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The way the IRS tax worksheet operates, they consider capital gains first.
So you'd have $70,700 of capital gains at 0% and $9,300 taxed at 15% for a total capital gains tax of $1,395.

Your $40,000 in traditional IRA withdrawals is taxed as ordinary income from $80,000/yr to $120,000/yr which put you in the 25% bracket ($72,500 to $146,400 for a married couple) so you'd pay $10,000 in tax on the $40,000 IRA withdrawal.

Overall the $120,000 in income would have $11,395 in tax (ignoring exemptions and deductions.)

Thank you for this example. Wow. Powerful. A 9.5% effective tax rate on $120K income in retirement, due to favorable capital gains treatment. That is amazing.

FIRE will be beautiful.

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