US taxes in the withdrawal phase

Start with the punchline, because it runs against everyone's intuition. A household living on $50,000 or $60,000 a year out of a well-built portfolio often owes no federal income tax at all, or a couple of percent. There is no scheme in that, and no aggressive reading of anything. It falls out of two plain facts: the system taxes the gain inside a sale rather than the sale, and long-term gains have a bracket whose bottom rate is zero.

That number is worth understanding rather than believing. Take it on faith and every year that breaks the pattern will catch you out: the year you sell one big position, the year the traditional accounts start paying, the year a health insurance credit disappears. The mechanism is the part that generalizes, so this article walks it.

One warning belongs at the top. Every mechanism below was read against its primary source in 2026, and mechanisms of this kind change slowly. The dollar figures attached to them do not: brackets, bands and deductions are indexed and move every year, and the few printed here carry a 2026 tag for that reason. Read the current figures on irs.gov before you act, and make that reading part of the annual review (The annual review: the retiree's checklist).

🔑 A withdrawal is not income

Selling $10,000 of a fund to pay for the year does not create $10,000 of taxable anything. Part of that money is capital you already paid tax on before you invested it, and it comes back to you untaxed. Only the gain riding along inside the sale is taxed at all.

The share that is gain is the number that matters. Call it the embedded gain fraction. Put $100,000 in and let it grow to $160,000, and the account is 37.5% gain: sell $10,000 and you realize $3,750 of gain, while $6,250 is your own basis coming home.

That fraction starts near zero and climbs with the years, because the gain compounds and the basis does not. Twenty years of 7% turns a lot bought at 100 into one worth 387, and 74% of every dollar you sell out of it is gain. This is the friction that How much you need asks you to write down as an assumption: the share of a gross withdrawal that never reaches your bank account. It grows on its own, which is exactly why the plan revisits it once a year rather than setting it once.

Two ladders, side by side§

The United States runs two rate schedules at the same time, and almost everything about the withdrawal phase follows from how they fit together.

The ordinary income ladder climbs from 10% to 37%. It taxes wages, interest, non-qualified dividends, short-term capital gains, and every dollar that comes out of a traditional 401(k) or a traditional IRA.

The preferential ladder has three rungs, 0%, 15% and 20%, and it taxes net long-term capital gain and qualified dividends (Topic 409). Long-term means held more than one year: "if you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term."

The two ladders are not parallel universes. They stack, and the order of the stack is what makes the 0% band usable. Ordinary income fills the bottom of the scale first; long-term gains and qualified dividends sit on top of it (section 1(h) of the Code). The standard deduction comes off before any of it. So the room available at 0% is not a separate allowance: it is whatever is left of the band once your ordinary taxable income has taken its share.

For a couple filing jointly in 2026, the standard deduction is $32,200 and the 0% rate runs up to $98,900 of taxable income (Rev. Proc. 2025-32). A couple with no ordinary income at all can therefore realize roughly $131,000 of long-term gain in a single year and owe no federal income tax on it. That is not a loophole. It is the printed schedule, applied to someone whose income happens to be the right shape.

Dividends split in two. A dividend is qualified, and taxed on the preferential ladder, when it comes from a US corporation or a qualified foreign one and you held the shares "for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date" (Publication 550). Broad US and developed-market stock funds distribute mostly qualified dividends. Interest from bond funds and money market funds, and most of what a REIT pays out, is ordinary income and climbs the other ladder.

Short-term gains are ordinary income, full stop, which is one more reason the withdrawal phase sells old shares rather than new ones.

And one surtax sits above both. The net investment income tax adds 3.8% on the lesser of your net investment income and the amount by which your modified adjusted gross income exceeds $250,000 for a couple filing jointly, or $200,000 otherwise (Topic 559). Those thresholds are written into the statute with no inflation adjustment at all (26 U.S.C. 1411), so they quietly catch more households every decade.

🧮 The friction, computed

Rachel and Tom are 52, file jointly, and draw $56,000 a year. No wages, no pension yet, no Social Security. All 2026 figures.

