How a $534K Income Can Still Leave You in the 12% Ordinary MFJ Tax Bracket
Episode 45
How a $534K Income Can Still Leave You in the 12% Ordinary MFJ Tax Bracket
Published on July 29th, 2026
Episode Summary
Episode 45 of Retirement Tax Matters walks through a live tax planning case study for a married couple reporting $534,200 in total Adjusted Gross Income who remain inside the 12% ordinary marginal tax bracket. Garrett Crawford, CFP® and Adam Reed demonstrate how a household with $100,000 in fixed income from Social Security and pensions alongside $400,000 in realized long-term capital gains keeps their ordinary taxable base at lower rates. The episode illustrates how important managing capital gains inside taxable brokerage accounts is for distribution planning. By utilizing tax-return-driven financial planning before the December 31st deadline, high-net-worth retirees can evaluate multi-year Roth conversion windows up through the 22% or 24% ordinary tax brackets.
Key Tax Planning Questions
Question 1: How much taxes will I owe on $400K capital gain?
Whether you are selling real estate or liquidating stock positions from a taxable brokerage account, calculating taxes on capital gains depends on the type of asset sold, how long you held the position, your marital status, and the other income sources reported on your tax return. Assuming this $400,000 gain comes from an investment account, your first step is determining your holding period.
If you held the security for longer than one year, the sale usually qualifies as a long-term capital gain. Many retirees fear that realizing a $400,000 gain will automatically push their entire return into top-tier ordinary tax brackets. Fortunately, the federal tax code evaluates capital gains under a separate rate schedule rather than combining all income as ordinary income taxed at higher rates.
To understand your actual liability, you have to separate ordinary income brackets from long-term capital gains brackets. Ordinary income (pensions, Social Security, interest, and Traditional IRA distributions, etc.) fills standard progressive brackets ranging from 10% to 37%. For a married couple filing jointly in 2026, ordinary income is taxed at…
10% up to $24,800
12% up to $100,800
22% up to $211,400
24% up to $403,550
32% up to $512,450
35% up to $768,700
37% for income above $768,700.
Long-term capital gains do not fill those ordinary income brackets. Instead, capital gains stack on top of your ordinary income base. For married joint filers in 2026, preferential long-term capital gains rates are 0% for taxable income up to $98,900, 15% for income between $98,901 and $613,700, and 20% for taxable income exceeding $613,701.
For example, suppose a married couple reports $100,000 in ordinary baseline income from pensions and pre-tax IRA withdrawals. That ordinary base is taxed at lower ordinary rates (10% and 12%). Stacking a $400,000 long-term capital gain on top brings their total taxable income to roughly $500,000. Because that total sits below the $613,700 ceiling, the $400,000 capital gain is taxed at the 15% federal capital gains rate rather than pushing their ordinary brackets higher.
(Note: Depending on your total Modified Adjusted Gross Income, realizing large capital gains may also trigger the 3.8% Net Investment Income Tax if MAGI exceeds $250,000 for joint filers, or impact Medicare IRMAA tiers.)
Question 2: BJ and Annie are both 65 years old and married. BJ is already retired and Annie is retiring this year. They have a $3M IRA and a $3M Brokerage Account of which $1M is highly appreciated stock with a cost basis of $100k. BJ and Annie are wondering if they should convert some of their $3M IRA to Roth and are wondering how to leverage their Brokerage account to do so.
The taxable brokerage account is one of the most flexible tax planning variables in retirement. While it introduces more reporting complexity than a traditional IRA (you might notice those 30-60 page tax form envelopes you get mailed to your house every spring!) they can provide a lot of control over your taxable income in retirement compared to only having pre-tax IRAs.
In BJ and Annie’s scenario, a few key elements stand out for a household with $6 million in total portfolio assets:
First, if their ongoing lifestyle spending is modest relative to their total portfolio, their brokerage account offers a distinct bridge for executing multi-year Roth conversions. Because $2 million of their $3 million brokerage account sits at a higher cost basis, they can distribute cash for living expenses with taxes triggered being less painful. For instance, withdrawing $200,000 in cash might only realize $50,000 of taxable long-term capital gains. Combined with $100,000 in baseline pension and Social Security income, their taxable ordinary income base remains low during their first full years of retirement.
