How to pay ZERO taxes in retirement with 6-figure expenses
How to pay ZERO taxes in retirement with 6-figure expenses
OK, provocative thread title. Let's see if it holds water.
The setup:
Married, filing jointly, ages 55.
They need $100,000 a year after-tax to pay for expenses. Typical rule of thumb is that the sustained withdrawal rate from a portfolio is 4%, but they also have the possibility of Social Security benefits that would go towards that $100K, so give the couple $2 million in a portfolio split half in taxable and half in tax-advantaged. Of the tax-advantaged, 94% is in tax-deferred 401(k), 403(b), traditional IRA accounts and 6% in Roth IRAs.
They have been diligently tax-loss harvesting and the stock market has not done so well in the last few years, so their net gains in the taxable assets are essentially zero. That is, they have enough carryover losses to deduct $3,000 from ordinary income each year for quite a while. If they sell any taxable assets, the net capital gain will be essentially zero for a number of years. Their taxable portfolio generates 2% in qualified dividends each year. They get a foreign tax credit as well. They live in a state with no state income taxes.
They have a kid in college and one in high school who will go to college, thus they will get education credits, but they pay for college partially out of 529 plans (not included in portfolio described above).
They have no debts and own their home mortgage-free. They take the standard deduction in odd years and bunch property taxes and charitable contributions into even years.
They will delay taking SS until age 70 while converting their tax-deferred assets to Roth IRAs between ages 55 and 70.
OK, that's the setup. Any comments before we compute the taxes and the amount of Roth conversions each year?
The setup:
Married, filing jointly, ages 55.
They need $100,000 a year after-tax to pay for expenses. Typical rule of thumb is that the sustained withdrawal rate from a portfolio is 4%, but they also have the possibility of Social Security benefits that would go towards that $100K, so give the couple $2 million in a portfolio split half in taxable and half in tax-advantaged. Of the tax-advantaged, 94% is in tax-deferred 401(k), 403(b), traditional IRA accounts and 6% in Roth IRAs.
They have been diligently tax-loss harvesting and the stock market has not done so well in the last few years, so their net gains in the taxable assets are essentially zero. That is, they have enough carryover losses to deduct $3,000 from ordinary income each year for quite a while. If they sell any taxable assets, the net capital gain will be essentially zero for a number of years. Their taxable portfolio generates 2% in qualified dividends each year. They get a foreign tax credit as well. They live in a state with no state income taxes.
They have a kid in college and one in high school who will go to college, thus they will get education credits, but they pay for college partially out of 529 plans (not included in portfolio described above).
They have no debts and own their home mortgage-free. They take the standard deduction in odd years and bunch property taxes and charitable contributions into even years.
They will delay taking SS until age 70 while converting their tax-deferred assets to Roth IRAs between ages 55 and 70.
OK, that's the setup. Any comments before we compute the taxes and the amount of Roth conversions each year?
Last edited by livesoft on Thu Dec 22, 2011 4:43 am, edited 1 time in total.
-
- Posts: 7417
- Joined: Sun Nov 15, 2009 8:24 am
Re: How to pay ZERO taxes in retirement with 6-figure expens
You're solving the wrong problem. Many posters here believe their tax rate in retirement will be over 40%. You need to help them figure out how to get there.
Re: How to pay ZERO taxes in retirement with 6-figure expens
They already got there by following the tax tips found in this thread:
Taxes on family with $200,000 income
Or do you mean help them figure out how to pay 40% of their income in taxes?
Taxes on family with $200,000 income
Or do you mean help them figure out how to pay 40% of their income in taxes?
Re: How to pay ZERO taxes in retirement with 6-figure expens
Assign everything to a trust and have the trust pay the taxes
I think I win
I think I win
Re: How to pay ZERO taxes in retirement with 6-figure expens
Taxes have nothing to do with your expenses unless the expenses are deductions. If you want no taxes, have no taxable income; i.e., live off principal and invest in tax-free returns.
Re: How to pay ZERO taxes in retirement with 6-figure expens
Alas, I tried that one year and the county would not take my advance payment of real estate taxes in December.livesoft wrote: bunch property taxes
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
Re: How to pay ZERO taxes in retirement with 6-figure expens
paying zero taxes isnt the most important part. too many people use the tax scare to sucker people into poor investments such as permanent life insurance. thus one should only care about paying zero taxes if it really provides you with the most money. thus the title should be providing the most income in retirement by reducing taxes to near zero if that is what you plan to show.
