Retirement income tax rate

[nanameg]

Remembering that there is “ no question too simple” how could someone’s income tax rate be HIGHER when they are retired, ie no longer have income from working?

Perhaps it only happens when people have pensions plus SS plus plus ,say, rental income?

I’m just trying to see if we should investigate Roth conversions or Roth IRA’s. When my husband stops working in 3 years or so (68)we will only have our retirement savings for income and plan to postpone SS until 70.

[macher]

Remembering that there is “ no question too simple” how could someone’s income tax rate be HIGHER when they are retired, ie no longer have income from working?

Perhaps it only happens when people have pensions plus SS plus plus ,say, rental income?

I’m just trying to see if we should investigate Roth conversions or Roth IRA’s. When my husband stops working in 3 years or so (68)we will only have our retirement savings for income and plan to postpone SS until 70.

What I’ve read is if your income is going to be more than pre-retirement then Roth is the way to go. If your income is less than pre-retirement then tax deferred.

I could be wrong.

[nanameg]

Remembering that there is “ no question too simple” how could someone’s income tax rate be HIGHER when they are retired, ie no longer have income from working?

Perhaps it only happens when people have pensions plus SS plus plus ,say, rental income?

I’m just trying to see if we should investigate Roth conversions or Roth IRA’s. When my husband stops working in 3 years or so (68)we will only have our retirement savings for income and plan to postpone SS until 70.

What I’ve read is if your income is going to be more than pre-retirement then Roth is the way to go. If your income is less than pre-retirement then tax deferred.

I could be wrong.

That’s what I’m asking...what are situations where post retirement income is higher than working income? I know ours won’t be and I don’t understand how anyone’s could be. Unless it’s pension + SS and maybe rental income as I said above.

[McDougal]

Bookmarking this post for reference!

[Chip]

That’s what I’m asking...what are situations where post retirement income is higher than working income? I know ours won’t be and I don’t understand how anyone’s could be. Unless it’s pension + SS and maybe rental income as I said above.

Yes, those things. Plus RMDs from retirement accounts at age 72 and later.

People who maxed out their 401ks for years plus received employer matches may have very large balances by age 72, resulting in significant RMDs.

But often there is a period of time before taking social security and RMDs where tax rates are relatively low. That can be a good time for Roth conversions.

[retiredjg]

You are correct that most people have lower incomes or the same income in retirement.


Here's an example where the opposite can happen.

• -married couple, savers, not big spenders
  
  -both working, decent salary
  
  -between them there are 4 different tax-deferred accounts that they fill each year - keeping their taxable income quite low for their salary
  
  -1 or both will have a pension, 1 or both will have SS
  
  -they love their work and plan to retire at 68 or 70 and maybe even part time beyond that

When people like this retire, there could be a lot of money in the tax deferred accounts. With the pensions and their low spending habits and no debt they have no need for the tax-deferred accounts. The tax-deferred accounts just keep getting larger.

Since they retired late, there are only a few years in which to do Roth conversions. They take SS late (70). Then RMDs start (now 72). The RMDs can actually push them into a higher bracket. When the first one dies, the survivor is pushed into yet a higher tax bracket....

So this couple that used to be in something like the 22% tax bracket becomes a couple in something like the 25% tax bracket and the survivor becomes a single person in the 28% bracket (made up numbers).

There are other versions of this often including very high earners who live modestly who have access to a lot of different tax-deferred accounts.

There are a number of factors that can contribute to this "perfect storm" causing high taxes in late years and all of these people think they are doing everything right, not realizing what can happen later on.

[whereskyle]

Remembering that there is “ no question too simple” how could someone’s income tax rate be HIGHER when they are retired, ie no longer have income from working?

Perhaps it only happens when people have pensions plus SS plus plus ,say, rental income?

I’m just trying to see if we should investigate Roth conversions or Roth IRA’s. When my husband stops working in 3 years or so (68)we will only have our retirement savings for income and plan to postpone SS until 70.

What I’ve read is if your income is going to be more than pre-retirement then Roth is the way to go. If your income is less than pre-retirement then tax deferred.

I could be wrong.

That’s what I’m asking...what are situations where post retirement income is higher than working income? I know ours won’t be and I don’t understand how anyone’s could be. Unless it’s pension + SS and maybe rental income as I said above.

