I have $10 million and ready to retire and I want to find a tax break that might include me becoming a barista

There’s a reason it can be very advantageous to save for retirement in a Roth IRA or 401(k). In a Roth retirement plan, your investment gains are yours to enjoy tax-free. And withdrawals are also tax-free.

But many people who retire early choose to save in taxable brokerage accounts so they don’t have to worry about early withdrawal penalties. And while the flexibility these accounts offer is nice, the downside is that gains in these accounts are subject to taxes.

The good news is that long-term capital gains are taxed more favorably than short-term capital gains, which apply to investments that are held for one year or less. But long-term gains can still trigger a tax bill. And that’s something this Reddit poster is trying to avoid.

Does lowering your income to avoid long-term capital gains taxes work?

In this post, we have someone who’s looking to retire early. They have a large nest egg they can tap, and they want to know how to reduce their long-term capital gains taxes once they’ve stopped working their primary job.

One idea they have is to become a barista and earn a very low income doing that. And that strategy could work up to a point.

People who are single earning up to $47,025 don’t pay long-term capital gains taxes. And married couples filing jointly earning up to $94,050 get out of taxes on long-term capital gains, too.

The problem, though, is that the poster here also expects $200,000 a year in dividend income on top of their barista earnings. So that’s going to add to their total income and push them beyond the point of being able to qualify for a  0% long-term capital gains tax rate.

Now if they have funds in a traditional retirement account, they could do a Roth conversion to get access to 0% long-term capital gains taxes later on. But that conversion will trigger a large near-term tax bill.

It’s best to get help with minimizing taxes

It’s an important thing to try to minimize taxes — during your working years as well as during retirement. But for someone retiring early, it’s even more important to have a solid tax strategy.

That’s why this poster’s best bet is to talk to a qualified financial advisor and/or tax professional. Someone in that category can help them figure out how to lower their tax burden without having to deny themselves the income they need to live comfortably.

This doesn’t mean that the poster shouldn’t consider working as a barista in retirement just to have something to do and get out of the house. But from a tax mitigation standpoint, their thought process doesn’t work. They’ll need to figure out another plan if they don’t want to pay any long-term capital gains taxes.

However, long-term capital gains taxes max out at 20%, and this poster would probably be in the 15% bracket based on their expected early retirement income. That’s not as good as 0%, but it’s also not so terrible.