Re: How to pay ZERO taxes in retirement with 6-figure expens
jebmke:
- Porcupine
That's not the way to do it. For instance, you pay one year's taxes in January the next year, and the next year's as soon as you are billed (in October or November, I believe).jebmke wrote:Alas, I tried that one year and the county would not take my advance payment of real estate taxes in December.livesoft wrote: bunch property taxes
- Porcupine
Re: How to pay ZERO taxes in retirement with 6-figure expens
Many states have two due dates: one in the fall and one in the spring. We get sent the two payment stubs at the same time in the fall for a tax year that ends on June 30. There is nothing wrong with paying both with one check in one envelope before the first deadline. If you pay your taxes as follows, you get three payments in one calendar year every other year.jebmke wrote:Alas, I tried that one year and the county would not take my advance payment of real estate taxes in December.livesoft wrote: bunch property taxes
tax year 1: one payment in November of calendar year 1, one payment in February of calendar year 2.
tax year 2: two payments in November of calendar year 2.
tax year 3: one payment in November of calendar year 3, one payment in February of calendar year 4.
rinse and repeat.
Calendar year 2 has three payments; calendar year 3 has one payment, and so on.
Re: How to pay ZERO taxes in retirement with 6-figure expens
We get one bill at the end of June. You can pay it all in July and take a 3% discount, pay it in full in August or start paying installments where the installments have a 3% adder and have to be paid by December. On the other hand, our property taxes are very low by national standards so I can't really complain.sscritic wrote:Many states have two due dates: one in the fall and one in the spring. We get sent the two payment stubs at the same time in the fall for a tax year that ends on June 30. There is nothing wrong with paying both with one check in one envelope before the first deadline. If you pay your taxes as follows, you get three payments in one calendar year every other year.jebmke wrote:Alas, I tried that one year and the county would not take my advance payment of real estate taxes in December.livesoft wrote: bunch property taxes
tax year 1: one payment in November of calendar year 1, one payment in February of calendar year 2.
tax year 2: two payments in November of calendar year 2.
tax year 3: one payment in November of calendar year 3, one payment in February of calendar year 4.
rinse and repeat.
Calendar year 2 has three payments; calendar year 3 has one payment, and so on.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
- jeffyscott
- Posts: 13487
- Joined: Tue Feb 27, 2007 8:12 am
Re: How to pay ZERO taxes in retirement with 6-figure expens
Ignoring some of your complex details...
Gross income $55,200 from 401K
+ $44,800 from taxable and Roth (none of this taxable income, according to your premise all taxes due on this money were paid in the past)
= $100,000
$55,200 - $11,400 std deduction - $14,800 personal exemptions (4 x $3700) = $29,000 taxable income
From tax tables for married filing jointly, gross income tax due = $3496
- $1000 Child tax credit, assuming the HS student is under 17 or whatever the age cutoff is for this credit
- $2500 American Opportunity Tax Credit, assuming at least $4000 in eligible expenses
Net income tax = $0
Gross income $55,200 from 401K
+ $44,800 from taxable and Roth (none of this taxable income, according to your premise all taxes due on this money were paid in the past)
= $100,000
$55,200 - $11,400 std deduction - $14,800 personal exemptions (4 x $3700) = $29,000 taxable income
From tax tables for married filing jointly, gross income tax due = $3496
- $1000 Child tax credit, assuming the HS student is under 17 or whatever the age cutoff is for this credit
- $2500 American Opportunity Tax Credit, assuming at least $4000 in eligible expenses
Net income tax = $0
-
- Posts: 3971
- Joined: Tue Sep 22, 2009 7:56 pm
Re: How to pay ZERO taxes in retirement with 6-figure expens
Need to get to $100,000
Between 55-70:
Income: $0
Dividends: 2% from $1 million -> +$20,000, tax rate - 0% (if in 10-15% bracket)
Sell $80,000 assets in taxable, which are offset by previous losses
Move Trad. Ira to Roth Ira: ~$30,800 to be offset by the items below +college deduction.
Loss carryover: -$3,000
Standard deduction: -$11,900.
Personal exemption: -$14,800
Child tax credit : -$1,000
(supplement the income with RothIRA withdrawals after 60 in order to get to $100K).
Taxes: $0
After 70:
Income: Social Security
Taxable assets: $0
RothIRA/TradIRA split should be ~50/50 (depending on the college deduction).
Pay taxes on SS.
Don't know details about the tax code in 15 years.
Between 55-70:
Income: $0
Dividends: 2% from $1 million -> +$20,000, tax rate - 0% (if in 10-15% bracket)
Sell $80,000 assets in taxable, which are offset by previous losses
Move Trad. Ira to Roth Ira: ~$30,800 to be offset by the items below +college deduction.
Loss carryover: -$3,000
Standard deduction: -$11,900.
Personal exemption: -$14,800
Child tax credit : -$1,000
(supplement the income with RothIRA withdrawals after 60 in order to get to $100K).
Taxes: $0
After 70:
Income: Social Security
Taxable assets: $0
RothIRA/TradIRA split should be ~50/50 (depending on the college deduction).
Pay taxes on SS.
Don't know details about the tax code in 15 years.
Re: How to pay ZERO taxes in retirement with 6-figure expens
A tax guru associate of mine once told me that if you find a legal way to reduce your taxes in a manner that is not generally known, shut up about it. History has shown that it eventually comes to the attention of the IRS and Congress and the opportunity is lost. A good example is the limited partnerships that were so effective in the '80's but which were eventually plugged.