Sadly, one situation is when a spouse dies, making the widow(er) single and exposing the remaining spouse to a higher tax bracket.

[Monster99]

Pension + SS + spousal SS + dividend from taxable + RMD. Live in a low to moderate COL area and don't have children and you will have more income than when working......

[HomeStretch]

In addition to the possibilities given by other posters, there could be:
1) an inheritance of a non-spousal IRA/401k with RMDs over a 10-year period
2) a strong bull run that results in higher-than-expected RMDs from tax deferred accounts
3) an increase in statutory tax rates

[nanameg]

Thank you very much for the replies. I see it’s something to think more about and try to plan for. A reminder again that “the tax man cometh” no matter what.

[Randtor]

You are correct that most people have lower incomes or the same income in retirement........
[edit for brevity]
There are a number of factors that can contribute to this "perfect storm" causing high taxes in late years and all of these people think they are doing everything right, not realizing what can happen later on.

Interesting thought... so, knowing this can happen, is there a work around or solution to prevent this or soften the blow...other than spending all you got!

[dwickenh]

Remembering that there is “ no question too simple” how could someone’s income tax rate be HIGHER when they are retired, ie no longer have income from working?

Perhaps it only happens when people have pensions plus SS plus plus ,say, rental income?

I’m just trying to see if we should investigate Roth conversions or Roth IRA’s. When my husband stops working in 3 years or so (68)we will only have our retirement savings for income and plan to postpone SS until 70.

What I’ve read is if your income is going to be more than pre-retirement then Roth is the way to go. If your income is less than pre-retirement then tax deferred.

I could be wrong.

That’s what I’m asking...what are situations where post retirement income is higher than working income? I know ours won’t be and I don’t understand how anyone’s could be. Unless it’s pension + SS and maybe rental income as I said above.

Sadly, one situation is when a spouse dies, making the widow(er) single and exposing the remaining spouse to a higher tax bracket.

I'm there right now as this is my first year I will be taxed as "single". I am trying to hold off on SS to be able to do some roth
conversions before taking SS.

[delamer]

Remembering that there is “ no question too simple” how could someone’s income tax rate be HIGHER when they are retired, ie no longer have income from working?

Perhaps it only happens when people have pensions plus SS plus plus ,say, rental income?

I’m just trying to see if we should investigate Roth conversions or Roth IRA’s. When my husband stops working in 3 years or so (68)we will only have our retirement savings for income and plan to postpone SS until 70.

What I’ve read is if your income is going to be more than pre-retirement then Roth is the way to go. If your income is less than pre-retirement then tax deferred.

I could be wrong.

That’s what I’m asking...what are situations where post retirement income is higher than working income? I know ours won’t be and I don’t understand how anyone’s could be. Unless it’s pension + SS and maybe rental income as I said above.

Sadly, one situation is when a spouse dies, making the widow(er) single and exposing the remaining spouse to a higher tax bracket.

In addition, tax rates are subject to change as we saw a couple years ago. So even if under current law your marginal rate would be lower in retirement, the current law may not be relevant for your entire retirement.

Another possibility is that substantial tax-deferred savings, pre-tax health insurance premiums, and taking the mortgage (or other) deduction might cause your taxable income to be lower while working then when retired.

[retiredjg]

You are correct that most people have lower incomes or the same income in retirement........
[edit for brevity]
There are a number of factors that can contribute to this "perfect storm" causing high taxes in late years and all of these people think they are doing everything right, not realizing what can happen later on.

Interesting thought... so, knowing this can happen, is there a work around or solution to prevent this or soften the blow...other than spending all you got!

Mostly just be aware that it is possible to have too much in tax deferred accounts - this is not one of those things where "if a little is good, then a lot more is even better".

My (gu)estimation is that ordinary people filling 1 tax-deferred account per person will not create a problem unless you started filling them at an early age (like 24 or something) and have a very long career.

Filling more than 1 tax-deferred account per person will unlikely be a problem if you retire early enough to use the money or convert a good portion to Roth before RMDs.

If you have a pension or two pensions coming, consider using more Roth contributions than tax-deferred contributions even if it means paying more tax while working.

Most people do not start early. Most do not fill even 1 tax-deferred account much less more than 1. So this consideration of "saving too much in tax-deferred" does not apply to most people. It probably applies to Bogleheads more because BHs are more likely to be super-savers.

