How much cash to withdraw when retiring

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fantasytensai
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How much cash to withdraw when retiring

Post by fantasytensai » Sun Mar 19, 2017 12:55 pm

I am helping my parents plan retirement. They are not SS age yet, so their current pension is ~$50,000 pretax per year. They have a fully paid off house and not many expenses, so I want to find out the optimum way for them to withdraw from their investments for tax purposes.

First, a preliminary question - for long term capital gains to be 0%, does the taxable income have to be less than $75,900? As in, if your taxable becomes $75,901, it jumps all the way to 15%? I know the normal brackets are progressive but idk about capital gains. If so, then I guess $75,899 is the magic number I want to hit.

In 2017, standard deduction is $12,700, and personal exemption is $8,100 for two. So is the calculation as simple as $75,899 + $12,700 + $8,100 - $50,000 = $46,699? Using this math, with their current pension, and if they withdraw $46,699, they can do so at a 0%? If so, that would be awesome.

I am 99% sure I am overlooking something. Which is why you guys would be SO awesome if you point it out as always!

Cheers to happy retirements,
fantasytensai

Edit: forgot a couple of things. 1. They live in a state without income tax so itemized deduction is not the way to go; and 2. they would be withdrawing from their 401(k), which is where most of the bonds/income funds are stored. Their taxable accounts holds mostly equity.

Edit 2: It has been pointed out to me that 401k withdrawals do NOT qualify for capital gains rate.
Last edited by fantasytensai on Sun Mar 19, 2017 1:50 pm, edited 2 times in total.

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elgob.bogle
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Re: How much cash to withdraw when retiring

Post by elgob.bogle » Sun Mar 19, 2017 12:58 pm


dwickenh
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Re: How much cash to withdraw when retiring

Post by dwickenh » Sun Mar 19, 2017 1:07 pm

Here is a good link to understand the tax treatment of capital gains vs regular income.

http://fairmark.com/general-taxation/your-tax-bracket/

Dan
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett

fantasytensai
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Re: How much cash to withdraw when retiring

Post by fantasytensai » Sun Mar 19, 2017 1:14 pm

dwickenh wrote:Here is a good link to understand the tax treatment of capital gains vs regular income.

http://fairmark.com/general-taxation/your-tax-bracket/

Dan


Great info. Thanks! I copied and pasted the below from the link you provided.

If my ordinary income puts me in the 15% tax bracket, can I receive an unlimited amount of long-term capital gain at the 0% rate?
No, the 0% rate applies only to the amount of long-term capital gain and qualified dividend income needed to “fill up” the 15% tax bracket. For example, if your ordinary income is $4,000 below the figure that would put you in the 25% bracket and you have a $10,000 long-term capital gain, you’ll pay 0% on $4,000 of your capital gain and 15% on the rest.

kolea
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Re: How much cash to withdraw when retiring

Post by kolea » Sun Mar 19, 2017 1:35 pm

fantasytensai wrote:First, a preliminary question - for long term capital gains to be 0%, does the taxable income have to be less than $75,900? As in, if your taxable becomes $75,901, it jumps all the way to 15%? I know the normal brackets are progressive but idk about capital gains. If so, then I guess $75,899 is the magic number I want to hit.


I believe it is $74.9k to stay in the 15% bracket. But the important thing is that when you have LTCG, your tax bracket is not determined by your AGI, it is determined by: AGI - (LTCG + QD). When you have LTCG you are thrown into the worksheet for calculating taxes and the first thing that worksheet does is subtract off LTCG and QD from the AGI figure on line 43 of the 1040. It then determines the tax on that amount in the normal way and separately determines the tax on LTCG + QD

So in your case, your parents can have 50k pension + 50k LTCG = 100k of AGI. But their tax bracket is still 15%. (I am ignoring deductions).

But where it gets tricky for the 15% bracket is that only the amount of LTCG that keeps the AGI less than $74.9k will be taxed at 0%, the remainder will be taxed at 15%.

