Got your eyes set on an early retirement? Then you probably know what a pain taxes can be. And if you have funds in a non-retirement account, the capital gains tax will take a big bite out of your income.

At least, that's what conventional wisdom says.

But, as it turns out, there is a simple way for future early retirees to avoid the capital gains tax altogether.

By reading the fine print, you can reduce or avoid the capital gains tax. Photo: Wikimedia Commons user Niabot. 

Investigating the capital gains tax
Every year, the IRS publishes a table for how people will be taxed for capital gains -- that is, the money they get from selling stocks at higher prices than they were bought for. In 2014, the capital gains tax table looks like this.

As you can see, if you fit in the 10% or 15% tax bracket, then you owe exactly zero dollars for your investment gains.

So what do you need to make to fit into the 10%-15% tax bracket?

Filing Status

Maximum AGI for 15% Bracket



Married Filing Jointly, Qualifying Widow(er)


Married Filing Separately


Head of Household


AGI = adjusted gross income.

Usually, this 0% tax rate on capital gains doesn't make much of a difference: Working families who fall in the lower tax brackets rarely have enough money left over after making ends meet to invest much.

But this article isn't about those folks. It's about people who have worked for 30 years and saved up plenty of money and who want to retire early and bridge the income gap until they can start withdrawing money from their individual retirement accounts and Social Security.

Consider a married couple who are both 55, done working and saving, and ready to retire. They'll need to fund a gap of five years before they can withdraw money from their IRAs penalty-free. If they can get by on an adjusted gross income of $73,800 or less (in order to remain in the 15% tax bracket or lower), they can simply pull out of a taxable account and avoid all taxes and penalties.

Not even a Roth IRA -- which allows you to withdraw your contributions (but not your earnings) at any age -- allows those types of tax benefits. That's a big deal!

Let's put an income like that in perspective. If a married couple has an AGI of $73,800 in retirement, that means they're getting at least $94,000 in pre-tax income. For a retired couple, that's a ton of income. The median household income for 55- to 64-year-olds in 2012 was about $59,000; for those older than 65, it was about $34,000.

What's the catch?
As you might expect, there are some requirements that you need to fulfill in order to avoid the capital gains tax -- and other taxes -- altogether.

First and foremost, this is a strategy that will only work for dedicated, long-term, buy-to-hold investors. If you buy shares of a company and sell them before one year passes, you'll owe short-term capital gains taxes.

More importantly, if you sell shares while you're still working -- even if you just use the proceeds to buy shares of another company -- you'll probably be in a higher tax bracket and pay the capital gains tax.

To put it in real-world terms, if you buy shares of Apple (NASDAQ:AAPL) for your taxable account when you're 40 and sell them when you're 50 (and still working), you'll probably pay some capital gains taxes. The only way to avoid the tax is to make sure your adjusted gross income falls in the 10% to 15% bracket in the same year you sell shares.

Then there are dividends. Though a tax on dividends isn't in the form of the capital gains tax, any dividends you receive in a non-retirement account can be taxed. That means your income investments would do better in your IRAs.

And finally, there is broad misunderstanding of how tax brackets work. Let's say you and your spouse are both still working and your household AGI is $70,000 next year, which falls in the 15% bracket (using chart above). You will only be able to sell shares that have shown a gain of up to $3,800 before the capital gains tax sets in. Once you go above that threshold, you'll start paying taxes on gains over that amount.

Putting it into action in the real world
In no way am I saying that you should divert all of your retirement money to non-retirement accounts. Your 401(k)s, IRAs, and Roth IRAs all have their place in the retirement planning process. But if an early retirement looks increasingly possible for you, socking money away in a non-retirement account could go a long way in helping you to start enjoying your retirement at a younger age.

Brian Stoffel owns shares of Apple. The Motley Fool recommends and owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.