[whereskyle]

Remembering that there is “ no question too simple” how could someone’s income tax rate be HIGHER when they are retired, ie no longer have income from working?

Perhaps it only happens when people have pensions plus SS plus plus ,say, rental income?

I’m just trying to see if we should investigate Roth conversions or Roth IRA’s. When my husband stops working in 3 years or so (68)we will only have our retirement savings for income and plan to postpone SS until 70.

What I’ve read is if your income is going to be more than pre-retirement then Roth is the way to go. If your income is less than pre-retirement then tax deferred.

I could be wrong.

That’s what I’m asking...what are situations where post retirement income is higher than working income? I know ours won’t be and I don’t understand how anyone’s could be. Unless it’s pension + SS and maybe rental income as I said above.

Sadly, one situation is when a spouse dies, making the widow(er) single and exposing the remaining spouse to a higher tax bracket.

In addition, tax rates are subject to change as we saw a couple years ago. So even if under current law your marginal rate would be lower in retirement, the current law may not be relevant for your entire retirement.

Exactly. My attitude is that, unless you're in the highest bracket, max out your Roth.

[dbr]

Thank you very much for the replies. I see it’s something to think more about and try to plan for. A reminder again that “the tax man cometh” no matter what.

Yes, its math. A person has to go through and estimate the numbers. Also a lesson about taxes is that it all depends on the details, different for every person.

Another thing that can happen, while we are not to speculate on policy, is that tax law can change, and it is a long time between starting out as a young taxpayer and ending up in retirement looking at what the tax bill is.

The 401k (1978) didn't even exist for the first ten years of my earning career and the Roth IRA until into the fourth decade of my earning years (1997). Also when I started working the tax rate was already 39% at $24k taxable income and 70% at the top bracket. Last year the whole schedule for deductions and exemptions got drastically changed.

[Retiredron]

Doing a large Roth conversion in one year in retirement will be taxable income that could push you into the next tax bracket vs when you were working. I continue to talk to friends and others who don't recognize this potential. If you want to consider Roth conversions you have to understand what each annual conversion does to your marginal tax rate. Also, remember the hidden Medicare tax that sometimes comes into play when you do a large Roth conversion in a single year.

With a large Roth conversion a retiree (married or singe) could easily be in a higher tax bracket vs. the last working year.

[leftcoaster]

Non qualified deferred compensation

Sale of ESPP shares , which have an embedded income part

Interest income from savings bond deferral.

[Faith20879]

I can think of one other scenario, doesn't happen often but it does.

For someone who failed to spread out their savings bond purchases may end up with a huge amount maturing in a single year, especially if bought before the $10,000 limit was installed.

[Ron Ronnerson]

Here are some factors that may affect my tax rate in retirement (these are my actual circumstances, and not theoretical):

The current tax brackets expire in 2025

I won’t be able to claim the mortgage interest deduction as the house is paid off

Kid will grow up and won’t be able to claim child tax credit

The Affordable Care Act provides us with a tax credit toward health insurance. It’s $16k this year. We may no longer qualify for it in the future or the law could be changed by then.

I won’t have tax deferred accounts available anymore

RMDs

I’m expecting a six-figure pension and we’re both expecting social security

Tax status change once one of us passes away

We bought our Bay Area home in 2010 and it has gone up in value. Capital gains are excluded on only up to $500k in gains for married filing jointly (half that for singles). If our house appreciates at 3% per year, in about 5 years, when we are age 50, we will exceed the $500k in gains.

I will no longer be able to deduct educator expenses

We use a flexible spending account for medical expenses that won’t be available

I currently make $115k per year and we pay an effective tax rate of approximately 1% for federal income tax and 0% for California income tax. This is mainly due to using tax deferred accounts. It’s hard to imagine it being lower in retirement.

[Watty]

Here are a couple that may not have been mentioned yet.

1) Future tax rate increases. Tax rates are scheduled to revert to the old tax rates in 2026 if there are not any future tax law changes.

2) You may move to a state with higher state taxes.

That said you always need to be careful about comparing your current marginal tax rate to your effective tax rate when you are retired.

