Why do so many people quote "You will likely be in a lower tax bracket in retirement"
Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
because you theoretically have paid off your primary home which for many is 20-35% of their expenses, and then not have the expense of commuting to work, gas, wear and tear on car, work clothes, work lunches, etc... so that should take out 40-50% of your costs right there....
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
Sorry to dig up this old thread but I realize that nobody answered your question! Was it because it was too easy or was it because it was too difficult? Why would I pay you $1000 for that gold coin if you are willing accept $750? What am i missing here?mptfan wrote: ↑Fri May 18, 2018 9:26 amThere is lots of doubt about that because it is not true for most people. Consider this analogy: I have a gold coin and I offer to sell it to you and I give you two options:
Option 1: You pay me $750 now, and I will agree to buy it back from you in the future when you are ready to sell for $850.
Option 2: You pay me $1,000 now, and I will agree to buy it back from you in the future when you are ready to sell for $1,000.
Which option will you pick?
Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
Don't forget that the kids are grown and graduated from college and off the payroll.Thegame14 wrote: ↑Tue Feb 26, 2019 12:04 pm because you theoretically have paid off your primary home which for many is 20-35% of their expenses, and then not have the expense of commuting to work, gas, wear and tear on car, work clothes, work lunches, etc... so that should take out 40-50% of your costs right there....
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
Thegame14 wrote: ↑Tue Feb 26, 2019 12:04 pm because you theoretically have paid off your primary home which for many is 20-35% of their expenses, and then not have the expense of commuting to work, gas, wear and tear on car, work clothes, work lunches, etc... so that should take out 40-50% of your costs right there....
Old post, but someone brought the thread back. You are not taxed on your costs/expenses. You are taxed on income. Many people have SS and RMDs which they get whether they are spending the money or not.
Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
Exactly, you wouldn't. You are not missing anything.wrongfunds wrote: ↑Mon Jan 27, 2020 11:18 pmWhy would I pay you $1000 for that gold coin if you are willing accept $750? What am i missing here?
Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
I do not understand how the expenses going down affects the tax bracket in retirement?Thegame14 wrote: ↑Tue Feb 26, 2019 12:04 pm because you theoretically have paid off your primary home which for many is 20-35% of their expenses, and then not have the expense of commuting to work, gas, wear and tear on car, work clothes, work lunches, etc... so that should take out 40-50% of your costs right there....
The taxes are directly affected by income and which type of accounts provide the income: pretax, Roth, SS, pension, after tax ,etc.
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
Since nobody else answered that question, is it possible that others would have preferred the other option of having the guarantee of getting back their $1000 which is $250 *MORE* that they will be getting? They are getting MORE money backmptfan wrote: ↑Tue Jan 28, 2020 8:30 amExactly, you wouldn't. You are not missing anything.wrongfunds wrote: ↑Mon Jan 27, 2020 11:18 pmWhy would I pay you $1000 for that gold coin if you are willing accept $750? What am i missing here?
Are there people like that on this forum? There must be because otherwise you would not have asked that question to begin with and somebody else would have answered it in last 3 years!
Last edited by wrongfunds on Tue Jan 28, 2020 8:47 am, edited 1 time in total.
Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
That’s a possibility. But you are guaranteed to have to pay taxes on a traditional IRA/401k withdrawal. I’d rather max my Roth IRA and Roth 401k next to someone maxing their traditional IRA and traditional 401k and know that I technically have more in retirement on the current promise of tax free withdrawalsrandomizer wrote: ↑Wed May 16, 2018 9:24 pmAnd that laws re: Roth don’t change. Anything is possible on a long enough time scale.bmelikia wrote: ↑Wed May 16, 2018 7:01 pm I'm 33.5 years old - I don't pretend to know what tax bracket I will be in 26 year from now - also, I don't know what tax brackets will be in 26 years - maybe there won't even be "tax brackets" in 26 years. . .
