of guest Mark Livingstone, reveals that taxes may not be the daunting obstacle many anticipate.

Mindy Jensen opens the discussion by highlighting the common misconception that taxes significantly erode retirement savings. She states:

"During retirement, few people understand how little taxes will actually impact their withdrawal strategy." [00:00]

---

Guest Spotlight: Mark Livingstone’s Analytical Approach

Mark Livingstone, described as the show's "king of guests," contributes a data-driven perspective by presenting a comprehensive mathematical model. His analysis challenges the intuition that higher retirement withdrawals lead to exorbitant tax burdens.

Mark Livingstone explains his motivation:

"I was nodding my head along saying, Scott, your intuition is completely wrong. That impact doesn't really exist as the headline." [01:58]

Mark emphasizes his methodological approach:

"I love looking at data, I love putting models together and really seeing from a variable perspective how can I tweak and twist and try to optimize things." [02:06]

He assures listeners of his non-professional status but underscores the reliability of mathematical models:

"Math doesn't lie. Numbers are numbers, and 1 plus 1 is always 2." [03:48]

---

Understanding Tax Rates: Marginal vs. Effective

A core segment of the episode delves into the distinction between marginal and effective tax rates, a concept often misunderstood by retirees.

Mark Livingstone clarifies:

"Effective tax rate is, hey, if I take all the income I have, all the way from zero, all the way up to whatever number I've earned, what is the overall tax I'm paying on that entire amount." [05:03]

Using a tangible example, Mark illustrates that an individual earning $350,000 with a marginal tax rate of 32% might only face an 18% effective tax rate. This is a stark contrast to the feared notion that a third of retirement funds would be lost to taxes.

Mindy Jensen reinforces this by stating:

"Math works. And you didn’t even do the math by hand yourself. You did it in Excel. And the math is always right." [03:35]

---

Historical Context: Tax Rates Over the Decades

Mark provides a historical perspective, comparing current tax rates to those of the 1970s. He notes that:

"Back in the mid-70s [...] higher earners were paying almost half in taxes." [13:10]

In contrast, today's effective tax rates are at their nadir, offering a more favorable environment for retirees. However, he cautions:

"It could change. We believe tax rates are going to go up." [14:14]

Despite this, Mark maintains optimism, suggesting that:

"People on the FI journey have a number of conservative assumptions built in. Even if we know taxes might go up, it'll be offset by conservative assumptions elsewhere." [14:14]

---

Tax Planning Strategies: Leveraging Various Accounts

The conversation transitions to actionable strategies for minimizing tax liabilities in retirement through strategic asset allocation.

Mark outlines the following levers:

1. Traditional 401(k) and IRAs: Tax-deferred accounts where withdrawals are taxed as ordinary income.
2. Roth Accounts: Tax-free withdrawals.
3. After-Tax Brokerage Accounts: Subject to capital gains taxes, which are generally lower than ordinary income taxes.

He provides a detailed example involving a $2.5 million portfolio, demonstrating how diversified account types can optimize tax outcomes. The breakdown includes:

• $1.5 million in Traditional 401(k)
• $500,000 in Roth
• $500,000 in After-Tax Brokerage

By adhering to the 4% withdrawal rule, Mark shows that an effective tax rate remains around 18%, yielding substantial post-tax spending power.

---

Real Estate and Its Tax Implications

While not initially included in his model, Mark discusses how incorporating real estate can further optimize tax strategies. Rental income, after accounting for depreciation, can reduce taxable income:

"Real estate income [...] is generally taxed as ordinary income [...] depreciation can offset this income." [24:07]

This addition provides another layer of flexibility, allowing retirees to manage their taxable income effectively.

---

Tools for Tax Planning: Spreadsheets and Simulators

To empower listeners, Mark introduces a custom spreadsheet available at biggerpockets.com/moneytaxtools. This tool enables users to:

• Adjust allocations between different account types.
• Model various withdrawal scenarios.
• Understand the impact of different growth rates and tax brackets.

Scott Trench complements this by recommending cfiresim.com, a tool that, while powerful, doesn’t account for tax impacts. He suggests using both tools in tandem for comprehensive planning:

"Between cfiresim.com [...] and Mark's spreadsheet [...] you could build the types of portfolio that you'd be really comfortable with." [37:25]

---

Personal Insights and Allocations

Mark shares his personal strategy, emphasizing flexibility and diversification:

"I try to have as many different levers that I can pull so that based upon what the environment's like in the future, I will be able to have that flexibility to be able to move about." [38:57]

He is increasingly investing in single-family rentals and syndications to balance his traditional accounts, ensuring multiple income streams and tax advantages.

---

Conclusion: Taxes Are Manageable in FIRE

The episode wraps up with a strong affirmation that taxes, often perceived as a "silent wealth killer," are actually manageable and should not deter individuals from pursuing FIRE.

Scott Trench summarizes:

"The big headline is tax consideration does not change the basis that one needs by so much that it fundamentally changes the equation about how to achieve FIRE." [43:04]

Mindy Jensen echoes this sentiment, emphasizing the importance of understanding effective tax rates:

"Your taxes after FIRE are not nearly the huge burden that you might be thinking they are." [40:16]

---

Key Takeaways:

1. Effective Tax Rates Are Lower Than Feared: Understanding the difference between marginal and effective tax rates is crucial. This knowledge can significantly alter retirement planning strategies.
2. Diversify Your Account Types: Leveraging a mix of traditional, Roth, and after-tax accounts can optimize tax outcomes.
3. Historical Context Matters: Current tax rates are historically low, but it's essential to remain adaptable as policies evolve.
4. Utilize Available Tools: Employing spreadsheets and simulators can aid in modeling and optimizing your retirement tax strategy.
5. Incorporate Real Estate: Adding real estate to your portfolio can provide additional tax benefits and income streams.
6. Taxes Should Not Deter FIRE Aspirations: With strategic planning, taxes remain a manageable aspect of retirement, allowing for robust financial independence.