Second, if BJ and Annie have charitable intentions, the $1 million of highly appreciated stock ($100,000 cost basis) presents an ideal giving vehicle. You don’t want to convert all your IRA money to Roth if you want to give some of it away! Contributing those appreciated shares directly to a charity or a Donor-Advised Fund (DAF) can neutralize the embedded capital gains tax while generating a deduction at full market value (subject to the IRS AGI limits for what kind of property you donate — 30% commonly for appreciated stock). Because Qualified Charitable Distributions from an IRA are unavailable until age 70½, gifting appreciated brokerage stock is the primary lever available at age 65.
Third, this temporary window of lower ordinary income allows them to systematically convert pre-tax IRA funds into a Roth IRA. They could fill the 24% ordinary income tax bracket up to the Medicare IRMAA limit (~$342k in 2026) inside that 24% tax bracket. Each household will be a little different on what is a comfortable amount to convert that aligns with their family goals.
Full Episode Transcript
Adam: Good morning, and welcome to Retirement Tax Matters. I'm Adam Reed. This is Garrett Crawford, our resident CFP® professional, and this morning it feels a little bit like back to the basics. We do a lot of conversations about Roth conversions, doing year-end tax planning, and income projections throughout the year. Our last few episodes have maybe been a little more theory with our one-year anniversary of posting things. So, fun stuff for us and maybe fun for the people that follow along all the time, but the people just searching online were like, "I don't want this stuff." So a little more back to the basics today.
Garrett: Yeah, I've got my laptop out ready, so I'm ready to go. Let's go.
Adam: I came in this morning, and it was like steam coming out from under the door. Garrett had Holistiplan pulled up and was like, "I'm ready." So today, I think we're going to tackle a topic that maybe we've seen some discourse online about, and we've actually had some people we've interacted with talk about it. But learning about it, maybe the title of this is how you can have a $500,000 income and still be in the 12% bracket.
Garrett: Say what?
Adam: What? I can't believe it. And maybe some people watching or listening along have an idea of where this is going. We're going to be using Holistiplan. We did this a few weeks ago, screen sharing and showing some different things. So if you're on your commute to work and you're like, "I live for Wednesday mornings listening to Adam and Garrett on my way to work," it may not be the best week to listen. Somebody told us that they paused it, saved it, and came back that Sunday and had their cup of coffee and listened to us, which is so weird to think about compared to a year ago—that some stranger across the world would do that. But it was cool, and it was encouraging. So maybe follow their lead; YouTube or Apple is going to be your best option this week with the video.
So with that being said, I guess one last thing is check out our year-end tax planning checklist. A lot of what we're about to do we put together because this is what we're doing for clients. This is how we're helping them think through and navigate their income projections, the tax brackets they're going to be in, and what financial plays may be on the table for them. So I think if you appreciate this video, you're going to love the content on our website. Check that out in the link below. There's a free download there. You throw in your email address, and we send you our year-end tax planning checklist. Definitely check that out.
So Garrett, I'm going to give you the keys to the car here, and tell us a little bit about what we're doing today. I guess just throw us into Holistiplan and see what happens.
Garrett: Yeah. So as Adam mentioned, this is not a phrase that we see thrown around the internet. It's something that Adam and I came up with, but what we're about to get into is what we call tax return-driven financial planning. It's an awareness of what's happening on your tax return, and that's got to be looked at during the year so that we can guess what your income is going to be by December 31st so that you can make some informed financial planning in your retirement.
The people that we're talking to today are kind of our niche: high-net-worth retirees between $2 million and $8 million that understand this idea that proactive tax planning is how they're going to make a big difference in the amount of money that they have during retirement and at the end of their life for beneficiaries. As I work with people, this is something that I get questions about a lot, and it's even misunderstandings. I know even as I work with advisors in our industry that aren't used to tax planning, this topic comes up because we're preconditioned to think that there's one single tax bracket. But there are a couple of different tax brackets based on the different types of income that you have.
I think it's really important when it comes to tax planning that we understand the difference between an ordinary income tax bracket and a preferential long-term capital gain and qualified dividend tax bracket, and how income pops up on different ones so that your income might not be what you expect it to be. If you understand the difference between those two tax brackets, you're going to easily understand that you can have a really high income and you can not pay a lot of federal taxes.
That's what we're going to do today. I'm just going to set up briefly the case study scenario. This is a made-up couple, Tim and Ann. Again, they are married, filing jointly. They are 66 years old, and I'm going to switch us over to our tax planning software.
Adam: Tim and Ann must be doing something funky with the IRS because their tax return looked a lot different a few weeks ago when we met with them.