. . .I am confident, however, that "future me" will enjoy not paying any taxes on my Roth IRA and Roth 401k withdrawals - that assumes my health allows me to make it to 59.5+ years old
Also, I am 35 now. . . I took a while to respond
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
bmelikia,bmelikia wrote: ↑Tue Jan 28, 2020 8:57 amThat’s a possibility. But you are guaranteed to have to pay taxes on a traditional IRA/401k withdrawal. I’d rather max my Roth IRA and Roth 401k next to someone maxing their traditional IRA and traditional 401k and know that I technically have more in retirement on the current promise of tax free withdrawalsrandomizer wrote: ↑Wed May 16, 2018 9:24 pmAnd that laws re: Roth don’t change. Anything is possible on a long enough time scale.bmelikia wrote: ↑Wed May 16, 2018 7:01 pm I'm 33.5 years old - I don't pretend to know what tax bracket I will be in 26 year from now - also, I don't know what tax brackets will be in 26 years - maybe there won't even be "tax brackets" in 26 years. . .
. . .I am confident, however, that "future me" will enjoy not paying any taxes on my Roth IRA and Roth 401k withdrawals - that assumes my health allows me to make it to 59.5+ years old
Also, I am 35 now. . . I took a while to respond
You are guaranteed to have less in retirement than someone that max their Trad. 401K and Roth IRAs. It is simple math. If you provide the actual numbers, we can prove this easily.
We had done this again and again to all the Roth 401K folks. There are less than 1% of folks that use Roth 401K that did it for the right reason.
<<But you are guaranteed to have to pay taxes on a traditional IRA/401k withdrawal.>>
Who say so?
viewtopic.php?t=87471
<<How to pay ZERO taxes in retirement with 6-figure expenses>>
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
People make this claim all the time, but it is not really true. While your total taxable income in the withdrawal phase will be subject to a total effective tax rate.stlutz wrote: ↑Wed May 16, 2018 10:05 pm Also keep in mind that it's your effective tax rate that matters when you withdraw. When you save it's the marginal rate.
When I contribute to my 401K, it reduces my taxable income--thus I'm taking money "off the top" in terms of income. Whatever bracket I'm in, I'm getting a deduction at my marginal rate.
When I withdraw that money, it's actually taxed at a variety of rates. So even if you were in the same marginal rate as when you are working, the average rate per dollar is still lower.
Any pre/post-tax contribution decisions you make will alter your pre-tax portfolio balance in the withdrawal phase. Any resulting decrease increase/decrease in that balance will be taxed at your marginal tax rates.
All decrease or increases in income whether in the accumulation of withdrawal phases will be subject to marginal tax rates. The only proper metric to use is your current marginal tax rates vs. your projected withdrawal marginal tax rates.
Your projected effective tax rate is irrelevant.
Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
OK ...I understand the drawing part fairly well.
But at some point someone is going to pay the taxes on those accounts - are we just ignoring that now for the sake of this discussion?
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
After reading over 600 posts again on this topic, I have realized that I prefer to pay as I go on the tax front. I am not enthusiastic about pre-paying taxes on my future earnings because nothing is guaranteed. I have realized it will hurt me more mentally to pay taxes on income which I did NOT actually received aka things went horribly wrong than alternate scenario where things went right and I could have saved more money if I had prepaid my taxes. I understand that the chance of things going wrong is much much less than things going right and probabilistic model would warrant choosing prepay at this stage.
This is no longer an academic exercise for us. Looking at the numbers we have, we will be paying lot of taxes going forward. With 3 year age difference and NOT voluntarily wanting to pay for private insurance, our plan is to continue working for next at least 7 years. The tax deferred is already in 3m range and if we keep on doing what we have been doing it will probably reach 4.5m. With two professional earners, SS at 70 would be close to max. Even if we have 4 years of zero W2 income, it will not make much dent to pre-tax.
Knowing our current situation, I still don't think I would have given up pre-tax 15 years ago. I am not even giving up that today. We will continue to max 401K, HSA, equvt of non-deductible IRA, after tax etc. Without realizing, we have been following KF principle for 2 earner income for a long time aka 1/3 taxes 1/3 savings 1/3 expenses.