A non-tax example of an attractive situation that was talked about way too much on this board, was the opportunity to purchase Savings Bonds with credit cards. This came to the attention of the Treasury as well as the banks and we are now limited to a cash purchase of $5,000. I felt at the time that too much discussion was going to kill the golden goose and, sure enough, it did.
John
A non-tax example of an attractive situation that was talked about way too much on this board, was the opportunity to purchase Savings Bonds with credit cards. This came to the attention of the Treasury as well as the banks and we are now limited to a cash purchase of $5,000. I felt at the time that too much discussion was going to kill the golden goose and, sure enough, it did.
John
Re: How to pay ZERO taxes in retirement with 6-figure expens
John:
And don't forget taking social security at 62 and then paying it all back and reapplying at 70 if you were still alive. That was taken away just over a year ago.
And don't forget taking social security at 62 and then paying it all back and reapplying at 70 if you were still alive. That was taken away just over a year ago.
-
- Posts: 3314
- Joined: Wed Feb 03, 2010 9:17 am
Re: How to pay ZERO taxes in retirement with 6-figure expens
I really don't understand the point of these hypotheticals.
The tax code is so complex that with a little jiggling here and a little wiggling there, you can pretty much create any hypothetical outcome to any hypothetical factual situation that you choose. Whether the hypothetical has any bearing on real life for the vast majority of people, however, is a totally separate issue....
The tax code is so complex that with a little jiggling here and a little wiggling there, you can pretty much create any hypothetical outcome to any hypothetical factual situation that you choose. Whether the hypothetical has any bearing on real life for the vast majority of people, however, is a totally separate issue....
Re: How to pay ZERO taxes in retirement with 6-figure expens
As I pointed out in another thread less than one minute ago, because they are fun. I read this board and post for fun. If it weren't fun, why would I waste my time? As it is, I spend five hours a day watching Chinese soap operas (they are called dramas, be we know they are really soap operas) and five hours a day on bogleheads. I do both for fun. If bogleheads were not fun, I would watch Chinese soap operas ten hours a day and not waste my time here.I really don't understand the point of these hypotheticals.
Last edited by sscritic on Thu Dec 22, 2011 10:39 am, edited 1 time in total.
Re: How to pay ZERO taxes in retirement with 6-figure expens
livesoft, this is a well-timed thread. Seems like people are having trouble wrapping their brains around the concept of having lots of money and but paying only a little tax.
Link to Asking Portfolio Questions
-
- Posts: 7417
- Joined: Sun Nov 15, 2009 8:24 am
Re: How to pay ZERO taxes in retirement with 6-figure expens
Since the press gets wealth and income mixed up all the time, I'll add that it's also possible to have lots of income and pay only a little tax.retiredjg wrote:having lots of money and but paying only a little tax.
I think the "expenses" part of livesoft's title is supposed to emphasize that you don't necessarily have to have income to cover living expenses; I think that's been misunderstood in the thread. We get many posters in the accumulation phase of life who don't appreciate the flexibility you have in retirement or early retirement or partial retirement to manipulate the amount and type of income you have.
Re: How to pay ZERO taxes in retirement with 6-figure expens
These are good exercises for people to go through. I have said before, I am constantly amazed at how much mental energy some people will invest to save $10-20 on their cable bill or phone bill when the biggest expense in their entire life is probably taxes. I recently explained tax loss harvesting to a very savvy investor/friend and he looked at me like I had invented the wheel.
I always wanted to be a procrastinator.
Re: How to pay ZERO taxes in retirement with 6-figure expens
This will be the second year I will be paying zero or <$100 in Federal taxes as a result of taking SS and limiting my IRA withdrawals. It will be fun while it lasts! (Edit: Fixed who made the statement]Bob's not my name wrote:We get many posters in the accumulation phase of life who don't appreciate the flexibility you have in retirement or early retirement or partial retirement to manipulate the amount and type of income you have.
Last edited by BigFoot48 on Thu Dec 22, 2011 11:58 am, edited 1 time in total.
Retired |
Two-time in top-10 in Bogleheads S&P500 contest; 18-time loser
Re: How to pay ZERO taxes in retirement with 6-figure expens
Yes. That is actually closer to what I meant.Bob's not my name wrote:Since the press gets wealth and income mixed up all the time, I'll add that it's also possible to have lots of income and pay only a little tax.retiredjg wrote:having lots of money and but paying only a little tax.
Link to Asking Portfolio Questions
Re: How to pay ZERO taxes in retirement with 6-figure expens
Well, actually not-Bob said that part, not me. But I certainly agree!BigFoot48 wrote:This will be the second year I will be paying zero or <$100 in Federal taxes as a result of taking SS and limiting my IRA withdrawals. It will be fun while it lasts!Bob's not my name wrote:retiredjg wrote:We get many posters in the accumulation phase of life who don't appreciate the flexibility you have in retirement or early retirement or partial retirement to manipulate the amount and type of income you have.