---

Notable Quotes:

• Mindy Jensen:

  • "Mathematics doesn't lie. Numbers are numbers, and 1 plus 1 is always 2." [03:35]
  • "Your taxes after FIRE are not nearly the huge burden that you might be thinking they are." [40:16]

• Mark Livingstone:

  • "Effective tax rate is, hey, if I take all the income I have, all the way from zero, all the way up to whatever number I've earned, what is the overall tax I'm paying on that entire amount." [05:03]
  • "Math works. And you didn’t even do the math by hand yourself. You did it in Excel. And the math is always right." [03:35]
  • "I believe that especially people on the FI journey have a number of conservative assumptions that they have built in." [14:14]

• Scott Trench:

  • "Taxes really aren't a major factor in planning for retirement for early retirement. That's a remarkable headline." [40:34]
  • "The big headline is tax consideration does not change the basis that one needs by so much that it fundamentally changes the equation about how to achieve FIRE." [43:04]

---

Final Thoughts:

This episode serves as a beacon of clarity for those navigating the complexities of retirement planning. By dissecting tax implications with precision and providing actionable tools, BiggerPockets Money Podcast empowers listeners to pursue FIRE with confidence, free from the paralyzing fear of tax-related setbacks.

Transcript

[Mindy Jensen]

Today, we are tackling what most people think is the silent wealth killer in early retirement taxes. During retirement, few people understand how little taxes will actually impact their withdrawal strategy. Now, today's episode relies heavily on visuals, so if you're listening to this episode on audio, you might want to hop on over to our YouTube channel to follow along. Hello, hello, hello, and welcome to the BiggerPockets Money Podcast. My name is Mindy Jensen, and with me, as always, is my giant tax nerd co host, Scott Trench.

[Scott Trench]

Yeah, Mindy, I used to be IR. Yes. Now I'm going to be IR. No, after this episode. I think BiggerPockets has a goal, creating 1 million millionaires. You're in the right place if you want to get your financial house in order, because we truly believe financial freedom is attainable for everyone, no matter when or where you're starting. And the tax payments, the taxes you'll pay in early retirement should be pretty negligible, as the headline. Mark Livingstone emailed Mindy and I a few months back when I was perseverating over this topic because I was. My intuition was telling me, hey, if I want to spend a little more than maybe the 50, 60, $70,000, that seems to be a target baseline for a lot of people in the FI community. But if I wanted to spend 150, for example, I'm gonna have to realize a lot more income, right? And that's going to result in a tax burden. And how does that geometrically compound, you know, grow the asset base required to sust higher spending level? And Mark picked up on that and decided to say, Scott, your intuition is completely wrong. That impact doesn't really exist as the headline. And here's a very detailed mathematical model to prove out how that works. And Mark, I couldn't be more grateful and excited and thankful that you did that. Welcome to the Bigger Pockets Money podcast.

[Mark Livingstone]

Well, thank you for having me. I appreciate it. I've been a big fan of the show for a long time and I feel like you guys are in my head constantly as I'm doing my walks and listening to you and friends of mine. So this feels, feels great to be here. Thank you.

[Scott Trench]

Awesome. What? Would you mind just kind of telling me what triggered you to do this exercise and how did you go about it? How did you start thinking through the problem?

[Mark Livingstone]

Sure. Well, as you noted, you talked about it a couple of times on previous podcasts, and I listened as well and said, okay, yeah, if I wanted to increase the amount I was going to spend in retirement, what would that take from a tax implication. And I also thought offmed I was nodding my head along saying, Scott, I think you're right. That makes sense to me. But I'm one of those data nerds who I need to prove to myself that that's really the reality. And so in my life, I love looking at data, I love putting models together and really seeing from a variable perspective how can I tweak and twist and try to optimize things. And as I put this together, I started digging into the worlds of really tax code and what the tax rates are and all the different opportunities you have with the different tax advantaged accounts that we have. And I was actually surprised to see that the implications were not that large. Even as you get into the multi hundred thousand dollar withdrawals over a year, there's some bigger right amounts, but not dramatically larger. I was just surprised to see that.

[Scott Trench]

Awesome. And just for the record, you, like Mindy and I are complete are a complete amateur at these things. You're not professional tax preparer. And this episode is entirely for entertainment and laughing purposes only. For this as a quick disclaimer on this, is that right?

[Mark Livingstone]

Absolutely, yes. My, my data nerdiness only helps me in my work here within the IT space and budgeting, managing large budgets. But yeah, no professional tax experience.

[Scott Trench]

Awesome. And with that, we'll get into the very detailed tax planning work that you have put together for us.

[Mindy Jensen]

Hold on, I'm going to stipulate that. But also then, Mark, I need you to stipulate that math doesn't lie. Numbers are numbers, and 1 plus 1 is always 2.

[Mark Livingstone]

Very true, very true. Absolutely.

[Mindy Jensen]

Yes, you're not a professional. But also math works. And, and you didn't even do the math by hand yourself. You did it in Excel. And their math is always right.

[Mark Livingstone]

Assuming you do your formulas correctly. Yes, that's always the trick.

[Mindy Jensen]

Okay, well, thank you for the disclaimers. Now let's jump in to all this data.