We will be paying insane amount of taxes in retirement. Well, we have been paying insane amount of taxes in our working years. If we get similar or more income in retirement, I will accept insane taxes as given.
This is no longer an academic exercise for us. Looking at the numbers we have, we will be paying lot of taxes going forward. With 3 year age difference and NOT voluntarily wanting to pay for private insurance, our plan is to continue working for next at least 7 years. The tax deferred is already in 3m range and if we keep on doing what we have been doing it will probably reach 4.5m. With two professional earners, SS at 70 would be close to max. Even if we have 4 years of zero W2 income, it will not make much dent to pre-tax.
Knowing our current situation, I still don't think I would have given up pre-tax 15 years ago. I am not even giving up that today. We will continue to max 401K, HSA, equvt of non-deductible IRA, after tax etc. Without realizing, we have been following KF principle for 2 earner income for a long time aka 1/3 taxes 1/3 savings 1/3 expenses.
We will be paying insane amount of taxes in retirement. Well, we have been paying insane amount of taxes in our working years. If we get similar or more income in retirement, I will accept insane taxes as given.
Last edited by wrongfunds on Tue Jan 28, 2020 9:38 am, edited 1 time in total.
Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
+1.JoMoney wrote: ↑Wed May 16, 2018 6:38 pm There are many many people who visit and use this site and are not among the super wealthy image some have created as "typical" Boglehead.
The consequence of having too much taxable money in retirement is having to pay more taxes.
The consequence of paying more in taxes today and a smaller balance in retirement may mean not being able to match expenses.
If I can plan around the taxes optimally, then great.. but there are worse situations then having to pay taxes because you're drawing down RMDs on too big of a retirement account.
For me, it is hard to call it too much money. Not super wealthy but am comfortable. I am paying taxes for Roth conversions and hope to land where only 50% of my SS is taxed. Its hard to do with single tax rates. Taxcaster says I will probably pay on RMD + SS - 10-15% effective taxes instead of around 20% effective during my last work years.
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
It is difficult for most people to save enough to have retirement income to match their income during working years. Some can do, but I feel they are in the minority. If they end up with savings which can produce their reduced income during retirement, they succeeded.smitcat wrote: ↑Tue Jan 28, 2020 8:42 amI do not understand how the expenses going down affects the tax bracket in retirement?Thegame14 wrote: ↑Tue Feb 26, 2019 12:04 pm because you theoretically have paid off your primary home which for many is 20-35% of their expenses, and then not have the expense of commuting to work, gas, wear and tear on car, work clothes, work lunches, etc... so that should take out 40-50% of your costs right there....
The taxes are directly affected by income and which type of accounts provide the income: pretax, Roth, SS, pension, after tax ,etc.
Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
wrongfunds,wrongfunds wrote: ↑Tue Jan 28, 2020 9:23 am After reading over 600 posts again on this topic, I have realized that I prefer to pay as I go on the tax front. I am not enthusiastic about pre-paying taxes on my future earnings because nothing is guaranteed. I have realized it will hurt me more mentally to pay taxes on income which I did NOT actually received aka things went horribly wrong than alternate scenario where things went right and I could have saved more money if I had prepaid my taxes. I understand that the chance of things going wrong is much much less than things going right and probabilistic model would warrant choosing prepay at this stage.
This is no longer an academic exercise for us. Looking at the numbers we have, we will be paying lot of taxes going forward. With 3 year age difference and NOT voluntarily wanting to pay for private insurance, our plan is to continue working for next at least 7 years. The tax deferred is already in 3m range and if we keep on doing what we have been doing it will probably reach 4.5m. With two professional earners, SS at 70 would be close to max. Even if we have 4 years of zero W2 income, it will not make much dent to pre-tax.
