Podcast Summary: BiggerPockets Money Podcast, Ep. "Why Early Retirement Means Paying Less in Taxes"

Date: September 23, 2025
Hosts: Mindy Jensen & Scott Trench
Guests: Sean Mullaney & Cody Garrett
Topic: Tax planning advantages and strategies for early retirement, and why many fears about high retirement taxes are unfounded.

Episode Overview

This episode brings together tax experts Sean Mullaney and Cody Garrett to discuss why early retirement can actually lower your tax bill instead of increasing it—contrary to common fears. They dive into the realities of tax rates before and after retirement, provide practical tax planning strategies, and address misconceptions that discourage people from achieving early financial independence.

Key Discussion Points & Insights

1. Public Misconceptions About Retirement Taxes ([00:54])

• Prevalent Fear: Many believe leaving work raises their tax burden, fueled by terms like “widow’s tax trap” and “required minimum distributions.”
• Sean: “Most people are going to pay less tax in retirement during their working years...when you don't try to earn income, you tend to pay less tax.” ([01:02])

2. Income & Spending Dynamics Shift in Retirement ([02:22])

• Cody: When working, income determines your tax rate regardless of spending. In retirement, “your spending is a brake on your income”—you typically withdraw only what you plan to spend.
• Focus should be on managing sources of taxable income, not just tax rates.

3. Tax Rates in Early vs. Later Retirement ([04:10])

• Sean explains: Early retirees usually rely on long-term capital gains and qualified dividends; much of this income can be taxed at 0% for married couples up to ~$97,000 (in 2025).
• Taxable Income Example: Selling $150,000 of mutual funds with $100,000 basis = $50,000 taxable income ([04:10]).
• In later retirement, withdrawals from traditional accounts benefit from large standard deductions and low starting tax brackets, making significant tax rises politically and practically unlikely.

4. Tax Bracket Dynamics: Contribution vs. Withdrawal ([07:43])

• Cody: While working, you deduct earnings at your highest (marginal) rate. In retirement, you gradually fill lower tax brackets from the bottom up, meaning dollar-for-dollar, most retirees pay a lower effective tax rate than during their careers.

  “Your effective tax rate for most early retirees is going to be like half or less than the tax rate that you deferred those traditional retirement account contributions.” ([08:46])

5. Types & Sources of Retirement Income ([12:09])

• Ordinary Income: W-2 jobs, self-employment, IRA withdrawals (potential 10% penalty before age 59½, unless exceptions apply).
• Long-Term Capital Gains: Taxed favorably vs. ordinary income—relevant for most early retirees with taxable brokerage accounts.
• Asset Location: Bonds in traditional retirement plans, equities in taxable and Roth accounts for optimizing tax impact.

6. Calculating Effective Tax Rate ([15:23])

• Use online calculators (e.g., DinkyTown) to input income sources, divide total tax owed by total income to find the true “lived” tax rate.
• Cody: "For most early retirees it's very rare for that number ... to be over ten percent." ([16:49])

7. Political & Structural Realities of Tax Law ([17:54])

• Sean: Retiree-heavy electorate makes sweeping tax hikes on retirement income unlikely.

• Preferential treatment of capital gains and dividends is common internationally and built into current policy logic.

• U.S. government can and does run deficits rather than relying solely on tax increases.

  “It's hard to envision ... politicians ... being eager to increase taxes on those at or near retirement.” ([17:54])

8. Tax Optimization Mindset: “Pay Tax When You Pay Less Tax” ([20:54])

• Instead of worrying about rising tax rates, focus on deferring taxes during high-income years and paying when your rate is lower in retirement.
• Avoid making decisions out of fear—analyze both the numbers and your emotions.

9. Recommended Order of Operations for Accumulation ([24:15])

• 1. Small emergency reserve
• 2. High-interest debt payoff
• 3. Employer match (401(k))
• 4. Emergency fund
• 5. HSA (Health Savings Account)
• 6. 401(k) (traditional; Roth optional based on situation)
• 7. Roth IRA
• 8. 529 plan (optional—college savings)
• 9. After-tax/taxable brokerage accounts
• 10. Low-interest debt payoff

  Notable Quote:

  “You are a very brave man, you put fully fund 401(k) ahead of a Roth IRA ... I commend you for that because I agree with it.” —Sean ([27:23])

• Nuances: Prioritize flexibility and risk management (emergency fund, debt) before full tax optimization.