[Scott Trench]

Mark, this is the 640th. Don't quote me on that. We might be 637 or 643 depending on the timing when we release it, but let's call it the 600 fortiet episode of the Bigger Pockets Money podcast. And for the first time in Bigger Pockets Money history, a guest has come in with a PowerPoint presentation prepared to discuss a subject here. So you are the king of guests so far. The Bigger Pockets Money podcast. This is a pretty good presentation here and I would love to walk through that to guide our thought process here since you did all that work. So I'm going to pull it up on my screen here, folks. We should be able to follow along if you are listening in your car or at the gym. But this might be a good one to go back on YouTube and follow along with so you can see the great work visually that Mark has put together here. So with that, I will share my PowerPoint. We got this presentation, Effective Tax Rates for Retirement. Please help, please set the stage here and let us learn from you.

[Mark Livingstone]

Sure, yeah. I mean, really, I mean the key word there is that effective tax rate. And I think that's where some people might misguidedly in their heads when they're modeling or thinking about what the tax implications are, they might be thinking more about their marginal tax rate. Again with this progressive tax rate system we have in the US Today and have had for quite a period of time, a lot of people think about that last dollar that they bring in. And what we call that is the marginal tax rate, right? The last dollar that you bring in, what's that going to be taxed at? And that might be at a 32 or 35% tax rate if you're making significant dollars. But the reality is, if you think about the effective tax rate. So effective tax rate is, hey, if I take all the income I have, all the way from zero, all the way up to whatever number I've earned, what is the overall tax I'm paying on that entire amount? And that's what we call the effective tax rate. And that effective tax rate is usually significantly smaller. And we'll go through a presentation or we'll go through an example here, but just a punchline, you know, even if I just earned $350,000 as a married file jointly individual, right. My marginal tax rate will be, you know, around that 32% level. But that effective tax rate, what I pay because of the progressive tax system, because that first set you get a standard deduction and then the first x amount is 10% and then 12%, it actually goes down to 18%. And so I might be way off on my calculations and thinking about, hey, a third of my retirement money is going to go to taxes when the reality is it's actually quite a bit smaller.

[Scott Trench]

Awesome. So love that, love that framing. And obviously that, you know, until you get to really large amounts of income, the problem that I was worried about really doesn't come into play at all is the big headline here. But stay tuned because the rest of the presentation is going to walk through exactly how that works and all of the intricate inputs that go into building to that. Is that correct?

[Mark Livingstone]

Yes. Yeah.

[Scott Trench]

Awesome.

[Mark Livingstone]

Yeah. I mean so this is just kind of demonstrating, just thinking about progressive tax rates. This was that $350,000 examp and I just put together here that the table of. And this is for the assumption of 2024. Mary file jointly. You can do the same thing and plug in the numbers for single or head of household or whatever the case may be. But in this example I tried to show really that $350,000 of income, you know, what is the taxes I'm actually paying and what portion of that 350,000 is subject to each of those increases of tax rates. Where that first 29,000 in this example, no tax at all. Right. So again, in retirement, think about if I'm pulling out $30,000 from a traditional 401k, there'll be zero tax I need to pay on that and even the next X dollars, et cetera. Right. Slowly increasing to that 10, the 12, the 22%. You don't get into, you know, the 30s until significantly higher amounts. And overall when you average it out, it you can see here I was mentioning about that 18% rate on a $350,000.

[Scott Trench]

Now we need to take a quick ad break. But listeners, I'm so excited to announce that you can now buy your ticket for BPCON 2025, which is October 5th through 7th in Las Vegas. And I'd argue is a business expense offsetting real estate income. You know, talk to your tax pro about that. Though I also wonder if the losses you incur at the craps table would count against your tax bill in that situation. I don't know. That one might be more iffy.

[Mindy Jensen]

Starting a business can feel like a lot forms, filings and figuring out what goes where. But it doesn't need to be complicated. With Northwest Registered Agent, you can set up your entire business entity in just 10 clicks and 10 minutes. No red tape, no legalese headache. Just a clear streamlined process designed to save you time, stress and sanity. And you get more than just paperwork. They'll form your business, build a custom website and set up your local presence wherever you need it. You don't need to be a legal expert or a tech wizard to get started. It's just 39 plus state fees to form your business backed by by real experts who know what they're doing and are ready to help. And they help protect your identity by using their address on your formation documents, not yours. Want more? Their premium mail forwarding gives you a legitimate business address totally separate from your private information. Don't wait. Protect your privacy, build your brand and set up your business in just 10 clicks in 10 minutes. Visit northwestregisteredagent.com money and start building something amazing. Get more with Northwest registered [e-mail] money.

[Unknown]

You ever feel like your IRA's just coasting? It's 2025 and those safe stocks might not be cutting it anymore. Inflation, market swings and lack of control are real risks. It's time to diversify with something tangible. With a self directed IRA you can invest in things that actually make sense to you, like real estate. Spread your risk and grow your retirement corpus with what you actually understand. Plus, enjoy tax perks, no capital gains tax, and with a Roth ira, tax free withdrawals. You can even pass your wealth to family with little to no tax. If that all sounds good, check out trustetc.com bpmoney that's trustetc. It's your retirement. Make it work for you.

[Mindy Jensen]

Did you know that parents rank financial literacy as the number one most difficult life skill to teach? Meet Greenlight, the debit card and money app for families. With Greenlight, you can send money to kids quickly, set up chores automate allowance and keep an eye on your kids spending with real time notifications. Kids learn to earn, save and spend wisely and parents can rest easy knowing their kids are learning about money with guardrails in place. Try Greenlight Risk free [e-mail] Spotify thanks for sticking with us. Okay, I want to stop. Scott, I'm sorry to jump on top of you. I want to stop right here and say that I know that I am supposed to not pay. You know my tax rate is not 38% on my entire amount, but you just have that in the back of your head. I have never seen it laid out like this, which makes it so easy to understand the effective tax rate and the progressive tax on $350,000. So if you are listening to this episode on your audio only this one. I hate to say it because I love when people are just listening on audio too, but this is a definite got to watch it on YouTube episode. This is.