I would also caution that if you are years away from being retired the things may not go as planned and you may not actually end up in a high retirement tax bracket. Especially when I was going through my 50s I saw more people than I would have expected run into things like layoff, burnout health problems, divorces, the death of spouse that changed their retirement plans and likely put them in a lower retirement tax bracket than expected.

[TomatoTomahto]

Remembering that there is “ no question too simple” how could someone’s income tax rate be HIGHER when they are retired, ie no longer have income from working?

Perhaps it only happens when people have pensions plus SS plus plus ,say, rental income?

I’m just trying to see if we should investigate Roth conversions or Roth IRA’s. When my husband stops working in 3 years or so (68)we will only have our retirement savings for income and plan to postpone SS until 70.

1. Well, we are not allowed to speculate on such things, but I think I’m allowed to say that, of the three choices (marginal tax rate stays the same, goes up, or goes down), if you forced me to make a choice, I’d say goes up.
2. As others have said, sadly, many of us will be filing single at some point
3. Many of us have 7 digit deferred tax accounts whose RMDs, while they start low, go up impressively
4. 2026 tax reversion
5. Many of us have deferred compensation that will come into play

In our individual case, our earned income will be considerably lower once my wife retires. However, when my widow files single, and with my expectations of future single tax rates, and so on, I expect that she will have a higher marginal tax rate than today.

We are doing some paced Roth conversions and her current contributions go to a Roth 401k.

[Dandy]

During my accumulation years I was a good saver in my 401k. I also focused on waiting to collect Social Security until age 70 and delayed collecting a small pension until 65. All was focused on getting a high income in retirement. It was successful. My pension and SS almost equals our normal retirement expenses. What I didn't focus on very much was how large my TIRA was and that after a 10 year bull market it would be much larger. I did some modest Roth conversions.

When I reached age 70 a couple of years ago I collected my first RMD. What I then realized was the my RMDs would cause me to be in a high tax bracket for life. I'm not complaining since I got tax relief while contributing to my TIRA and it is time for Uncle Sam to get his money. I just spent too much time building retirement income and my 401k and not enough about thinking what income and taxes would be at age 70 and beyond -- even though my TIRA allocation is about 22/78!!

I should have done more Roth conversions. But I didn't have enough focus on tax life after age 70. It kind of goes against nature to incur taxes when you don't have to - that also limited my Roth conversion focus.

[TomatoTomahto]

I should have done more Roth conversions. But I didn't have enough focus on tax life after age 70. It kind of goes against nature to incur taxes when you don't have to - that also limited my Roth conversion focus.

It’s painful to even think about it. It’s also not a great dinner time conversation. My wife is brilliant and the reason we have this “problem,” , but she looked at me funny when I said, “honey, I think we should do some Roth conversions and pay more tax than we absolutely have to this year.” It’s a good thing that she loves me and is non-violent.

[ruralavalon]

Remembering that there is “ no question too simple” how could someone’s income tax rate be HIGHER when they are retired, ie no longer have income from working?

Perhaps it only happens when people have pensions plus SS plus plus ,say, rental income?

I’m just trying to see if we should investigate Roth conversions or Roth IRA’s. When my husband stops working in 3 years or so (68)we will only have our retirement savings for income and plan to postpone SS until 70.

An example of a person who might be in a higher tax bracket in retirement is a young person just starting with a modest income, in a profession or occupation which will put them at very high earnings for most of their working life (e.g. physician in residency training for a highly paid specialty; young attorney, engineer, or MBA in similar circumstances; young entrepreneur or contractor). Then it may be best to make Roth contributions early in their career, and traditional contributions later.

A substantial pension in addition to Social Security, coupled with a large amount in traditional tax-deferred accounts, is a common example of how someone might be in a higher tax bracket in retirement.

Distributions from traditional tax-deferred accounts are taxed as ordinary income, as are pension payments, and up to 85% of Social Security benefits.

For most people traditional deductible IRA or 401k contributions will likely be better.

The income tax code is progressive, with a lower tax rate for lower income. Retirement usually means that employment income has ended. Therefore, most people are in a lower tax bracket in retirement and for most people traditional deductible IRA or 401k contributions will probably be better.