So in the example above: $24.9 of LTCG will be taxed at 0% (since 50 + 24.9 = 74.9, the limit), and $25.1k will be taxed at 15%.
Kolea (pron. ko-lay-uh). Golden plover.

fantasytensai
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Re: How much cash to withdraw when retiring

Post by fantasytensai » Sun Mar 19, 2017 1:43 pm

kolea wrote:
fantasytensai wrote:First, a preliminary question - for long term capital gains to be 0%, does the taxable income have to be less than $75,900? As in, if your taxable becomes $75,901, it jumps all the way to 15%? I know the normal brackets are progressive but idk about capital gains. If so, then I guess $75,899 is the magic number I want to hit.


I believe it is $74.9k to stay in the 15% bracket. But the important thing is that when you have LTCG, your tax bracket is not determined by your AGI, it is determined by: AGI - (LTCG + QD). When you have LTCG you are thrown into the worksheet for calculating taxes and the first thing that worksheet does is subtract off LTCG and QD from the AGI figure on line 43 of the 1040. It then determines the tax on that amount in the normal way and separately determines the tax on LTCG + QD

So in your case, your parents can have 50k pension + 50k LTCG = 100k of AGI. But their tax bracket is still 15%. (I am ignoring deductions).

But where it gets tricky for the 15% bracket is that only the amount of LTCG that keeps the AGI less than $74.9k will be taxed at 0%, the remainder will be taxed at 15%.

So in the example above: $24.9 of LTCG will be taxed at 0% (since 50 + 24.9 = 74.9, the limit), and $25.1k will be taxed at 15%.



But if you take deductions and exemptions into consideration, that would still mean that I was right that 50 + 46.7 - 12.7 - 8.1 = 74.9; so 46.7 will be 0%; the 50k will be taxed at 15% (normal income rate for 18,650 to 75,900), and that should be it as far as federal tax liabilities are concerned, right?

Edit: Follow up question to see if I understood you correctly - IF my parents withdraws another 20k on top of the 46.7, then that 20k would be taxed at 15% LTCG rate, but the original 50k from the pension will NOT be subject to higher bracket of 25%. It will still remain 15% of normal rate, correct?

kolea
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Re: How much cash to withdraw when retiring

Post by kolea » Sun Mar 19, 2017 2:16 pm

fantasytensai wrote:Edit: Follow up question to see if I understood you correctly - IF my parents withdraws another 20k on top of the 46.7, then that 20k would be taxed at 15% LTCG rate, but the original 50k from the pension will NOT be subject to higher bracket of 25%. It will still remain 15% of normal rate, correct?


Yes, that is correct.

The 15% bracket is a wonderful thing. For the first time in our tax paying lives we were in it this year. Our effective tax came out to about 6%, largely because of how LTCG are handled. Our numbers are not too dissimilar from what we have been throwing around here.
Kolea (pron. ko-lay-uh). Golden plover.

Fishing50
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Re: How much cash to withdraw when retiring

Post by Fishing50 » Sun Mar 19, 2017 11:51 pm

How much equities in taxable? They can sell equities in taxable, paying 0% LTCG to fill up the 15% tax bracket which will probably generate more than $50k including the basis. Next year they can do Roth conversions to fill up the 15% tax bracket, paying taxes from taxable.

Beware of going over 15% tax bracket with income because the last added income is taxed at 15% and the LTCG that moved into 25% tax bracket is taxed at 15% LTCG, causing 30% taxes.
It's perfectly legal, go ask the IRS, they'll say the same thing. I actually feel stupid telling you this, I'm sure you would've investigated the matter yourself. Andy Dufresne

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BL
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Re: How much cash to withdraw when retiring

Post by BL » Mon Mar 20, 2017 7:02 am

Edit: forgot a couple of things. 1. They live in a state without income tax so itemized deduction is not the way to go; and 2. they would be withdrawing from their 401(k), which is where most of the bonds/income funds are stored. Their taxable accounts holds mostly equity.

Edit 2: It has been pointed out to me that 401k withdrawals do NOT qualify for capital gains rate.


If they are indeed withdrawing from 401k, then they will pay 15% on all of it up to the top of the bracket, and 25% on any above that.

If they withdraw instead from taxable, the basis is not taxed at all but Capital Gains would be taxed at 0% to the top of the 15% tax bracket and 15% on any amount above that.

cherijoh
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Re: How much cash to withdraw when retiring

Post by cherijoh » Mon Mar 20, 2017 7:27 am

fantasytensai wrote:I am helping my parents plan retirement. They are not SS age yet, so their current pension is ~$50,000 pretax per year. They have a fully paid off house and not many expenses, so I want to find out the optimum way for them to withdraw from their investments for tax purposes.