[Scott Trench]

Yeah, I think that's. I think that's right here because Mark's work is too good and too professional and polished here for us to not react to the images he's sharing. But we still will release it on podcast episode and I think people will get value from it. But yeah, the headline here is that at $350,000 the taxes of $63,000 on that is pretty negligible. And that leaves you with 290 something, almost $290,000 in spending, 287,000 in spending power on this, which is far more than the vast majority of people listening to this podcast will want in an early retirement world. Post tax, I believe.

[Mark Livingstone]

Yeah. And the table on the right, you know, it just shows, really, if we look at each of the different dollar increments, really, how does that tax start to ramp up a little bit? But so for those under a couple hundred thousand dollars, I mean, we're still in the teens in terms of tax rates, effective tax rates.

[Scott Trench]

Awesome. One more thing, you know, for, for those listening here, can you walk us through the tax table that we're looking at? What, what tax are we talking about here? This is income or capital gains.

[Mark Livingstone]

This is solely income. So this picture is just, you get, forget about even retirement at this time. Right. This is just around income. So if I was a W2 employee and I made $350,000 of standard income, this is the type of tax I would be paying. As we Talked about with 401k, like traditional, you know, same thing. When you pull that money out, it's taxed as standard income. So you would use the same kind of tax. Table, we'll talk about in a little bit. There's other levers that you can use to help reduce your overall tax impacts by leaning into things like capital gains from your after tax, or obviously Roth, which is not going to be taxed at all. So you've got numbers of levers to even go lower than 18% if you really need $350,000 in retirement.

[Scott Trench]

Perfect. Let's keep rolling.

[Mark Livingstone]

Yeah. So this one is another eye opener here to me. I wanted to go back and take a look at where are we today? There's always been the situation of we know, or at least kind of knew tax rates were relatively low based upon history, but I didn't know how bad it was. And so went back and calculated that same $350,000 and said, okay, if we just adjusted for inflation back for the last 50 years and we just took every five year increment, how much would I pay in the effective tax rate? You can see back in the mid-70s when there were definitely different tax implications, especially for higher earners back then you were paying almost half. Right. So that would be a totally different story. So back to the world of if I wanted to withdraw a lot of money back in the 1970s, then I really have to consider the tax situation here. We're at the lowest tax effective tax rates that we've ever bid. Now it could change. And so I think that's just something to be aware of.

[Scott Trench]

Is that a reasonable response to this? That this is actually a huge risk to the early financial independence world because we're at such a historically low effective tax rate on this level of income in real adjusted dollars that a good assumption would be that these rise back to something closer to the average for the last 50 years.

[Mark Livingstone]

I mean I think they'd have to go up some. I think there is a challenge for politicians to raise taxes. I think that's not necessarily necessarily a favored opinion by many. So I don't think we're going to go back to the world of the, the 1970s in this case, but something to consider and think about. But I also believe that especially people on the FI journey have a number of conservative assumptions that they have built in. And so even if we know taxes might go up over the next set of years, my guess is it'll be offset by some of the conservative assumptions they may have somewhere else in terms of what they need. I can't imagine it going back. But again, I'm no expert in what might happen with tax policy in the future.

[Scott Trench]

Awesome.

[Mark Livingstone]

So yeah, this one basically breaks down if we think about kind of again those levers in retirement. Really there's. We typically they talk about the three legged stool here I've got a four which starts with just knowing that oftentimes, especially folks on the five journey, they may still have income coming in. So they may actually still have either residuals or some type of side income or a side gig that they're doing. So I'm just breaking down, you know, what, what is, how does the tax work? So standard income, income tax, I think that's straightforward as we talked about with tax referred. So traditional 401ks IRAs, same thing. Anything you pull out that'll hit income tax, your Roth obviously is tax free. So anything you pull out of your Roth will have no tax implication. And then lastly your after tax that you pull on the gains of that you'll be subject to the capital gains tax on, you know, over the cost basis associated to that. Some of it will be long term capital gains, some of it will be short term as well. As one of the things I think people don't think about is if they have a large after tax portfolio, there's still some capital gains even if they're not selling and withdrawing. There's still capital gain impacts that are happening inside their account that they'll need to pay taxes for. But if you're using things like standard index funds, those are pretty relatively low. There'll be less than 2% of your account and 95% of that is typically long term capital gains which are much tacked more favorably.

[Scott Trench]

Awesome.

[Mark Livingstone]

So after tax accounts, I just again wanted to kind of spell out here a little bit on thinking about in. In my. If I got after tax brokerage and I have just a Standard S&P 500 As I mentioned, dividends there that are being paid out on an annual basis is usually around 2%, usually a little bit less than 2% of that 95% are considered qualified. So those will hit the capital gains and around 5% might still have some short term capital gains. So it'll be a little bit amount that's actually hitting that income tax. And then everything you're withdrawing is just the gains, your long term capital gains again subject to the capital gains tax rates which I have later on and short term capital gains that you have. So if you sell something that you just recently had purchased, that'll also hit your income tax.

[Scott Trench]

It's pretty eye opening. These are the rookie items here when you state them like this and they're not really top of mind in these things. And it clearly paints the picture for oh wow, taxes are not going to be the boogeyman that I had originally thought them to be here at least not as they're currently laid out. Maybe tariffs change the opinion. But you made this before tariffs I believe, right, Mark?

[Mark Livingstone]

Yes. And who knows what that story will be tomorrow and the day after and the day after. It's a constant story here. Right?