Link to Asking Portfolio Questions
Re: How to pay ZERO taxes in retirement with 6-figure expens
You're so right, sscritic. I remember thinking that at the time it was being so actively discussed. Too many people taking advantage of a good thing and I'm sure Social Security decided enough is enough.sscritic wrote:John:
And don't forget taking social security at 62 and then paying it all back and reapplying at 70 if you were still alive. That was taken away just over a year ago.
John
Re: How to pay ZERO taxes in retirement with 6-figure expens
[quote="BigFoot48"]This will be the second year I will be paying zero or <$100 in Federal taxes as a result of taking SS and limiting my IRA withdrawals. It will be fun while it lasts![/quote
Maybe not in your case, but in many, this would mean you probably are wasting an opportunity to have some income taxed in the lowest bracket. Paying zero tax isn't always wise.
John
Maybe not in your case, but in many, this would mean you probably are wasting an opportunity to have some income taxed in the lowest bracket. Paying zero tax isn't always wise.
John
Re: How to pay ZERO taxes in retirement with 6-figure expens
The thread is provocative only to the extent that it emphasizes ZERO taxes. If one reads it with an eye for MINIMIZING taxes, a few prudent financial approaches can be identified in the OP message, including (in no particular order) the following:livesoft wrote:OK, provocative thread title. Let's see if it holds water.
...
OK, that's the setup. Any comments before we compute the taxes and the amount of Roth conversions each year?
1. Tax-loss harvesting.
2. Living in a state without state income tax.
3. Having a paid off house.
4. Getting education credits, while paying for the children's college out of the 529 plans.
5. Combining various deductions to do itemized deductions every other year.
6. Postponing taking Social Security until the age of 70 and using the early retirement years for converting tax-deferred accounts into Roth accounts.
However, ZERO or MINIMUM taxes are secondary to having money to start with. And having money is generally secondary to having a satisfying life. And so some of these tax-saving approaches are not relevant to most people, and even when they are relevant, the trade-offs may not be worth it. For example, one may want to live in a high-taxing city as a matter of quality of life (New York City comes to mind). Another one may not want to own house to be able to move around (both in the U.S. and abroad). The third one does not have college-age children.
Victoria
Inventor of the Bogleheads Secret Handshake |
Winner of the 2015 Boglehead Contest. |
Every joke has a bit of a joke. ... The rest is the truth. (Marat F)
Re: How to pay ZERO taxes in retirement with 6-figure expens
I will always be in the lowest or near-lowest bracket of 15%, assuming a lot of things don't change.JDCPAEsq wrote:Maybe not in your case, but in many, this would mean you probably are wasting an opportunity to have some income taxed in the lowest bracket. Paying zero tax isn't always wise.
John
Retired |
Two-time in top-10 in Bogleheads S&P500 contest; 18-time loser
Re: How to pay ZERO taxes in retirement with 6-figure expens
Pay off their mortgage from their taxable account. This would greatly reduce their cash requirements each year and then they could still take the standard deduction. Withdrawing money from a 401K to pay the mortgage negates any mortage interest deduction.
A part time "fun" job that brings in $12,000 a year between them would allow them to contribute $12,000 a year from their taxable accounts to the Roth instead of rolling it over from an IRA.
Some "just thinking out loud" ideas for further discussion;
If they are real careful about their other retirement account withdrawals and where there other money comes from, then they might even be able to qualify for a retirement contribution credit and maybe an earned income credit.
When they do the Roth conversion in 2012 they could do it in January of 2012 so they could recharacterize it back to a IRA until their filing deadline the next year which if I remember correctly is as late as October 2013 with extensions. With different his and her accounts can they do two Roth conversions in one year and invest one on "black" and the other on "red" and then just recharacterize the one that loses? This would effectively cut the taxes on the Roth conversion in half.
If they didn't already live in a state with no income taxes, they could temporarily "move" to a state with no income tax and do the Roth rollover while they travel in their RV or take other expended vacations.
A part time "fun" job that brings in $12,000 a year between them would allow them to contribute $12,000 a year from their taxable accounts to the Roth instead of rolling it over from an IRA.
Some "just thinking out loud" ideas for further discussion;
If they are real careful about their other retirement account withdrawals and where there other money comes from, then they might even be able to qualify for a retirement contribution credit and maybe an earned income credit.
When they do the Roth conversion in 2012 they could do it in January of 2012 so they could recharacterize it back to a IRA until their filing deadline the next year which if I remember correctly is as late as October 2013 with extensions. With different his and her accounts can they do two Roth conversions in one year and invest one on "black" and the other on "red" and then just recharacterize the one that loses? This would effectively cut the taxes on the Roth conversion in half.
If they didn't already live in a state with no income taxes, they could temporarily "move" to a state with no income tax and do the Roth rollover while they travel in their RV or take other expended vacations.