Knowing our current situation, I still don't think I would have given up pre-tax 15 years ago. I am not even giving p that today. We will continue to max 401K, HSA, equvt of non-deductible IRA, after tax etc. Without realizing, we have been following KF principle for 2 earner income for a long time aka 1/3 taxes 1/3 savings 1/3 expenses.
We will be paying insane amount of taxes in retirement. Well, we have been paying insane amount of taxes in our working years. If we get similar or more income in retirement, I will accept insane taxes as given.
I cannot claim credit for this principle. It is from some book. It might be from "The Richest Man in Babylon".
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
First, it is not a given that taxes must be paid on tax deferred accounts...it is possible to withdraw funds from tax deferred accounts and not have to pay any taxes if your taxable income is below the total of your tax deductions or exemptions or credits. Remember that everyone has a certain amount of taxable income that they can draw each year tax free even before you get into the lowest tax bracket (right now that is 10%). And even if taxes are going to be paid eventually as you withdraw from tax deferred accounts, isn't it better to continue to pay those taxes at a lower rate than the rate you saved when you contributed to the accounts? And even if you (or your heirs) have to pay taxes eventually at the same rate, it's better to continue to defer those taxes for as long as possible to allow the investments to grow tax free. And it's possible that your heirs will be able to withdraw those funds tax free if their taxable income is below the total of their tax deductions and exemptions and credits... and so it goes.
Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
I personally have no idea if I'll be in a lower or higher tax bracket upon retirement. Too many variables.
Will I stay with my current job (with pension)?
Will my job reduce the pension?
Will my job eliminate my pension?
Then theres...
Will I be able to continue contributing what I currently contribute?
Will my income continue to climb as I predict or will there be greater raises, or cuts?
Will market performance continue the way it has over the past 90 years?
How about...
How will tax brackets change over time?
So I hedge my bet and contribute some to Roth and some to 403b.
Will I stay with my current job (with pension)?
Will my job reduce the pension?
Will my job eliminate my pension?
Then theres...
Will I be able to continue contributing what I currently contribute?
Will my income continue to climb as I predict or will there be greater raises, or cuts?
Will market performance continue the way it has over the past 90 years?
How about...
How will tax brackets change over time?
So I hedge my bet and contribute some to Roth and some to 403b.
Light weight baby!
Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
"Remember that everyone has a certain amount of taxable income that they can draw each year tax free even before you get into the lowest tax bracket (right now that is 10%)."mptfan wrote: ↑Tue Jan 28, 2020 9:38 amFirst, it is not a given that taxes must be paid on tax deferred accounts...it is possible to withdraw funds from tax deferred accounts and not have to pay any taxes if your taxable income is below the total of your tax deductions or exemptions or credits. Remember that everyone has a certain amount of taxable income that they can draw each year tax free even before you get into the lowest tax bracket (right now that is 10%). And even if taxes are going to be paid eventually as you withdraw from tax deferred accounts, isn't it better to continue to pay those taxes at a lower rate than the rate you saved when you contributed to the accounts? And even if you (or your heirs) have to pay taxes eventually at the same rate, it's better to continue to defer those taxes for as long as possible to allow the investments to grow tax free. And it's possible that your heirs will be able to withdraw those funds tax free if their taxable income is below the total of their tax deductions and exemptions and credits... and so it goes.
yes ..of course.
"And even if you (or your heirs) have to pay taxes eventually at the same rate, it's better to continue to defer those taxes for as long as possible to allow the investments to grow tax free."
But the heirs may be paying at a higher rate which in turn would lead you to pay the taxes earlier at a lower rate.
"And it's possible that your heirs will be able to withdraw those funds tax free if their taxable income is below the total of their tax deductions and exemptions and credits"
Yes again - but that does not really have to do with my question about taxes being relative to expenses for us. I am pretty confident that our heirs will have higher tax rates while working then we will have retired (they already do) so the comparison in this case is not to our expenses but to the relative tax payments expected on their income as well.
"And even if taxes are going to be paid eventually as you withdraw from tax deferred accounts, isn't it better to continue to pay those taxes at a lower rate than the rate you saved when you contributed to the accounts?"