[Scott Trench]

Awesome. Yeah. I think the best thing we can do is keep letting you roll, Mark. This is great.

[Mark Livingstone]

Sure. So I tried to just put together an example. So in this case the assumption is, okay, I am an individual, well married. I'm using married file jointly. It was just all my assumptions along the way just to have an easy assumption there. And the assumption here is, okay, I have $50,000 of income, so I've still got some kind of maybe part time job or something else that's still bringing in some income. And then I'm taking 4% of my $2,500,000 portfolio. So this example is $2.5 million. I'm going to take my 4% if we follow just the standard 4% rule. And then the assumption was that I had spread this across tax, deferred, Roth and after tax so 1.5 million in a traditional after tax or sorry, in our tax deferred, 401k, traditional 401k, $500,000 in our Roth and a half million dollars in a after tax, which I think is a pretty common scenario. We've seen retirees kind of be in terms of percentage wise and just walk through, you're taking out your $60,000 from your tax deferred, that's 4% of your 1.5 million, 20,000 from your Roth and then taking out the additional 20,000 from your after tax and then also calculating in again that 2% dividend that you'll need to pay taxes on. So we're just trying to figure out here what your total taxable income tax is. So you've got basically 110,500 of taxable income that's come in with again, you go to your tables, an income tax rate, income tax amount of $9,300. And then on the long term capital gains, you will recognize 24,500 with a capital gains tax rate of 36, amount 3,675. And you can see up here in the top right, the capital gains tax table. We didn't talk a lot about that yet where the first $90,000 of capital gains, and again this is after your income isn't taxed at all and then up to a half a million dollars is 15% tax rate. So that's again thinking about when I was thinking of those 32 and 35% assumptions. If a lot of that money is coming from capital gains, I'm only going to pay 15% up to a half a million dollars. And again, if you're taking out more than half a million dollars a year, great. You probably will have to think a little bit more about your tax implications. But even after that, we're talking 20%.

[Scott Trench]

Mark, if I'm, let's say I'm earning 100k a year, sorry, let's, let's say this. I have no other income sources and I only realize capital gains from my after tax brokerage here and dividends. The first $90,000 is taxed at 0%. Correct. Let's say that I also earn 100k because I'm a traditional retiree and I am forced to realize, you know, begin, begin my, my 401k distributions in there. How does that impact the tax bracket that I'm in for this capital gains item here?

[Mark Livingstone]

Yeah, it comes after the fact. So your income comes in first. So if you've made $100,000. That basically fills up your bucket of eligible in terms of the capital gains and then anything above that 100,000 all the way up to a half a million would be taxed at 15%. So the capital gains in this example would all be at 15%. If you had zero income, all that would be at 0%.

[Scott Trench]

Awesome. So if I, let's say I have a big cash cushion, let's say I have 200k in a cash position, right? Big, big cash position there. And it's earning 4% in a money market or something like that. Right. So that would be eight grand. That would, that interest that would first hit here. So then I only have 81,000 of capital gains or dividends that tax the 0% rate, is that correct as well?

[Mark Livingstone]

Well, let's be careful. Money markets and the income there are typically considered short term interest and not actual capital gains.

[Scott Trench]

Right.

[Mark Livingstone]

Capital gains are going to be things I've invested into the stock market or index funds and things like that. And then over the time period in selling those things like money markets, all that would just be interest income and would it be considered just standard income?

[Scott Trench]

Sorry, yes. But what I'm saying is can I have a high ordinary income and still pay zero for capital gains taxes, the first $90,000 for long term capital gains?

[Mark Livingstone]

So the answer is no. Again, the ordinary income will fill up that bucket. That 90,000 is including any ordinary income that you have as well.

[Scott Trench]

That's what I'm saying here. Right. That simple interest threshold in my money market, for example, would count as ordinary income or short term, you know, like in there. And that would begin filling up this bucket.

[Mark Livingstone]

Right, yeah, yes, sorry, yes.

[Scott Trench]

Yeah, that's all, that's all I'm saying here is this is, this is the first that marginal piece on the long term capital gains. But it is, the short term stuff fills this up, I think is an important nuance for folks.

[Mark Livingstone]

Yeah. So again, there's a lot of levers here that you can do. And you know, if you, you don't have to take 4% out of every single one of these boxes, if you want to adjust and you have more in your Roth or you want to take more of your Roth, be able to reduce your income in a given year. Right. You have those levers to be able to adjust so that you could actually try to optimize the tax that you're paying. But again, you have to think about in the future, right. We believe tax rates are going to go up. Maybe we want to take some of that Hit now and then, you know, save that Roth for when the, the tax impacts might be higher. Right. So again, you get choices as you go along, but having money in each of these different investment strategies, awesome.

[Scott Trench]

We don't talk about real estate here. Does that come up in a little bit?

[Mark Livingstone]

It does not. I did not necessarily use that as an assumption in here. Typically real estate income will just be your standard income. I'm assuming that you're, you know, making that. Obviously that's offset a lot with depreciation and other expenses and such. Right. Just like any business income. But that really does not help us necessarily in the Roth or deferred. It really just be in your income bucket. Anything that's coming up from there.

[Scott Trench]

So if we factor in real estate into this situation, then things begin to continue to get really interesting. Right. Real estate income, as you just mentioned, after depreciation and all these other things have been taken out of it is generally taxed as ordinary income at that point at the marginal tax rate for that. But let's say you had a million dollar real estate investment, let's say, let's pretend it's all building, so it's fully depreciation. The depreciation is on the entire million dollar amount, generating 67, $60,000 in cash flow here. You would offset that $60,000 in income essentially by 27,5 in depreciation and be left with 33,5 in income on there, filling up that bucket with $60,000 in cash flow. So the game can get really fun, I imagine, when we start layering those types of things, which was not even contemplated in your model here, there's additional opportunity for folks to explore.