-
- Posts: 3314
- Joined: Wed Feb 03, 2010 9:17 am
Re: How to pay ZERO taxes in retirement with 6-figure expens
YMMV may vary, but the exercise doesn't strike me as being particularly fun.sscritic wrote:As I pointed out in another thread less than one minute ago, because they are fun. I read this board and post for fun. If it weren't fun, why would I waste my time? As it is, I spend five hours a day watching Chinese soap operas (they are called dramas, be we know they are really soap operas) and five hours a day on bogleheads. I do both for fun. If bogleheads were not fun, I would watch Chinese soap operas ten hours a day and not waste my time here.I really don't understand the point of these hypotheticals.
I may, and often do, take some particular action to legally minimize my tax bill, but having children* isn't one of them. I suspect that others act likewise.
Thus, the hypothetical exercise seems to me more about "based on today's tax code, if I have X, Y, and Z, regardless of how improbable the combination of X, Y, and Z as I have set them out may be, what do I end up with" than anything else. I can't say that I see a lot of value in engaging in that type of exercise except for and as to the hypothetical family in question and, I suppose, those situated exactly the same as them.
* Noted solely because it sure seems to me that many of these "hypothetical tax" threads involve the existence of children and that they are always at just the "right" age.
Last edited by Random Poster on Thu Dec 22, 2011 12:30 pm, edited 1 time in total.
- jeffyscott
- Posts: 13487
- Joined: Tue Feb 27, 2007 8:12 am
Re: How to pay ZERO taxes in retirement with 6-figure expens
Watty wrote:Pay off their mortgage from their taxable account.
livesoft wrote:The setup:
...
They have no debts and own their home mortgage-free.
Re: How to pay ZERO taxes in retirement with 6-figure expens
This is a good point. But, I suspect the thread may actually be aimed at a different group - people who are paying 40% or more in taxes now to move money into Roth status, because they think they will be paying lots of taxes in retirement.VictoriaF wrote:However, ZERO or MINIMUM taxes are secondary to having money to start with. And having money is generally secondary to having a satisfying life. And so some of these tax-saving approaches are not relevant to most people, and even when they are relevant, the trade-offs may not be worth it.
Link to Asking Portfolio Questions
Re: How to pay ZERO taxes in retirement with 6-figure expens
You are welcome to add any different hypothetical scenario you would like and show how to minimize taxes under that scenario.Random Poster wrote:...
Thus, the hypothetical exercise seems to me more about "based on today's tax code, if I have X, Y, and Z, regardless of how improbable X, Y, and Z may be, what do I end up with" than anything else. I can't say that I see a lot of value in engaging in that type of exercise except for and as to the hypothetical family in question and, I suppose, those situated exactly the same as them.
* Noted solely because it sure seems to me that many of these "hypothetical tax" threads involve the existence of children and that they are always at just the "right" age.
I will say that the OP is not so hypothetical. Polls on the forum show that (a) many folks here are multimillionaires, (b) many folks here have children, (c) many folks here will own their home free and clear, and (d) many folks here retire early.
So far, hsv_climber is the most on-track. There are a number of Roth conversion threads and "Roth 401(k) vs Trad 401(k)" threads that this thread will be relevant for as retiredjg has hinted at.
Also I am somewhat surprised that no one wrote as the answer: "Taxpayer dies right away and owes no taxes."
Re: How to pay ZERO taxes in retirement with 6-figure expens
jeffyscott wrote:Watty wrote:Pay off their mortgage from their taxable account.livesoft wrote:The setup:
...
They have no debts and own their home mortgage-free.
ohoops, I was thinking of the other $200K thread.
Last edited by Watty on Thu Dec 22, 2011 3:15 pm, edited 1 time in total.
-
- Posts: 3314
- Joined: Wed Feb 03, 2010 9:17 am
Re: How to pay ZERO taxes in retirement with 6-figure expens
You just modified the hypothetical.livesoft wrote:I will say that the OP is not so hypothetical. Polls on the forum show that (a) many folks here are multimillionaires, (b) many folks here have children, (c) many folks here will own their home free and clear, and (d) many folks here retire early.
Re: How to pay ZERO taxes in retirement with 6-figure expens
Then you'd have to modify the "delay SS to age 70" to "delay SS forever"livesoft wrote:[ "Taxpayer dies right away and owes no taxes."
I always wanted to be a procrastinator.
-
- Posts: 3971
- Joined: Tue Sep 22, 2009 7:56 pm
Re: How to pay ZERO taxes in retirement with 6-figure expens
Won't solve the OP's problem.livesoft wrote:[ "Taxpayer dies right away and owes no taxes."
livesoft wrote: The setup:
Married, filing jointly, ages 55.
Re: How to pay ZERO taxes in retirement with 6-figure expens
Random Poster wrote:You just modified the hypothetical.livesoft wrote:I will say that the OP is not so hypothetical. Polls on the forum show that (a) many folks here are multimillionaires, (b) many folks here have children, (c) many folks here will own their home free and clear, and (d) many folks here retire early.
Are you arguing about use of the future tense?original hypothetical wrote:They have no debts and own their home mortgage-free.
