Let’s assume a married couple is 55 years old, newly retired, but with one high school student and one college student. They are not yet receiving Social Security and have no pension. Their house is paid off, they don’t give much to charity, and they live in a tax-free state, so they have decided to just take the standard deduction. Their spending money comes from a large taxable investing account where the basis (eg, what they paid for the mutual fund shares) is about half the value of the account, some small Roth IRAs, an HSA, and large traditional IRAs from rolling over their 401(k)s from when they were working.

Let’s say they take $10,000 from their Roth IRAs and another $5,000 from their HSA. Their taxable account kicks off $10,000 from municipal bond interest (tax-free) and $20,000 from qualified dividends. They sell another $20,000 worth of shares from the account. Finally, they withdraw $35,000 from their tax-deferred accounts using the substantially equal periodic payment (SEPP) rule to avoid paying any penalties for withdrawing prior to age 59.5. That is a total spending amount of $100,000. What is their tax bill on that income? It’s $0. No tax at all is due.

How can that be? Let’s go through the items one by one.

• The $10,000 Roth IRA withdrawal is not taxed at all.
• The $5,000 HSA withdrawal used for health care expenses is not taxed at all.
• The $10,000 in municipal bond interest is not taxed at all.
• Half of the sold mutual fund shares ($10,000) are basis and thus not taxed at all.
• The other half of the shares are subject to long-term capital gains taxes. However, in this case that is the 0 percent bracket.
• The qualified dividends are subject to tax as well but like the long-term capital gains, only at 0 percent.
• That leaves the $35,000 tax-deferred account withdrawal to be taxed at ordinary income tax rates.

However, we haven’t even touched this family’s deductions or credits. First, we can subtract their $12,600 standard deduction and their $16,200 personal exemptions. That leaves $6,200 of taxable income, which results in a tax bill of $620 because it is all taxed in the 10 percent bracket. However, this family qualifies for a nonrefundable child tax credit of $2,000. Thus, no tax would be due. And we didn’t even consider the likely possibility of this family receiving the American Opportunity Tax Credit (a credit of up to $2,500 paid toward college tuition).