[Mark Livingstone]

Absolutely.

[Scott Trench]

Yeah. Okay, awesome. And so what are we looking at on this last slide that summarizes your work here?

[Mark Livingstone]

Yeah, so this is just trying to really kind of show as we went from low income to higher amounts of income at retirement, what is that effective tax rate? And you know, yes, it does go up. Right. And it goes up as you pull out more money, but it's a little bit more linear than I would have expected. Again, where I think the original assumption was I was going to see some type of logarithmic or type exponential impact, the reality is that effective tax rate just really does not take off. I didn't go beyond the situation where I think it was a $20 million portfolio here and taking 4% of that, I'm still was only paying what is it, that 18 or so percent on that. And you know, I'm sure as I go out into the ride and I have $100 million portfolio. I will pay a lot more taxes, but I wouldn't mind being in that situation.

[Scott Trench]

Yeah, absolutely. So obviously as the money money compounds you will pay more taxes in most cases. But real estate? Again, there's plenty of ways to play around with this.

[Mindy Jensen]

We have to take one final ad break, but more from Mark after this. You just realized your business needed to hire someone yesterday. How can you find amazing candidates? Fast? Easy. Just use Indeed. When it comes to hiring, Indeed is all you need. That means you can stop struggling to get your job notice on other job sites. Indeed's sponsored Jobs helps you stand out and hire the right people quickly. Your job post jumps straight to the top of the page where your ideal candidates are looking. And it works. Sponsored Jobs on indeed get 45% more applications than non sponsored posts. The best part? No monthly subscriptions or long term contracts. You only pay for results. And speaking of results, in the minute I've been talking to you. 23 people just got hired through Indeed Worldwide. There's no need to wait any longer. Speed up your hiring right now with Indeed and listeners of this show will get a 75 sponsored job credit. To get your jobs more visibility at indeed.com biggerpockets just go to indeed.com biggerpockets right now and support our show by saying you heard about Indeed on this podcast. Indeed.com biggerpockets terms and conditions apply. Hiring Indeed is all you need. Starting a business can feel like a lot forms, filings and figuring out what goes where. But it doesn't need to be complicated. With Northwest Registered Agent you can set up your entire business entity in just 10 clicks and 10 minutes. No red tape, no legalese headache. Just a clear, streamlined process designed to save you time, stress and sanity. And you get more than just paperwork. They'll form your business, build a custom website and set up your local presence wherever you need it. You don't need to be a legal expert or a tech wizard to get started. It's just $39 plus state fees to form your business backed by real exper who know what they're doing and are ready to help. And they help protect your identity by using their address on your formation documents, not yours. Want more? Their premium mail forwarding gives you a legitimate business address totally separate from your private information. Don't wait. Protect your privacy, build your brand and set up your business in just 10 clicks. In 10 minutes, visit northwestregisteredagent.com money and start building something amazing. Get more with Northwest registered [e-mail] money.

[Unknown]

Okay, so Uncle Sam's knocking at your door wanting his cut again, but you want more of your money working for you. Well, that's where a 1031 exchange comes in. Instead of paying taxes now you can reinvest your sale proceeds and let your money grow. Want to level up? You can move into higher value or income generating properties or even spread your funds across multiple properties to build your portfolio faster. With over 50 years experience Equity 1031 Exchange is a qualified intermediary that makes this process smooth. Make your next property move tax efficient and profitable. Begin your 1031 exchange at getequity1031.com bpmoney that's getequity1031.com BPMoney Ryan Reynolds here from Mint Mobile.

[Mindy Jensen]

I don't know if you knew this, but anyone can get the same Premium Wireless for $15 a month plan that I've been enjoying. It's not just for celebrities. So do like I did and have one of your assistant's assistants switch you to Mint Mobile today. I'm told it's super easy to [e-mail].

[Mark Livingstone]

Switch upfront payment of $45 for 3 month plan equivalent to 15 DOL per month required intro rate first 3 months only then full price plan options available, taxes and fees extra. See full [e-mail].

[Scott Trench]

Lowes knows that no matter your paint or stain project, saving is at the top of your to do list. Save now with Buy one, get one half off. Select paints, stains and primers from top brands like Valspar, hgtv, Home by Sherwin Williams and Cabot via Visa gift card rebate. Find more Memorial Day deals now at Lowe's. We help you save. Selection varies by location while supplies last. Discount taken at time of purchase. See Sales Associate for details. Offer valid 515 through 528 welcome back to the show. Now we're going to switch over to the spreadsheet that you built to power the slides that we just discussed. Again, you are you. I think maybe one other person has built a spreadsheet coming into a BiggerPockets money podcast. So thank you again for being the the most prepared guest in BiggerPockets money history. Mark, we appreciate it.

[Mark Livingstone]

My pleasure.

[Scott Trench]

This tool effectively allows you to play with all of those toggles that we just went through and the assumptions that you based your base case on in the PowerPoint presentation. Both of these will be available at biggerpockets.com moneytaxtools as a free resource. Thank you so much, Mark, for producing this. I think it's going to help a lot of people walk us through how to use this tool and the way you built it. And I'll zoom in a little bit here for making it as well.