- jeffyscott
- Posts: 13487
- Joined: Tue Feb 27, 2007 8:12 am
Re: How to pay ZERO taxes in retirement with 6-figure expens
Actually we don't know the details about what the tax code will be even in 2013.hsv_climber wrote:Need to get to $100,000
Between 55-70:
Income: $0
Dividends: 2% from $1 million -> +$20,000, tax rate - 0% (if in 10-15% bracket)
Sell $80,000 assets in taxable, which are offset by previous losses
Move Trad. Ira to Roth Ira: ~$30,800 to be offset by the items below +college deduction.
Loss carryover: -$3,000
Standard deduction: -$11,900.
Personal exemption: -$14,800
Child tax credit : -$1,000
(supplement the income with RothIRA withdrawals after 60 in order to get to $100K).
Taxes: $0
After 70:
Income: Social Security
Taxable assets: $0
RothIRA/TradIRA split should be ~50/50 (depending on the college deduction).
Pay taxes on SS.
Don't know details about the tax code in 15 years.
The taxpayer has one kid in college and one in HS. They won't get the $1000 child tax credit for 15 years as that ends at age 17 and, under current law ends after 2012. They would get college tax credits, but I think the American Opportunity Credit ends after 2012 and will revert to the Hope Credit. So depending on the actual ages of the kids and assuming they go to college they will get college tax credits of some amount during certain years.
Actually, as I am thinking about it, maybe the kids could continue on in school, piling up degrees and if tuition is at least $10,000 each and the kids earn less than $3700 per year, the parent's can continue to take a $3700 deduction for each and a $2000 lifetime learning credit for each.
- jeffyscott
- Posts: 13487
- Joined: Tue Feb 27, 2007 8:12 am
Re: How to pay ZERO taxes in retirement with 6-figure expens
While your post is titled "...pay ZERO taxes...", clearly you meant only zero income tax, as they would still be paying sales taxes, gas taxes, etc.livesoft wrote:Also I am somewhat surprised that no one wrote as the answer: "Taxpayer dies right away and owes no taxes."
Therefore, another option is: the Federal Government implements a national sales or VAT tax and changes the tax rate to 0% for incomes of $50,000 single and $100,000 joint.
-
- Posts: 3314
- Joined: Wed Feb 03, 2010 9:17 am
Re: How to pay ZERO taxes in retirement with 6-figure expens
In the post that livesoft quoted, I stated that I can't see a lot of value in the hypothetical exercise except "for and as to the hypothetical family in question and, I suppose, those situated exactly the same as them." Given that the tax code changes every year, someone who "will own their home free and clear" in the (undefined) future is not the same as, nor likely treated the same tax-wise as, someone who "own their home mortgage-free" today.sscritic wrote:Random Poster wrote:You just modified the hypothetical.livesoft wrote:I will say that the OP is not so hypothetical. Polls on the forum show that (a) many folks here are multimillionaires, (b) many folks here have children, (c) many folks here will own their home free and clear, and (d) many folks here retire early.Are you arguing about use of the future tense?original hypothetical wrote:They have no debts and own their home mortgage-free.
-
- Posts: 11647
- Joined: Sat Oct 04, 2008 11:42 am
Re: How to pay ZERO taxes in retirement with 6-figure expens
RandomPoster, Livesoft's scenario does take advantage of certain rules that may expire such as low tax rates for QDI/LTCG and maybe some tax credit. Other parts of the scenario takes advantage of rules that are unlikely to change:
1. Capital loss carryovers offset future capital gains. Investors with taxable accounts who have capital loss carryovers can harvest losses as they appear and use them to offset gains realized in the future. The current low rates for QDI/LTCG are scheduled to expire at the end of 2012 which means higher LTCG tax rates in 2013. Many investors harvested losses in 2008/2009 when LTCG tax rates were very low and to the extent that the loss carryovers are still available in 2013 and beyond, they are immune to future increases in CG tax rates.
2. Specific share identification to control of how much gain to realize when withdrawing from taxable account. A retiree may need to raise 100K to meet expenses. He/she find shares with 90K basis in the taxable account which means only 10K realized gain.
3. Deductions and exemptions provide a 0% tax bracket to every taxpayer even if they don't fit into livesoft's scenario. The 0% bracket is even larger for those who itemize deductions so YMMV. The 0% bracket helps reduce every taxpayer's effective/average tax rate. The std deduction and exemptions adjusts every year for inflation I believe.
Bottom line, even people who don't fit exactly into livesoft's hypothetical can be can benefit or learn something from it.
1. Capital loss carryovers offset future capital gains. Investors with taxable accounts who have capital loss carryovers can harvest losses as they appear and use them to offset gains realized in the future. The current low rates for QDI/LTCG are scheduled to expire at the end of 2012 which means higher LTCG tax rates in 2013. Many investors harvested losses in 2008/2009 when LTCG tax rates were very low and to the extent that the loss carryovers are still available in 2013 and beyond, they are immune to future increases in CG tax rates.
2. Specific share identification to control of how much gain to realize when withdrawing from taxable account. A retiree may need to raise 100K to meet expenses. He/she find shares with 90K basis in the taxable account which means only 10K realized gain.
