This article originally appeared in Business Insider on June 22, 2024

Jeremy Schneider retired in 2016 at the age of 36. He sold a website he built that advertised rental property for $2 million, took the cash, and invested it in a brokerage account.

Since he retired before age 59, he wouldn’t have had access to any retirement fund he contributed to, such as a 401(k), without paying penalties for early withdrawals. So, having a regular brokerage came in handy when he had to live off of it between 2017 and 2021, until he began selling online personal finance courses.

Ditching a paycheck and living off of what he saved and invested in those years taught him that there are smart ways of making what you already have go further. Throughout the years, he has experimented with various funds to determine which could have had higher returns over time. From this, he learned that investing in one target date fund would have returned $680,000 more than the nine he held. He also discovered that keeping a withdrawal rate below 2% allows his investments to accumulate for life.

Schneider hasn’t stayed retired; his passion for learning about personal finance and helping his friends and family with their money goals led him to start a social media page to reach more people. This eventually grew into paid courses and a website that provides flat-fee financial advisors.

One of the most common questions he gets asked about is how someone could retire early. To him, the best answer to this question is having cash-flowing assets you could access before age 59 and a half. If you allocate most of your income to a 401(k) or an IRA, you’re probably not setting yourself up to ditch the paycheck anytime soon.

In this instance, Schneider recommends considering a regular brokerage account. The common misconception is that this offers no tax advantages. But, in some cases, you could withdraw from the account and incur zero capital gains tax if you remain within the IRS’s specified income brackets, he noted.

Zero Capital Gains

According to the IRS, you can see 0% capital gains tax on long-term investments — those held for at least one year — and qualified dividends if your taxable income is less than or equal to:

• $47,025 for single people and married couples filing separately
• $94,050 for married couples filing jointly or for a qualifying surviving spouse
• $63,000 for heads of households

At first glance, for a single filer, $47,025 may not seem like a realistic number to live off of. However, Howard Hook, CFP®, CPA, CAP®, says your actual income could be higher once you factor in deductions.

According to the IRS, the standard deduction rate for 2024 for a single filer is $14,600. If filing jointly as a married couple or a surviving spouse, the deduction is $29,200. And as the head of a household, you can deduct $21,900. This means that if you’re filing jointly, your income can be as much as $123,250 in 2024 — $29,200 income in tax-free income thanks to the standard deduction plus $94,050 in qualified investment income — and still pay 0% capital gains tax if you have no other income source, Hook noted.

Hook added that you can increase that number if you take an itemized deduction from things such as mortgage interest, property taxes, charitable contributions, and state and local taxes.

If you want to take it further, you can become very detailed about which securities you sell. Hook points to the first in, first out (FIFO) method, which means securities purchased earlier that likely have the most capital gains are sold. Normally, this would result in higher capital gains, but he noted that in a year where you have no additional income, selling assets with the highest profits could be advantageous. If your brokerage account allows you to sell by lots, you can select which shares to sell based on the capital gains they have accumulated, he added.

The other option is the “last-in, first-out” (LIFO) method, in which you would sell the most recently purchased securities. This option may mean your capital gains portion is lower and the principal is higher. This would allow you to withdraw more while keeping your capital gains low. It is another way to keep your taxable income below the bracket if you need more money in a specific year, assuming the securities were held for more than 365 days, classifying them as long-term capital gains.

But if you expect to have other sources of income in the future, LIFO may not be ideal, Hook said. Once you start getting Social Security, IRA payouts, or earned income, it’ll increase your taxable income and may put you over the threshold or reduce the amount you have left to take advantage of untaxed capital gains, Hook noted.

Hook added that if you have capital losses you don’t expect to recover, consider selling them in a year where you may end up with gains that would put you above the threshold. The losses could be used to offset that.

In Schneider’s experience, it’s very common for people to think they’re going to retire but later find additional hobbies that earn them money.

“Retirement is a weird word because people associate it with sitting on a rocking chair with a blanket over your legs,” Schneider said. “I really consider it more like financial independence, where I don’t need to work for money anymore. And so I do exactly what I want with my time, which is great. But for me, that’s actually turned into starting another business.”

Hook notes that these deductions are only applicable to federal income tax. State income tax rates aren’t impacted and will vary depending on where you live.