From the taxable account. The portfolio pays out $11,000 of dividends and interest during the year, $9,500 of it qualified. They sell $45,000 of shares to raise the rest. Those lots are 40% gain, so the sale realizes $18,000 of long-term gain and returns $27,000 of basis.

Their adjusted gross income is $11,000 plus $18,000, or $29,000. The standard deduction of $32,200 is larger than that, so taxable income is zero and so is the federal income tax. Their modified AGI is nowhere near $250,000, so no surtax either. Effective federal rate on a $56,000 draw: zero. The friction is zero.

The same draw twenty years later. The lots are now 75% gain. The same $45,000 sale realizes $33,750, and AGI comes to $44,750. Taxable income is $12,550, all of it long-term gain and qualified dividends, and it sits far below the $98,900 top of the 0% band. Still zero. The friction has not moved, because the band was never close to full.

The same draw, from a traditional 401(k). Now every dollar is ordinary income. AGI is $56,000, taxable income is $23,800, and the whole of it falls in the 10% bracket: $2,380 of tax, an effective rate of about 4%. To actually spend $56,000 they gross the draw up to roughly $58,700.

Same household, same portfolio, same lifestyle, two different bills. What changed is which tap the money left through (US accounts, and the order you drain them). And note the shape of the second case: even there the rate is modest, because the standard deduction erased the first $32,200 outright. A retiree who takes nothing at all from the traditional account is leaving that free slice of bracket unused.

The tools of the phase§

Gain harvesting. In a year with room left in the 0% band, sell appreciated shares, realize the gain at nothing, and buy the same fund back the same day. Your basis resets upward, so every future sale of those shares shows less gain. Nothing in the wash sale rule stops the repurchase: section 1091 speaks only of "any loss claimed to have been sustained", and a gain is not a loss. Done every quiet year, this quietly drains the embedded gain fraction that would otherwise compound into a real bill.

Loss harvesting. In a red year the trade runs the other way. Sell what is underwater, book the loss, and buy something similar but not substantially identical so the market exposure never leaves the table. Losses offset gains without limit, then up to $3,000 of ordinary income a year, with the remainder carried forward for good (Riding out a bear market in retirement: the playbook). A bear market is the one thing that hands you a tax asset.

The two operations never touch the same lot, since a lot is either above its basis or below it, and that is why a portfolio bought over many years is worth more than the sum of its parts: in almost any year, some lots are harvestable one way and some the other.

Specific identification is what makes any of this available. Tell the broker which tax lots to sell, at the time you place the order, and you choose the gain the sale shows. Say nothing and the default is first in, first out, which sells your oldest and most appreciated shares. Setting the account's cost basis method once, and checking it, is a five-minute job with a payoff measured in decades (Building it with US-listed ETFs: the retiree's shopping list).

Roth conversions want the same room. The bracket space in a low year is a single budget, and two very different uses compete for it. A dollar of conversion is ordinary income: it fills the bottom of the ladder and pushes your long-term gains up the stack, straight toward the 15% edge. A dollar of harvested gain fills the top of the band and does nothing to your ordinary ladder. You can spend the room on tax-free basis today or on cheap Roth space for later, and not on both. Which one pays better depends on how big the traditional balance is, how many quiet years are left before pensions start, and how much of the taxable account is gain. There is no general answer, only an arithmetic to run each year with your own numbers.

Required minimum distributions set the deadline. From the applicable age, 73 today and 75 for anyone who reaches 74 after 2032, the pre-tax accounts must pay out every year, as ordinary income, whether or not you want the money. That forced income lands on top of Social Security, and it pushes whatever long-term gains you realize that year up the stack. It is the reason the quiet years before it matter: they are the only time the ordinary ladder is empty.

And before Medicare, one more rate hides in the calculation. Health insurance bought on the marketplace is subsidized on a sliding scale, and as things stand for 2026 the credit stops dead above 400% of the federal poverty level rather than tapering. Every dollar of realized gain counts toward the income that decides it, so a household sitting near that line faces a marginal cost on realized income that has nothing to do with the tax schedule and can dwarf it: cross by a dollar and the entire year's credit is gone. That topic has its own article (US health coverage and Social Security: the two ends of the gap); what belongs here is that any plan to fill brackets has to be run against the insurance line too, in the same sitting.