10. The Roth vs. Traditional (401k) Debate ([28:27])

• Nuanced takes:
  • Roth is not necessarily "now or never"; you can convert later during low-income years (e.g., early retirement, business startup).
  • Roth becomes particularly attractive in years of “income disruption,” such as sabbaticals, career changes, or partial retirements.
  • Withdrawals up to the standard deduction from traditional IRAs can be tax-free (“hidden Roth” effect); qualified charitable distributions also offer tax escapes.

11. Bridge Strategies and Access to Retirement Funds ([40:34])

• “Middle class trap” - Perceived difficulty of accessing retirement funds before age 59½ is overblown; plenty of strategies (72(t) distributions, Roth conversion ladder, Rule of 55, partial distributions for certain government plans).
• Bridges usually require only months, not years, of cash for transition.
• Practical Tip: Set up IRAs at the same institution as your prior plan for faster rollovers.

12. Special Cases: Starting Over or Late to Saving ([47:10])

• For those starting at zero (younger or older): Prioritize building cash/liquidity and address today’s tax liability with traditional accounts.
• For entrepreneurs: Flexibility and liquidity may justify delaying retirement account contributions initially.
• Intentionality is key; deviation from “optimal” path is fine if it fits specific needs/plans.

Notable Quotes & Memorable Moments

• Sean (on misconception):

  “There’s this inchoate fear out there that...taxes are going up and I'm paying a lot of tax in retirement...” ([01:02])

• Cody (impact of asset location):

  “...right now is being very favorable to us...we have the protection of traditional retirement accounts for our interest-bearing, our bonds, and then we also have Roth accounts...” ([13:14])

• Sean (on tax hikes):

  “...the tax hikes that would be needed to get us to a place where that's not a favorable trade off for most listeners...the political environment isn’t there today and I don’t think it’s likely to be there in the next decade.” ([06:45])

• Mindy (on tax perspective):

  “There are people who say that taxation is theft and I think that I like having streets and roads...so ten percent, I'm okay with the ten percent.” ([16:49])

• Sean (on “hidden Roth”):

  “Why do we need to convert into a Roth IRA if we can withdraw from a traditional IRA tax free against the standard deduction...” ([29:27])

• Cody (on intentionality):

  “It’s intentionally saying no to tax optimization versus not understanding it exists.” ([50:33])

Timestamps for Important Segments

• Misconceptions about retirement taxes: [01:02]
• Income vs. spending and tax brackets: [02:22], [07:43]
• Capital gain taxation mechanics: [04:10], [13:14]
• Effective tax rate calculation steps: [15:23], [16:49]
• Order of operations breakdown: [24:15], [26:00]
• Roth vs. traditional 401(k) debate: [27:23], [28:27], [32:21]
• Bridge strategy and early access mechanics: [41:39], [43:43], [45:54]
• Case study: Flexibility vs. tax optimization: [47:10], [50:33]
• Resources & book info: [53:05], [53:24]

Further Resources

• Book: Tax Planning To and Through Early Retirement by Sean Mullaney & Cody Garrett (Amazon / measuretwicemoney.com/book)
• Sean’s blog: fitaxguy.com
• Cody: Measure Twice Money

Final Thoughts

This episode debunks popular tax fears around early retirement, showing that the majority of early retirees pay lower taxes—often much lower—than during their working years. The hosts and guests stress prioritizing tax flexibility, using order of operations suited to individual goals, and making intentional, informed decisions rather than blindly copying others. They promise a follow-up episode focused on the decumulation phase and withdrawal strategies.

For listeners: If you’re planning for early retirement—or just aiming for financial independence—don’t let tax fears hold you back. Understand your income sources, leverage advantageous tax brackets, and remember: You don’t need to fear the IRS if you plan ahead!