Because the tax code is progressive, when you withdraw from your IRA or 401k in retirement the income is not all taxed at the marginal tax rate specified for your tax bracket. TFB blog post, "The case against Roth 401k". "I think for most people the majority, if not 100%, of the contribution should go to a Traditional 401(k)." Because the tax code is progressive, "Until you know you can generate from your Traditional 401(k) enough income to fill the lower brackets, it doesn’t make sense to contribute to a Roth 401(k). For people without a traditional defined benefit pension plan, it means the majority of the retirement savings should go to a Traditional 401(k), not Roth."

A pension changes that analysis, so that Roth contributions are likely better if you have a significant pension coming in addition to Social Security. TFB blog post, "Most TSP participants should switch to the Roth TSP". That post discussed the effect of a federal pension, but the analysis should hold for other pensions.

Wiki article, "Traditional vs Roth".

As others have pointed out this is difficult because the tax code will surely change in future decades; it has changed in past decades.

Todays retirement investing vehicles didn't even exist when some of us began working. I started my first "real" job in 1971. The IRA didn't exist until 1974, and has been modified frequently . "History of the Individual Retirement Arrangement (IRA history)". The 401k didn't start until 1978, and has been modified frequently since. EBRI "History of 401(k) Plans: An Update". Roth IRAs didn't even exist until the 1997, and Roth 401k didn't start until 2006. I retired in 2011.

I expect there will be tax changes in the future. We get a new Congress every two years. So we can't know how future Congresses will act on taxes, I wouldn't even want to try to guess.

[RetiredAL]

Instead of putting everything into my 401K, I choose many years ago to fully fund our Roth's and less than maximum fund the 401K. Today I'm glad we did. My taxable income for many years was right below the rate step, so the 401K helped to keep the income flowing to the Roth's taxed low.

Now retired, I'm currently doing Roth conversions to the top of the bracket. The additional 2 years delay for the RMD's helps.

When RMD's start, we will still be in the 12% ( 15% in the future ) bracket as long as we are MFJ. Going single will be result in big a big tax hike to the survivor.

The reason for doing the Roth's was not due to financial prudence when I started doing so about year 2000. When I started modeling retirement money flows a few years before I retired, I realized how important that long before decision to not have everything tied up in the 401K actually was.

Even knowing the tax implications of becoming single, It grates me every year to do the conversions and pay the tax. The funny thing is I never batted an eye at paying tax early for those Roth's over the years since my payroll withholding covered it, but doing a conversion requires me to plan for that tax bill, which mentally hurts, even though the numbers say it's the right thing to do.

[MathWizard]

This can easily happen for the surviving spouse of a married couple.

Suppose that while yo are working, you make close to or under $104,650 for 2020,
income split about equally between spouses, and you live on $70K and your employer pays your health ins.
Then MFJ, with the standard deduction of $24,400 means that you are in the 12% federal tax bracket.

Now suppose that you retire, are required to take RMDs, and one spouse dies.
The next year, the surviving spouse must take RMDs from both of the couple's tax deferred accounts.
That along with then larger of the two SS benefits, of which 85% may be taxed, and either the RMD
you are required to take, or the amount you need to take anyway to support yourself, may
easily exceed $60K (you need to pay fror your own health care now, and Medicare is not free)
if you do not have a decent amount of ROTH funds. Suppose it is $60K.

Now you must start filing single, with a Standard Deduction of $12,400 + 1,650 (for single over 65)
Assume that larger SS check would is about $30K. Then you draw $30K from tax deferred,
so 1/2 SS + tax deferred income = $45K, so 85% of SS is taxable, giving income of
30K + 85% 30K = $ 55.5K before subtracting SD.

After the SD, this means taxable income is $41.45K, which is into the 22% (by the 25% bracket).

This is even with spending going down in retirement from $70K to $60K, even while picking up
the health care costs, and getting a higher SD dues to over 65.

[Vanguard Fan 1367]

I recommend "The Tax Bomb in Your Retirement" by Josh Scandlen. It discusses the situation of taxes and other increased fees in retirement sometimes due partly to poor planning and recommends Roth when appropriate to help with a number of issues, including what percent of your Social Security Income is taxable.kk

[GMT-8]

We are in this situation having started an IRA when the program was initially set up. Compound interest was my friend and my jobs were never too lucrative but I made massive 401(k) contributions in my last position.

Now we have a couple million in IRAs, one pension, a paid-off house and only charitable contributions.