And then there are the states§

Federal is only part of the bill. A handful of states levy no individual income tax at all, and a retiree living in one of them stops reading after the federal calculation. Most of the rest tax capital gains as ordinary income, with no preferential rate and no 0% band, which means the same sale that costs nothing federally can still cost several percent at home. One rule cuts the other way everywhere: interest on Treasury securities is exempt from state and local taxation by federal statute (31 U.S.C. 3124), so the cash and short-bond sleeve of a portfolio is worth holding in the form that qualifies. Beyond that, no table would survive its own printing, and state rules on residency, on retirement income and on where a gain is sourced are worth an hour with your own state's revenue department rather than a paragraph here.

⚠ Four ways the zero turns into a number

The 0% band is a band, not a status. It taxes the dollars inside it at zero, not you. Sell one oversized position, a concentrated stock or a rental property, and the gain above the band is taxed at 15%, the part above $250,000 of modified AGI picks up the 3.8% surtax, and the same income can cost you the whole health insurance credit in the same stroke. A large sale is often worth splitting across two calendar years for that reason alone.
Distributions you never asked for. A mutual fund that realizes gains inside the portfolio distributes them to you in December, taxable, whether or not you sold anything and even in a year your own position is down. ETFs largely avoid this through in-kind creation and redemption, which is one of the quiet reasons they dominate a taxable account (Building it with US-listed ETFs: the retiree's shopping list).
The wash sale, when harvesting losses. Buy a substantially identical security within 30 days before or after the sale and the loss is disallowed. The window spans all your accounts, and a repurchase inside your IRA is the expensive version: the loss is disallowed and the IRA's basis is not increased either, so it is gone for good (Rev. Rul. 2008-5).
The oldest lots may be worth never selling. Property inherited at death takes a basis equal to "the FMV of the property at the date of the individual's death" (Publication 551). A lot that is 85% gain, held for thirty years, carries a bill that simply evaporates if it is still there at the end. That is an argument for spending from newer lots and from the traditional accounts first, not an argument for hoarding, but it belongs in the order of sales.

The essentials§

A withdrawal is not income. Only the gain inside a sale is taxed, and the embedded gain fraction, low at first and rising every year, is the friction the plan grosses its spending up by (How much you need).
Two ladders run at once: ordinary income from 10% to 37%, and 0/15/20 for long-term gains and qualified dividends. Gains stack on top of ordinary income after the standard deduction, so the room at 0% is whatever ordinary income leaves.
A modest draw from a taxable account is often taxed at nothing, and the same draw from a traditional account is taxed as ordinary income and still lands in the low single digits. Which account the dollar leaves decides its tax (US accounts, and the order you drain them).
The tools of the phase are gain harvesting in green years, loss harvesting in red ones, specific identification to control both, and Roth conversions competing for the same bracket space. Required minimum distributions from 73, and 75 for those reaching 74 after 2032, close the window.
Three things turn a zero into a number: one oversized sale, a state that taxes gains as ordinary income, and the health insurance credit that vanishes above its income line before Medicare (US health coverage and Social Security: the two ends of the gap).

Going further§

IRS Topic 409, Capital gains and losses: the holding period, the 0/15/20 rates with the current year's thresholds, the collectibles and section 1250 rates, and the $3,000 loss limit against ordinary income.
IRS Publication 550, Investment Income and Expenses: qualified dividends and their holding period, wash sales, identifying which shares you sold, and the treatment of fund distributions.
IRS Topic 559 for the 3.8% net investment income tax, and Publication 590-B for what comes out of the retirement accounts, including required minimum distributions.
In this book: US accounts, and the order you drain them (which tap to open, and in what order), US health coverage and Social Security: the two ends of the gap (the insurance credit and the income that drives it), Building it with US-listed ETFs: the retiree's shopping list (cost basis method, fund structure, account placement), Riding out a bear market in retirement: the playbook (harvesting a loss while the market is down), The annual review: the retiree's checklist (the yearly tax block, where the friction gets re-estimated).
Every dollar figure in this article carries a 2026 tag because every one of them is indexed and moves. Read the current numbers before you act on any of it.