[Mark Livingstone]

Perfect. Yeah, I mean really the key variables are what I identify on the left hand top side there, that's really the things that you play with. So really lines 1 through 11 there in cell B, those are the things that you can kind of play and adjust with. And the first three lines are really, okay, how is my, my net worth allocated Right between tax deferred Roth and after tax. So you, if you're in a situation where you know 80% of it is in a standard 401k, you can change that to 80% and say that my taxable after tax is 10% and my Roth is 10% again, you can modify those. They should just add up to 100% ideally. And then the next one really thinks about a growth. So originally I was going to build this out to year over year over year and think about growth and acceleration of your portfolio. And what does that look like right now? I don't think that will have much of an impact on this spreadsheet dividend. We talked about the estimation of for my after tax, what types of dividends am I going to see on average in this case, I put in 2%. If you have a lot higher type of stock portfolio that maybe pays a little bit higher of dividends, you can up that to 3, 4, 5%. If you think it's a little bit lower, you can change that down to 1.5%. So again we allow that to change and then the qualified dividend rate is just again that what, what percentage of that is long term versus short term? Again, when I looked up the standard like an S&P 500 index fund, about 95% of that was long term capital gains. So we plugged that in 95%. But you can change that down to 90% or 80% to see how things might change over time. The withdrawal percentage is pretty straightforward. What are you going to take out of your portfolio? The assumption here is 4%. If someone wants to play with a 3% because they want to be a little bit more conservative, they can go ahead and put 3% in there. Line 9 actually I've removed, so it's there, but I actually in the pink or purple capital gains table, I, I updated my spreadsheet to calculate in the capital gains tax so that 015 and 20%. So that line actually doesn't do anything in that one. So that actually can get removed.

[Scott Trench]

And then the note, that's a note. This is all for the 2025 tax code, is that correct?

[Mark Livingstone]

This is all 2024. I use 2024.

[Scott Trench]

Okay. So if you're looking at this and it's five years in the future and you find our episode in the annals of the Internet, you will need to update these tax tables with the correct assumptions for that year.

[Mark Livingstone]

Yeah. And then row 10, the taxable. That's growth. That's basically the assumption of, okay, how much is actually going to be a gain when I sell. So in this case, we used 75%. So the assumption is I put in 25%. It's just the cost basis and it's grown 75%. You can change that if you think it's more around 50% for you in your situation, you can alter that. And then the last item there is again, am I going to make any income in addition to all the things that I'm pulling from my retirement accounts? So in this case, the assumption was $50,000 that I would be making in addition to. If you feel like, okay, nope, I'm actually fully retired, you can take that down to zero and it'll recalculate everything. Again, we talked about those buckets of income tax rates. It'll remove that from that to be able to calculate what things impacted income tax and then the capital gains tax.

[Scott Trench]

Awesome. So perfect. These are the basic things that you'll need to play around with to do it. It's a very simple model. Even though that might have been, you know, there's a lot, there's a lot of good detail that goes into it. But boiling it down to these inputs is really wonderful and making it a lot easier on folks here. Can you give us some high level overviews of the key other parts of the model that folks should know? The power your work. Sure.

[Mark Livingstone]

Under the notes, I just, there's a lot of assumptions that are made. You cannot not do this for every single scenario. So I just tried to highlight some of the assumptions I assumed in these calculations. These are not going to be precise. Right. I think they'll accurately put you in the right direction, but they're not going to be a precise predictor of exactly what down to the penny that you're going to owe at the end of any given year. But there are some assumptions built in there, so I tried to at least detail that out. And then in the center section There, those are the different portfolios as they grow. So I had a $500,000 portfolio, a million dollar portfolio, I think a 2 million, 5 million, 10 million. So that just continues to go down all the way up to, I think I did a $20 million portfolio. I figured that was probably sufficient. And then in the third columns, the JKL ones there, those are just the tables. Those are all the calculation tables I use. So here is all the married file adjointly, if you want to change that to single, you can go pull the single table and actually update those and put that information in. Or we can up the bit for folks that they'd like, the capital gains.

[Scott Trench]

For folks who are totally new to this. And I used this, you just Google income tax brackets to income tax table and you will find these for the latest year and they will populate in a very similar format to this. If it's not instantly available for you to copy and paste with whatever site you went in there, you will spend a little bit of time entering the data manually into the spreadsheet to plug those in. But that's not a very difficult task once you just Google it it to find those rates, whatever year you're looking at and whatever your tax status is. Sorry.

[Mark Livingstone]

And then that last table in blue there, the net worth and effective tax rate, that's just kind of the overall, you know, where do we land? What's the net result? So based on a certain net worth, based on all those assumptions, what's the effective tax rate I'm going to pay and how much cash am I actually pulling? So between my income and my withdrawals, how much cash do I actually pull out? And then we just graph that here on the very far right.

[Scott Trench]

I want to call out here, I want to call out another resource that you did not construct on this that I think is a wonderful companion resource to this, which is cfire sim. Are you familiar with that product?

[Mark Livingstone]

I am, yes. I haven't used it a lot, but I have heard a lot of good new things about it.

[Scott Trench]

We interviewed the creator of cfiresim, Lauren, and it's a really powerful tool that has a large amount of historical data to power assumptions. You can plug in different types of portfolios that you plan for and all these things. One issue that we pointed out on the show and that she owned was that it does not consider the tax impact of those portfolios. So between this tool, cfiresim.com which is a completely free resource for folks in the fire community, you could build the types of portfolio that you'd be really comfortable with in terms of feeling like it would support a certain amount of withdrawals. And then you can increase that amount by the pre tax amount needed to fund fire using Mark's spreadsheet that we've built here. I think those two things would really be a really powerful way to feel comfortable with how much you need on a pre tax basis, you know, how much you need to generate what kind of portfolio you need to generate the pre tax spending power to fuel your lifestyle, these rates. And I think that the answer is I was delighted to find that it's not as big a deal the tax impact as I had initially feared for someone who's looking for maybe twice as much as what the most the average person searching for fire wants. I think that's the answer to a lot of these planning scenarios here. Mark, what are you thinking about for your personal allocations in your life?