I’ve got 2 years more to whittle away at my IRA before hitting SS and RMDs. Our tax rate will be much higher unless I jump up the contributions proportionately.

[CurlyDave]

...Interesting thought... so, knowing this can happen, is there a work around or solution to prevent this or soften the blow...other than spending all you got!

We have brick and mortar real estate investments that throw off spendable income while providing a tax loss due to the magic of depreciation. Thanks to another provision of the tax code, the basis of these investments is reset to appraised value at the time of our death, greatly benefitting our heirs.

It is really unfortunate that one of the few ways I can think of to soften the tax blow involves dying, but our children will be better off.

[booch221]

Perhaps it only happens when people have pensions plus SS plus plus ,say, rental income?

That's correct. I have all of those plus a hefty traditional IRA.
When I have to start taking RMDs in five years it will push me from the 22% tax bracket into the 25%.
That is not enough of a difference to get me to convert to a Roth.

[retiredjg]

When I have to start taking RMDs in five years it will push me from the 22% tax bracket into the 25%.
That is not enough of a difference to get me to convert to a Roth.

But when that time comes, the 22% bracket will almost certainly be the 25% bracket atain and you will then be pushed into the 28% bracket. Is that enough to get you to convert some to Roth?

Or course, it might be too late for conversions to make a difference. But maybe not.

[nanameg]

During my accumulation years I was a good saver in my 401k. I also focused on waiting to collect Social Security until age 70 and delayed collecting a small pension until 65. All was focused on getting a high income in retirement. It was successful. My pension and SS almost equals our normal retirement expenses. What I didn't focus on very much was how large my TIRA was and that after a 10 year bull market it would be much larger. I did some modest Roth conversions.

When I reached age 70 a couple of years ago I collected my first RMD. What I then realized was the my RMDs would cause me to be in a high tax bracket for life. I'm not complaining since I got tax relief while contributing to my TIRA and it is time for Uncle Sam to get his money. I just spent too much time building retirement income and my 401k and not enough about thinking what income and taxes would be at age 70 and beyond -- even though my TIRA allocation is about 22/78!!
I’m sorry what’s TIRA? It’s not in the acronym list in the wiki
I should have done more Roth conversions. But I didn't have enough focus on tax life after age 70. It kind of goes against nature to incur taxes when you don't have to - that also limited my Roth conversion focus.

[nanameg]

During my accumulation years I was a good saver in my 401k. I also focused on waiting to collect Social Security until age 70 and delayed collecting a small pension until 65. All was focused on getting a high income in retirement. It was successful. My pension and SS almost equals our normal retirement expenses. What I didn't focus on very much was how large my TIRA was and that after a 10 year bull market it would be much larger. I did some modest Roth conversions.

When I reached age 70 a couple of years ago I collected my first RMD. What I then realized was the my RMDs would cause me to be in a high tax bracket for life. I'm not complaining since I got tax relief while contributing to my TIRA and it is time for Uncle Sam to get his money. I just spent too much time building retirement income and my 401k and not enough about thinking what income and taxes would be at age 70 and beyond -- even though my TIRA allocation is about 22/78!!
I’m sorry what’s TIRA? It’s not in the acronym list in the wiki
I should have done more Roth conversions. But I didn't have enough focus on tax life after age 70. It kind of goes against nature to incur taxes when you don't have to - that also limited my Roth conversion focus.

Sorry again...I inserted that question in the wrong place...what’s TIRA?

[nanameg]

I recommend "The Tax Bomb in Your Retirement" by Josh Scandlen. It discusses the situation of taxes and other increased fees in retirement sometimes due partly to poor planning and recommends Roth when appropriate to help with a number of issues, including what percent of your Social Security Income is taxable.kk

Thanks for the book recommendation

[Vanguard Fan 1367]

TIRA stands for traditional IRA as opposed to Roth IRA

[booch221]

When I have to start taking RMDs in five years it will push me from the 22% tax bracket into the 25%.
That is not enough of a difference to get me to convert to a Roth.

But when that time comes, the 22% bracket will almost certainly be the 25% bracket atain and you will then be pushed into the 28% bracket. Is that enough to get you to convert some to Roth?

Or course, it might be too late for conversions to make a difference. But maybe not.

No one knows what tax rates will be in five years. Even if your speculation comes true it's still a difference of only 3% in my marginal tax rate.