Garrett: Tim and Ann are our prototypical couple, here again in a different scenario. In this case, I don't have a specific client profile in mind; it's just somewhere in the $2 million to $8 million range. A lot of it is in pre-tax money. They've got a brokerage account where probably $1 million or $2 million is something that they put money in and invest. But what I'm going to walk through here today is Holistiplan tax planning software, and I'm creating a scenario here where I can adjust these numbers on the fly to help me evaluate Roth conversions, IRMAA, and their taxable income for the year.
I've got some basics in here. For Tim and Ann, we've got $10,000 of taxable interest. We're going to assume that this is a high-yield savings account at the bank or a CD where it's paying taxable interest at ordinary income tax rates. We're also going to assume that they have $37,000 of total dividends from their brokerage account. It could be a high dividend-paying brokerage account or a low dividend-paying one, but to keep things simple today, we're going to keep the qualified dividends at zero. In reality, they might have qualified dividends as well. Then we're also going to assume that Tim and Ann have $28,000 of total pensions, so I think that can be common out there. But then we're also assuming, because Tim and Ann are both age 66, they're at their full retirement age and they're going to be able to take their Social Security benefits. Between the two of them, we're estimating $72,000.
Generally speaking here, Tim and Ann, if we add up Social Security and their pensions, that's going to be $100,000 of income, which I think is very realistic for the type of person that we're seeing and talking to. Then on top of that, there's what we sometimes call phantom income—it's like this interest that stays at the bank or the dividends that are paying and being reinvested back in your brokerage account. But I would say this couple here would have a baseline standard of living of about $100,000 that they're living on.
So the question or the topic of today is a $500,000 income. Let's assume in base case example number one that they just need $500,000. They've got a pretty large IRA, and we pull out the difference, an additional $400,000 from their pre-tax IRA. What we're going to see if we did a $400,000 IRA distribution or 401(k) distribution—which for a lot of you out there, you're thinking, "Oh, I would never do that," and I get that, this is just an example—is that they have a total income of $536,000. They're taking the standard deduction, and their taxable income, their adjusted gross income, comes down to this $500,000 number that we're talking about.
If we go down a little bit, we can see how that ends up getting taxed. What this shows me as a financial planner is that their ordinary income has gone through the 10% bracket, the 12% bracket, and the 22% bracket. They're all the way through the 24% tax bracket, and they are basically at the very tip top of the 32% tax bracket. There's $11,750 left in the 32% tax bracket before they go to the 35% tier. In this case, there are no capital gains to speak of, and that's one way to generate $500,000 in livable income, but I don't think that may necessarily be the best way to do it.
So we're going to go back, and instead of doing $400,000 in an IRA, we're going to assume... Well, actually, I think this is a good stopping point, but let's assume the brokerage account is one of those accounts where they bought Apple back in the 1980s, and it's got a really, really low basis amount.
Adam: They met Steve Jobs in his garage and were like, "Yeah, we'll just give you some money."
Garrett: Yeah. So in that scenario, they put a little bit in and their brokerage account is huge. That means any money that they pull out of that highly appreciated brokerage account is going to be long-term capital gain. So, low basis, high value brokerage account. What we're going to do is assume this couple, Tim and Ann, pull out $400,000, and all of that is taxable at long-term capital gains rates.
I think this is where it gets pretty cool. If we go to the same report—all we've done is removed the $400,000 pre-tax distribution, and instead we have moved that to a long-term capital gain—it's still the same total income of $536,000, and still the same standard deduction. But we're going to see that it's not at the very tip top of the 32% tax bracket; we are now inside the 12% tax bracket.
Adam: Just snuck in by 100 bucks.
Garrett: By $100. This is really important for all you high-net-worth retirees with large brokerage accounts to realize, and I see this a lot with people. They get their tax return back, we've done some planning, and their tax return is $500,000 or $600,000. They're like, "I've never had a tax return this high, and I probably paid a lot of taxes." Well, in this case, maybe not.
Tim and Ann are inside the 12% tax bracket, but now we have this second tax bracket that stacks on top of that ordinary income, and this is for long-term capital gains. Because their modified adjusted gross income is below $613,700, all of that $400,000 capital gain gets taxed at the 15% threshold. Always be careful when your income creeps up that your net investment income tax could come into play depending on your specific scenario.
Adam: But that would still be well under the 32% we were looking at with the other example.
Garrett: Yeah. So we're looking at... It could be taxed at 15%, or it could be taxed at 18.8%, depending on the income makeup.