3. Deductions and exemptions provide a 0% tax bracket to every taxpayer even if they don't fit into livesoft's scenario. The 0% bracket is even larger for those who itemize deductions so YMMV. The 0% bracket helps reduce every taxpayer's effective/average tax rate. The std deduction and exemptions adjusts every year for inflation I believe.
Bottom line, even people who don't fit exactly into livesoft's hypothetical can be can benefit or learn something from it.
-
- Posts: 3314
- Joined: Wed Feb 03, 2010 9:17 am
Re: How to pay ZERO taxes in retirement with 6-figure expens
Are you sure that this assertion, insofar as it pertains to "every taxpayer," is true?DSInvestor wrote:3. Deductions and exemptions provide a 0% tax bracket to every taxpayer even if they don't fit into livesoft's scenario.
In general, I don't disagree.DSInvestor wrote:Bottom line, even people who don't fit exactly into livesoft's hypothetical can be can benefit or learn something from it.
Re: How to pay ZERO taxes in retirement with 6-figure expens
......
Last edited by BlueEars on Thu Dec 22, 2011 9:35 pm, edited 1 time in total.
Re: How to pay ZERO taxes in retirement with 6-figure expens
Expenses paid with tax-advantaged funds (like 529 plans) do not qualify for Education credits so they would have to pay up to 4K (for AOC) or 10K (for the LLC) with other fundsVictoriaF wrote:The thread is provocative only to the extent that it emphasizes ZERO taxes. If one reads it with an eye for MINIMIZING taxes, a few prudent financial approaches can be identified in the OP message, including (in no particular order) the following:livesoft wrote:OK, provocative thread title. Let's see if it holds water.
...
OK, that's the setup. Any comments before we compute the taxes and the amount of Roth conversions each year?
1. Tax-loss harvesting.
2. Living in a state without state income tax.
3. Having a paid off house.
4. Getting education credits, while paying for the children's college out of the 529 plans.
Victoria
-
- Posts: 88
- Joined: Sun Jul 31, 2011 8:52 am
Re: How to pay ZERO taxes in retirement with 6-figure expens
This is only partly the case. The earnings of a 529-wothdrawal does not qualify for education credits; but the portion of a 529-withdrawal that is classed as original contributions does qualify.pshonore wrote:Expenses paid with tax-advantaged funds (like 529 plans) do not qualify for Education credits so they would have to pay up to 4K (for AOC) or 10K (for the LLC) with other funds
- jeffyscott
- Posts: 13487
- Joined: Tue Feb 27, 2007 8:12 am
Re: How to pay ZERO taxes in retirement with 6-figure expens
Well, you can pay them with the 529 money and take the tax credits, it's just that then you would have to pay taxes, but no penalties, on the 529 gains (and there may not be any gains). But you can also use the 529 to pay things like room and board which are not eligible for the tax credits, anyway.pshonore wrote:Expenses paid with tax-advantaged funds (like 529 plans) do not qualify for Education credits so they would have to pay up to 4K (for AOC) or 10K (for the LLC) with other funds
- fundtalker123
- Posts: 901
- Joined: Tue Feb 27, 2007 3:18 am
Re: How to pay ZERO taxes in retirement with 6-figure expens
Renounce US citizenship and move to a foreign tax haven?
-
- Posts: 1075
- Joined: Sun Nov 06, 2011 5:59 pm
Re: How to pay ZERO taxes in retirement with 6-figure expens
livesoft you troublemaker,
Re: How to pay ZERO taxes in retirement with 6-figure expens
Some tools to figure some of this out are found at the Optimal Retirement Planner calculator, the Intuit TaxCaster calculator and the more involved TurboTax. Let's start with the first one found at http://www.i-orp.com to get some ballpark estimates of what we need to do.
You can plug in the numbers from the OP yourself. You can estimate how much SS benefits they will get. I think I have underestimated it by saying he will get $11K a year and she will also get $11K a year (they both worked before retirement at decent jobs, after all, how else are they gonna accumulate $2M and a paid-off McMansion?) Here's a bit of the output:
The i-orp output suggests that they will pay $2K in taxes in the 1st and 2nd years of retirement, and zero income taxes until age 70. It also suggests that those $2K in taxes are at the 10% marginal income tax rate and that the couple is never above the 15% marginal tax bracket. Conversions to Roth IRA are between $28K and $34K a year. Of course, all this is an estimate and makes no use of some of the details in the OP, so let's go use TaxCaster and put in some of those details.
Give the couple $20K in qualified dividends, the two kids, the college expenses and a $3K capital loss. This gives them some tax credits which are very helpful. I will ignore any foreign tax credit for now, but they may be eligible for $600 foreign tax credit though I am not sure about this since they won't be paying any taxes for a while. Maybe the FTC can be carried over to the future? TaxCaster says that they can convert about $58,400 to a Roth IRA and pay no income taxes. That's quite a bit different than the $34K calculated by I-ORP and there is no $2K tax.