Actually I would be in the 24% tax bracket if I were taking RMDs this year, not 25%, and only $1,375 would be subject to the higher tax rate. So by converting to a Roth I would save only $27.50. Not worth the bother.

[booch221]

The current tax brackets expire in 2025

I was unaware of this so I googled it:

While nothing is currently set to expire in 2024, December 31st, 2025, will be a significant day for most taxpayers. Twenty-three provisions from the Tax Cuts and Jobs Act directly relating to individual income taxes will expire, meaning most taxpayers will see a tax hike unless some or all provisions are extended. Some of the most impactful provisions scheduled to expire include the TCJA’s reduction of individual income rates, increased child tax credit, the increased AMT exemption and phaseout threshold, and the increased standard deduction. The individual income tax code is effectively scheduled to return to what it was before the TCJA, meaning personal exemptions, the overall limitation on itemized deductions, uncapped state and local tax deductions, and many other miscellaneous itemized deductions will return. Despite most of the individual income tax code returning to its pre-TCJA structure, inflation adjustments will continue to be determined by the Chained Consumer Price Index (C-CPI), as set by TCJA, which will result in most taxes increasing when compared to their pre-TCJA levels. Additionally, the qualified business income deduction, which allows pass-through businesses to deduct up to 20 percent of their income, will also expire. For a full list of the twenty-three expiring provisions, consult this JCT publication.
https://taxfoundation.org/look-ahead-ex ... rovisions/

YIKES!

[booch221]

I should have done more Roth conversions. But I didn't have enough focus on tax life after age 70. It kind of goes against nature to incur taxes when you don't have to - that also limited my Roth conversion focus.

Especially when they recommend not paying the taxes with IRA money, but from your taxable account.

[rockstar]

The whole premise behind tax deferred retirement accounts is that you'll be in a lower tax bracket when you retire. This is great until you hit mandatory withdrawals and expect to live another ten years. You might end up in a higher bracket. Also, who knows what our tax rates will look like when we retire? They could go to the moon to pay for all of the stimulus being used today. We really don't know.

I have decided to split my retirement 50/50. Half is in a tax deferred account. Half is in a taxable account. This is probably not the best strategy, but I have no clue what taxes will be like when I retire.

[clown]

One possible strategy to mitigate this. If you retire before 65, convert Traditional IRA to Roth IRA. Since you will not have social security or RMDs yet, your income will be less so this is the time to do it. In the e short run, you may need to cough hard and pay the tax man (although best practice is to pay tax from other sources). If you take the long view, however, there are three advantages -- (1) Roths do not have RMDs, thus keeping your income down (2) dividends and interest are free of tax (3) when you choose to withdraw from Roth, it is tax free. I am not a financial professional or tax accountant, but this made sense to me. I did it.

[Ron Ronnerson]

The current tax brackets expire in 2025

I was unaware of this so I googled it:

While nothing is currently set to expire in 2024, December 31st, 2025, will be a significant day for most taxpayers. Twenty-three provisions from the Tax Cuts and Jobs Act directly relating to individual income taxes will expire, meaning most taxpayers will see a tax hike unless some or all provisions are extended. Some of the most impactful provisions scheduled to expire include the TCJA’s reduction of individual income rates, increased child tax credit, the increased AMT exemption and phaseout threshold, and the increased standard deduction. The individual income tax code is effectively scheduled to return to what it was before the TCJA, meaning personal exemptions, the overall limitation on itemized deductions, uncapped state and local tax deductions, and many other miscellaneous itemized deductions will return. Despite most of the individual income tax code returning to its pre-TCJA structure, inflation adjustments will continue to be determined by the Chained Consumer Price Index (C-CPI), as set by TCJA, which will result in most taxes increasing when compared to their pre-TCJA levels. Additionally, the qualified business income deduction, which allows pass-through businesses to deduct up to 20 percent of their income, will also expire. For a full list of the twenty-three expiring provisions, consult this JCT publication.
https://taxfoundation.org/look-ahead-ex ... rovisions/

YIKES!