Adam: Still very favorable for the amount of money you just got out of investments to then live off of.
Garrett: We're going to come back to this in a second. We need to be careful with Medicare Part B and D premiums, and IRMAA charges, and we're going to hit that in a second. But the main thing to remember from this example is we've got this couple that's got $100,000 coming in from pensions and Social Security. They pulled out $400,000 that's all taxable from their brokerage account, and yet the total amount of tax that they're paying here is $82,000. That is made up of this 12% ordinary income plus the capital gain taxes on that $400,000 withdrawal. So we're looking at a 15.4% average tax rate, which is pretty crazy on $500,000 worth of income.
I want to kind of go back just one more time here. For a lot of you out there, this part probably isn't realistic that that brokerage account is all going to be taxable gains. Let's say you've got a $1.5 million brokerage account. Your basis in that account is probably more like $1 million or $1.2 million, and what that means is the entire amount that you pull out is not actually taxable. In this example, maybe the brokerage account is a higher amount, but they're still pulling out $400,000. But let me say that only $200,000 of that is actually taxable at long-term capital gains rates.
So instead of $400,000 of long-term capital gain, it's only $200,000. In this case, you've got the $100,000 of Social Security and pensions, and then you've also pulled out an extra $400,000 from the brokerage account, but only $200,000 of that comes as a realized long-term capital gain.
Adam: Because $200,000 is what you put in. It's always funny because I feel like the listeners we hear from are the ones that know more than we know about some of this stuff. But I'm sure there are people following along and viewing this that are like, "Wait, what's a capital gain? What's a cost basis?" We don't want to gloss over those things because it is kind of complex, but I know some of you guys, it's kind of your hobby and you like to nerd out on it just like we do.
Garrett: Yeah, and I would say as many people that love to nerd out on it as a hobby, there's probably a lot more that are like, "Oh boy."
Adam: Buckle up.
Garrett: Yeah, we're doing long-term capital gains brackets today.
Adam: This is why I have a tax preparer.
Garrett: Yeah. So we're back to this third example, and we can see again maybe an unexpected tax situation where we have total income now only at $336,000, taxable income at $300,000, and we're back to the same scenario where we've only maxed out the 12% ordinary income tax bracket. The long-term capital gains are much, much lower, which means our overall taxes are only down to $44,000.
So in all three examples, this couple is getting close to $500,000 in income, but they are taxed vastly different depending on if that money's all coming from the IRA, or if it's all coming from long-term capital gain, or in the best situation, part of it is basis and part of it is long-term gain.
I'm going to kind of come out of the tax software here a little bit. But I think probably the action item from this tax planning experience we just walked through is that there's a lot of different levers that we can pull here. So in the scenario where a client has high income that doesn't equate to high taxes, the question would be: Is that sustainable? Do you have enough brokerage money where your tax rate is always going to be that low? If you've got a $4 million IRA, we can create artificial years where your taxes are really, really low, but I think that's where we get into like Roth conversions and IRMAA.
Adam: Yeah, maybe where we could wrap this up today is—and I know in the past maybe we have some videos where it's hard to give like a really practical example—explain just briefly, like let's say Tim and Ann come in and say, "Hey, we've got all this pre-tax money. We could live off this brokerage account for five, six, seven years." Help me think through while they're looking at Roth conversions, what would that look like to stack all that into one year to get a bunch of Roth? Or how could somebody utilize this tool or what we've talked about today to execute on some financial game planning?
Garrett: Yeah. So let's do this. Let's go back to the screen, and we're going to go back to that second scenario. It may not be realistic for everybody, but it's just easy to illustrate. Let's say they pull out $400,000 from their brokerage account, and all of that is at long-term capital gains rates. I'm just going to show this real quick, but this was the picture that we were looking at. They've maxed out the 12% tax bracket, and then they've also pulled out the rest at the 15% capital gains rate.
When I come back to this picture, I start thinking, is this 12% ordinary income a real tax number, or is this an artificial number based on them not pulling the money from the IRA? And I think it's probably going to be artificial for some time period—maybe it's five to seven years, whatever.
Adam: So we're thinking more tactically. This isn't a long, sustainable thing for most people. For a lot of people, it's, "Hey, we could do this for a portion of time to execute on some other decisions or moves to set us up better for the long term."