That was all with the standard deduction (say an odd year). For even years, give them $12K in property taxes and $16K in charitable donations ($6K and $8K per year). With itemizing these deductions, TaxCaster says that they can convert about $74,500 to a Roth IRA and pay no income taxes.
That sets the stage for a more detailed analysis with TurboTax itself. Can the couple get all their tax-deferred assets converted to Roth IRAs by age 70? Maybe. Maybe not. The average conversion in the first few years is more than $66K per year. It is true that the youngest kid will graduate from college in 6 to 7 years. Also do not forget that their taxable assets have no net gains that will eventually be used up. Hopefully, the value of those assets will increase, but at the same time withdrawals may diminish the amount of qualified dividends received.
Anyways, folks can reproduce my results (or not) before I get the latest version of TurboTax to use in my scenario(s). Comments welcome.
You can plug in the numbers from the OP yourself. You can estimate how much SS benefits they will get. I think I have underestimated it by saying he will get $11K a year and she will also get $11K a year (they both worked before retirement at decent jobs, after all, how else are they gonna accumulate $2M and a paid-off McMansion?) Here's a bit of the output:
Code: Select all
Age TaxDef AfterTax RothIRA IRA2Roth Savings SocSec Taxes Spending
055 36 102 0 34 0 0 2 102
056 37 106 0 35 0 0 2 106
057 28 109 0 28 0 0 0 109
058 29 112 0 29 0 0 0 112
059 30 115 0 30 0 0 0 115
060 31 119 0 31 0 0 0 119
061 31 122 0 31 0 0 0 122
062 32 126 0 32 0 0 0 126
063 33 130 0 33 0 0 0 130
064 34 134 0 34 0 0 0 134
065 41 96 0 0 0 0 0 138
066 43 76 23 0 0 0 0 142
067 44 0 102 0 0 0 0 146
068 45 0 105 0 0 0 0 150
069 47 0 108 0 0 0 0 155
070 65 0 62 0 0 40 8 160
Give the couple $20K in qualified dividends, the two kids, the college expenses and a $3K capital loss. This gives them some tax credits which are very helpful. I will ignore any foreign tax credit for now, but they may be eligible for $600 foreign tax credit though I am not sure about this since they won't be paying any taxes for a while. Maybe the FTC can be carried over to the future? TaxCaster says that they can convert about $58,400 to a Roth IRA and pay no income taxes. That's quite a bit different than the $34K calculated by I-ORP and there is no $2K tax.
That was all with the standard deduction (say an odd year). For even years, give them $12K in property taxes and $16K in charitable donations ($6K and $8K per year). With itemizing these deductions, TaxCaster says that they can convert about $74,500 to a Roth IRA and pay no income taxes.
That sets the stage for a more detailed analysis with TurboTax itself. Can the couple get all their tax-deferred assets converted to Roth IRAs by age 70? Maybe. Maybe not. The average conversion in the first few years is more than $66K per year. It is true that the youngest kid will graduate from college in 6 to 7 years. Also do not forget that their taxable assets have no net gains that will eventually be used up. Hopefully, the value of those assets will increase, but at the same time withdrawals may diminish the amount of qualified dividends received.
Anyways, folks can reproduce my results (or not) before I get the latest version of TurboTax to use in my scenario(s). Comments welcome.
Re: How to pay ZERO taxes in retirement with 6-figure expens
Just a reminder: That money that went into the tax-deferred 401(k) and traditional IRAs was tax-free going in and it appears to be tax-free coming out. That's way better than a Roth IRA and a Roth 401(k). This thread should put to rest which is better: Roth 401(k) or Traditional 401(k).
- Epsilon Delta
- Posts: 8090
- Joined: Thu Apr 28, 2011 7:00 pm
Re: How to pay ZERO taxes in retirement with 6-figure expens
I don't think this is plausible. If they actually have zero net capital gains they have been very unlucky or been poor investors. Since they are 55 they have been investing since 1980 or so. The S&P is currently higher than it has been for all but about 7 of those 30 years, so to have zero net gains their purchases must have been concentrated and very badly timed. Note that tax loss harvesting does not change net gains; compared to not TLH the extra realized losses are offset by extra unrealized gains so no net change due to TLH, it just changes the timing.livesoft wrote: They have been diligently tax-loss harvesting and the stock market has not done so well in the last few years, so their net gains in the taxable assets are essentially zero. That is, they have enough carryover losses to deduct $3,000 from ordinary income each year for quite a while. If they sell any taxable assets, the net capital gain will be essentially zero for a number of years.
So they don't have zero net gains, how much carry over loss do they have? I have worked some numbers and I don't think you can get to a plausible number of more than about 150,000 of carry over losses, unless they were really unlucky or really stupid. And perhaps 85% of their holdings (everything bought before 2009) will have a basis of 700 or less in the S&P. Livesoft has them taking 80,000 of capital per year tax free, and using 3000 per year of capital gains against ordinary income. By my reckoning the carryover losses will run out in the 5th year.