[Mark Livingstone]

Again, back to flexibility is really where I'd like to be. So I try to have as many different levers that I can pull so that based upon what the environment's like in the future, I will be able to have that flexibility to be able to move about over the last set of years getting a little bit more into real estate. So I've been allocating a little bit more into single family rentals and syndications to have that as an option to play with. But also looking at, you know, making sure I'm balancing my rock and my traditional accounts and even building up my after tax and thinking about if I was to actually retire early before I'm going to withdraw from my traditional or my Roths, how would I best do that? And so, yeah, definitely continuing to keep an eye on making sure I have at least kind of irons in each fire so I can leverage and use that.

[Mindy Jensen]

Mark, I let Scott take almost all of the questions today simply because he's going to be the one that's asking much better questions about this. But I have to say you have extended explained this for those of us who don't have brains like Scott's so easily. And the illustrations that you first shared in the slideshow are so helpful to just drive this point home. Your taxes after fire are not nearly the huge burden that you might be thinking they are.

[Scott Trench]

Yeah, I, I think that's the headline of the show. Taxes really aren't a major factor in planning for retirement for early retirement. That's a remarkable headline. I love it. And that's what you've proved out here, I think pretty well, with these documents and really powerful resources.

[Mark Livingstone]

Thank you. Yes, I definitely agree. It's been eye opening and I encourage folks to really start to play with these types of things and build data models if they can. If they can't, other options is you can leverage these AI tools that are out there as well, the ChatGPTs and copilots of the world. You can actually plug in situations and ask them to calculate and hey, show me what this would look like in these questions that I have. I use these on a very frequent basis. You have to verify and validate some of the information that comes out. But they've been very helpful tools if you're not very spreadsheet or data oriented.

[Scott Trench]

And Mark, one last question here. What do you do professionally? Again? Could you remind us?

[Mark Livingstone]

Sure. I work in IT. I manage teams and budgets at a.

[Scott Trench]

Fortune 500 company and it involves building spreadsheets and creating PowerPoint presentations.

[Mark Livingstone]

Lots of PowerPoints, lots of spreadsheets and. Yes.

[Scott Trench]

All right, well, I can tell that wasn't a big stretch for me on this one. On it. So thank you for applying those incredible talents to this exercise here for the benefit of hopefully a lot of people.

[Mark Livingstone]

My pleasure.

[Mindy Jensen]

Yeah, I laughed because that was hilarious. Of course you do. Of course you do. But, Mark, thank you so much for reaching out to us. This was such a great episode. This was so helpful. I'm a visual learner. It is so helpful to see this on the screen and follow along and be like, oh, that's what that means. This is wonderful. Thank you so much for your time today and we'll talk to you soon.

[Mark Livingstone]

Thank you so much.

[Mindy Jensen]

Holy cats, Scott, that was such a great episode. I am so thankful that Mark sat down and took the time to type all this out, model this all out for us. It is so helpful. Even if you just go to the slides and look at slide number three, the effective tax rate on $350,000 is 18% when you're married, filing jointly. And these are 2024 tax rates, but they didn't change that much for 2025. 18% on $350,000. And it's just, I know this, I know that your tax rate of 10% is only applied to this amount. And then your tax, the tax bracket of 12% is only applied to this amount and 22 is this amount. But you forget that when you are, when you're thinking, you know, Oh, I made $100,000 last year and that is taxed at 12%. So I made 88,000 last year or I took home 88,000. And that's not actually true.

[Scott Trench]

Do this all day long, 600 episodes and you just like that basic fact of life needs to be restated to hit home on effective tax, tax rates. I think he did a great job with that. And then I think that with all the other levers in there, there's a lot of ways to pay no tax in a lot of years. I think in an early retirement scenario that folks should have been able to clearly put together. And he's absolutely right. To have as much wealth across a variety of these different asset classes as possible to be able to take advantage of those dynamics. So this is a really powerful planning tool. And I think again, the big headline is tax consideration does not change the basis that one needs by so much that it fundamentally changes the equation about how to achieve fire if you're looking for that next level of spending instead. You know, a lot of people use the 60 or 80 thousand dollars a year mark. And I think a good, about half our audience probably wants more than that. The good news is, the bad news is you got to accumulate millions more in order to do that, just to satisfy the 4% rule. The good news is that you won't have to. It won't geometrically compound the way that you might have feared before this episode. You will simply, you'll, you'll be in a slightly higher marginal tax bracket. You pay a slightly higher effective tax rate. Good grief. I just, you just did the show on it and I still got it wrong. And the verbiage, it's a lot of.

[Mindy Jensen]

Stuff thrown at you. I just can't thank Mark enough for taking the time to share this because it is, I mean, it's illustrated right there. There's colors, there's numbers, there's like actual data that you can see and understand in multiple different ways laid out so that you can choose your own adventure with that one. Choose the, the method that speaks to you the most. And like you said, Scott, we are going to include these tax tools we're calling the Money tax [e-mail] moneytax tools. But if you type in Money Tax Tool, it'll take you there too.

[Scott Trench]

Yeah. And then if you get into the 50 million dollar net worth range and are trying, are dealing with the tax consoles of that, please send me a link to your podcast because I will be subscribing there.

[Mark Livingstone]

All right.

[Scott Trench]

With that, should we get out of here, Mindy?

[Mindy Jensen]

We should. That wraps up this fantastic tax episode of the Bigger Pockets Money podcast. He is Scott Trench. I am Mindy Jensen, saying goodbye to all of my now future tax nerds.