First, a preliminary question - for long term capital gains to be 0%, does the taxable income have to be less than $75,900? As in, if your taxable becomes $75,901, it jumps all the way to 15%? I know the normal brackets are progressive but idk about capital gains. If so, then I guess $75,899 is the magic number I want to hit.

In 2017, standard deduction is $12,700, and personal exemption is $8,100 for two. So is the calculation as simple as $75,899 + $12,700 + $8,100 - $50,000 = $46,699? Using this math, with their current pension, and if they withdraw $46,699, they can do so at a 0%? If so, that would be awesome.

I am 99% sure I am overlooking something. Which is why you guys would be SO awesome if you point it out as always!

Cheers to happy retirements,
fantasytensai

Edit: forgot a couple of things. 1. They live in a state without income tax so itemized deduction is not the way to go; and 2. they would be withdrawing from their 401(k), which is where most of the bonds/income funds are stored. Their taxable accounts holds mostly equity.

Edit 2: It has been pointed out to me that 401k withdrawals do NOT qualify for capital gains rate.


I recommend that you run a dummy tax return for your parents in Taxcaster and then plug in various amounts of capital gains to see how it actually works. This will help you get it straight in your head.

ryman554
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Re: How much cash to withdraw when retiring

Post by ryman554 » Mon Mar 20, 2017 8:20 am

With a 50k/year pension and looming social security, it's a virtual lock that, by the time the OP hits 70.5 and SS and RMDs start coming, they will be in the 25% bracket.

At that point, without running any numbers, my guess is you would be significantly better off, tax-wise, to have minimized the value in any tax-deferred accounts, since the taxable accounts cap at 15% marginal rate.

The question the OP should be asking is the most efficient way to get there.

fantasytensai
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Re: How much cash to withdraw when retiring

Post by fantasytensai » Mon Mar 20, 2017 8:48 am

I need to (and I am currently) reading up on converting 401(k) to Roth IRA. I did not previously know it was possible.

delamer
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Re: How much cash to withdraw when retiring

Post by delamer » Mon Mar 20, 2017 10:38 am

cherijoh wrote:
fantasytensai wrote:I am helping my parents plan retirement. They are not SS age yet, so their current pension is ~$50,000 pretax per year. They have a fully paid off house and not many expenses, so I want to find out the optimum way for them to withdraw from their investments for tax purposes.

First, a preliminary question - for long term capital gains to be 0%, does the taxable income have to be less than $75,900? As in, if your taxable becomes $75,901, it jumps all the way to 15%? I know the normal brackets are progressive but idk about capital gains. If so, then I guess $75,899 is the magic number I want to hit.

In 2017, standard deduction is $12,700, and personal exemption is $8,100 for two. So is the calculation as simple as $75,899 + $12,700 + $8,100 - $50,000 = $46,699? Using this math, with their current pension, and if they withdraw $46,699, they can do so at a 0%? If so, that would be awesome.

I am 99% sure I am overlooking something. Which is why you guys would be SO awesome if you point it out as always!

Cheers to happy retirements,
fantasytensai

Edit: forgot a couple of things. 1. They live in a state without income tax so itemized deduction is not the way to go; and 2. they would be withdrawing from their 401(k), which is where most of the bonds/income funds are stored. Their taxable accounts holds mostly equity.

Edit 2: It has been pointed out to me that 401k withdrawals do NOT qualify for capital gains rate.


I recommend that you run a dummy tax return for your parents in Taxcaster and then plug in various amounts of capital gains to see how it actually works. This will help you get it straight in your head.


I second the recommendation for Taxcaster. It is very useful in mapping out different scenarios.

LeeMKE
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Re: How much cash to withdraw when retiring

Post by LeeMKE » Mon Mar 20, 2017 12:57 pm

I would also recommend that you run an analysis for them through http://www.i-ORP.com

This free tool tweaked our analysis of how much to convert to ROTH, and it is making a big difference in our tax picture throughout retirement. It estimates taxes, and is probably less detailed than running multiple scenarios through Taxcaster, but tax laws may change.

I am more interested in the parts I can control, like whether/when/how much to convert to ROTH.
The mightiest Oak is just a nut who stayed the course.

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