Yes, I should have clarified that the current tax brackets expire at the end of 2025. I wouldn't necessarily feel doom-and-gloom about this, though. First, there is a chance that some (or more than some) of the provisions will be extended. Secondly, there are often opportunities to control taxes, at least to some degree. When the TCJA went into effect, it pushed us from the 15% to the 22% bracket. I posted about it a couple of years ago here: viewtopic.php?t=236049

In 2018, we decided to make some changes and those changes resulted in our taxes going down (substantially even) instead of going up. There are often levers people can pull when it comes to taxes; being flexible and willing to adapt to changing tax laws can come in handy.

[MathIsMyWayr]

How about a two-teacher couple? Each maxes 403(b) and 457(b), and also contributes to pension.

[Stinky]

I currently make $115k per year and we pay an effective tax rate of approximately 1% for federal income tax and 0% for California income tax. This is mainly due to using tax deferred accounts. It’s hard to imagine it being lower in retirement.

You make $115k and pay about $1,150 in combined federal and California income taxes?

Impressively low!

[Ron Ronnerson]

I currently make $115k per year and we pay an effective tax rate of approximately 1% for federal income tax and 0% for California income tax. This is mainly due to using tax deferred accounts. It’s hard to imagine it being lower in retirement.

You make $115k and pay about $1,150 in combined federal and California income taxes?

Impressively low!

It’s about $1400 for federal and California combined at the moment but I expect to pay more in the future. I’m deferring much of my income right now.

[MathIsMyWayr]

I currently make $115k per year and we pay an effective tax rate of approximately 1% for federal income tax and 0% for California income tax. This is mainly due to using tax deferred accounts. It’s hard to imagine it being lower in retirement.

You make $115k and pay about $1,150 in combined federal and California income taxes?

Impressively low!

It’s about $1400 for federal and California combined at the moment but I expect to pay more in the future. I’m deferring much of my income right now.

This is a simple example of optimization in mathematics. If the present tax rate is higher than the future tax rate (including Roth conversion) on the next $1, it is better to defer tax on it. Otherwise, pay tax on it now, i.e., Roth. The 1% is the average tax rate. What is the marginal tax rate?

[Ron Ronnerson]

I currently make $115k per year and we pay an effective tax rate of approximately 1% for federal income tax and 0% for California income tax. This is mainly due to using tax deferred accounts. It’s hard to imagine it being lower in retirement.

You make $115k and pay about $1,150 in combined federal and California income taxes?

Impressively low!

It’s about $1400 for federal and California combined at the moment but I expect to pay more in the future. I’m deferring much of my income right now.

This is a simple example of optimization in mathematics. If the present tax rate is higher than the future tax rate (including Roth conversion) on the next $1, it is better to defer tax on it. Otherwise, pay tax on it now, i.e., Roth. The 1% is the average tax rate. What is the marginal tax rate?

Marginal tax rate is 12% federal and 2% California.

[MathIsMyWayr]

I currently make $115k per year and we pay an effective tax rate of approximately 1% for federal income tax and 0% for California income tax. This is mainly due to using tax deferred accounts. It’s hard to imagine it being lower in retirement.

You make $115k and pay about $1,150 in combined federal and California income taxes?

Impressively low!

It’s about $1400 for federal and California combined at the moment but I expect to pay more in the future. I’m deferring much of my income right now.

This is a simple example of optimization in mathematics. If the present tax rate is higher than the future tax rate (including Roth conversion) on the next $1, it is better to defer tax on it. Otherwise, pay tax on it now, i.e., Roth. The 1% is the average tax rate. What is the marginal tax rate?

Marginal tax rate is 12% federal and 2% California.

California is known as a high tax state, but it has many lower tax rungs leading to 9.3% with a very wide income range and higher. It is not so bad as Oregon.
OR Tax Bracket Tax Rate
$0.00+ 5%
$7,100.00+ 7%
$17,800.00+ 9%
$250,000.00+ 9.9%

[booch221]

California is known as a high tax state, but it has many lower tax rungs leading to 9.3% with a very wide income range and higher. It is not so bad as Oregon.
OR Tax Bracket Tax Rate
$0.00+ 5%
$7,100.00+ 7%
$17,800.00+ 9%
$250,000.00+ 9.9%

But California has a 7.25% sales tax.
Oregon has no sales tax.

[FiveK]

Especially when they recommend not paying the taxes with IRA money, but from your taxable account.

And a good recommendation it is: effectively converting taxable money into Roth money.