Garrett: And so in this example, I use another tool that's called Range Calculator. What it allows me to see is how can we... This couple probably has enough income coming in, right? They've taken $500,000 out and probably enough to live on. But the question becomes: how do we, by December 31st of this year, optimize their tax planning before the end of the year? What I would say is this picture helps me decide how much we could convert to Roth at a reasonable rate.
What it's saying is I'm in the net investment income tax category, so any additional income that we convert is going to be at the 22% tax level. That makes sense because we were only $100 away from going into the 22% bracket. And we're also, maybe a little bit difficult to see here, but we are pretty high up here on the Medicare IRMAA threshold, which means we're on tier five. But tier five is kind of special because it goes all the way up to $750,000. There's a lot of room in this bracket before you hit the top one.
So if I'm Tim and Ann, I am looking at this picture and thinking, "I probably ought to make use of the 22% tax bracket, maybe even some of the 24% tax bracket." My initial leanings here would be, what if we converted all the way up to that very next Medicare IRMAA threshold level? We're looking at like a $200,000 Roth conversion that would make sense by taking advantage of the 22% tax bracket. Or we could even maybe go up to the top of the 24% tax bracket if we're okay with that IRMAA charge, and that'd be more like $300,000.
So for Tim and Ann, we would get to the point of maybe throwing in here a $200,000 Roth conversion. In their situation, we could calculate the tax cost: $56,000. If they have some extra brokerage money or part of that $500,000 that we pulled out, if we can pay that, we've pulled out $200,000 at a rate that I think would probably be beneficial for them long term if they have a large pre-tax account.
Adam: I think the big thing to recognize there as we look at the range calculator—not that somebody's looking at that and saying, "You'd do that much?"—that's where a lot of the conversation comes in with a client, or you with your spouse or a trusted advisor of, "Hey, what is our goal with this money?" Is it to live off of it? Do we have some beneficiaries that we expect? What's everybody's health? So there's a lot more that goes into it, but just looking X's and O's, that helps us get a gauge of what are some appropriate points for us to be having the conversation around. Okay, $200,000 makes sense X's and O's, now let's find out your personal situation. Okay, $100,000 makes sense, now let's learn more about your personal situation. That's how we kind of work through that with clients.
I think that's probably a good place to stop for the day. I think it's always nice to be able to give kind of some actionable items, some things like, "Okay, I can take that home with me and look at that. That's kind of crazy, I hadn't thought about that." But last thing too is, your tax preparer is typically going to be looking at your year-to-year tax burden, and they're going to try to minimize each year. That's just kind of by default. I would say most tax preparers are optimized that way or work that way, and there's nothing wrong with that.
But what we're looking at specifically in this case is lifetime tax bills, looking at some of those Roth conversions. We say, "Well, I was already in the 15% bracket, or I was in the 12% and then the 15% with long-term capital gains. Why would I Roth convert all of this into the 22% or 24% bracket?" It's like, well, we've got to zoom out and look at the next 15, 20, 30 years and look at what those lifetime bills look like. You can do some of those calculations, but that's what we do—we help people calculate things like that.
Garrett: And I want to put my one compliance thing here at the end. One, we didn't go into state taxes, so a lot of listeners are all over the country. State taxes play into this. We're in Tennessee. You ought to move here for retirement; great place, no state income tax. Hey, real quick, did you just see this top 50 worst quality of life thing the other day?
Adam: Yeah, I saw that. Tennessee ranked number 50 on worst quality of life, and the young, prideful man in me said, "No, we're awesome." But then the old man in me that's a little bit wiser was like, "No, this is great. People will stop moving here. There'll be more resources, housing will get cheaper, this is awesome." So it was funny reading about that.
Garrett: Yeah, I think clickbait is what I call that. Tennessee is a great place. But what we're trying to do here is to give you principles of tax planning. Even Tim and Ann, you may say, "That situation sounds just like me, Garrett and Adam, so I should convert $200,000." You need to run through this with your financial planner and with your tax preparer. We do our very best to make sure that we get the numbers right. But hopefully this exercise was helpful for you.
Adam: Well, now that we've thrown a damp compliance towel on things, let's land the plane there. But thank you guys for joining us here. We really enjoy doing these things. I think the technical stuff is what a lot of you guys like, but we want to merge it with kind of the psychology and the behind the scenes of how we do these things, and to hopefully add value to what you guys are doing. So we appreciate you guys following along. Hope you all have a great rest of your day. I'm Adam Reed. This is Garrett Crawford. We're Retirement Tax Matters.
Garrett: See you next time.