Yes again - but this also has little to do with our expenses. We can Roth convert now and pay taxes that are high but less so than what will happen if we leave it alone until RMD's are required.
I do not see our expenses as being a key factor in many of these choices , but they do matter in what we do to maximize 'spendable' after tax dollars moving forward.
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
No, it wasn't that book. Clason recommended a 10% savings rate in it.KlangFool wrote: ↑Tue Jan 28, 2020 9:36 amwrongfunds,wrongfunds wrote: ↑Tue Jan 28, 2020 9:23 am After reading over 600 posts again on this topic, I have realized that I prefer to pay as I go on the tax front. I am not enthusiastic about pre-paying taxes on my future earnings because nothing is guaranteed. I have realized it will hurt me more mentally to pay taxes on income which I did NOT actually received aka things went horribly wrong than alternate scenario where things went right and I could have saved more money if I had prepaid my taxes. I understand that the chance of things going wrong is much much less than things going right and probabilistic model would warrant choosing prepay at this stage.
This is no longer an academic exercise for us. Looking at the numbers we have, we will be paying lot of taxes going forward. With 3 year age difference and NOT voluntarily wanting to pay for private insurance, our plan is to continue working for next at least 7 years. The tax deferred is already in 3m range and if we keep on doing what we have been doing it will probably reach 4.5m. With two professional earners, SS at 70 would be close to max. Even if we have 4 years of zero W2 income, it will not make much dent to pre-tax.
Knowing our current situation, I still don't think I would have given up pre-tax 15 years ago. I am not even giving p that today. We will continue to max 401K, HSA, equvt of non-deductible IRA, after tax etc. Without realizing, we have been following KF principle for 2 earner income for a long time aka 1/3 taxes 1/3 savings 1/3 expenses.
We will be paying insane amount of taxes in retirement. Well, we have been paying insane amount of taxes in our working years. If we get similar or more income in retirement, I will accept insane taxes as given.
I cannot claim credit for this principle. It is from some book. It might be from "The Richest Man in Babylon".
KlangFool
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
+1mptfan wrote: ↑Tue Jan 28, 2020 9:38 amFirst, it is not a given that taxes must be paid on tax deferred accounts...it is possible to withdraw funds from tax deferred accounts and not have to pay any taxes if your taxable income is below the total of your tax deductions or exemptions or credits. Remember that everyone has a certain amount of taxable income that they can draw each year tax free even before you get into the lowest tax bracket (right now that is 10%). And even if taxes are going to be paid eventually as you withdraw from tax deferred accounts, isn't it better to continue to pay those taxes at a lower rate than the rate you saved when you contributed to the accounts? And even if you (or your heirs) have to pay taxes eventually at the same rate, it's better to continue to defer those taxes for as long as possible to allow the investments to grow tax free. And it's possible that your heirs will be able to withdraw those funds tax free if their taxable income is below the total of their tax deductions and exemptions and credits... and so it goes.
No taxes are paid on qualified medical expenses exceeding 10% of your AGI. If you encounter a need for LTC, which can be $100k or more annually, this means that you can cover it with tax-deferred funds and pay very little in taxes on the withdrawals.
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
Huh... thx for passing that along. I had no idea. It's another data point in deciding whether to get LTC insurance and could alter one's retirement withdrawal strategy.willthrill81 wrote: ↑Tue Jan 28, 2020 10:18 am No taxes are paid on qualified medical expenses exceeding 10% of your AGI. If you encounter a need for LTC, which can be $100k or more annually, this means that you can cover it with tax-deferred funds and pay very little in taxes on the withdrawals.
Trade the news and you will lose.
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
LTC premiums must be paid for with after-tax funds (unless you have a business that can cover them, but that gets complicated), whereas LTC expenses are qualified medical expenses subject to the above deduction. It's a great reason to leave plenty of funds in tax-deferred accounts.ThereAreNoGurus wrote: ↑Tue Jan 28, 2020 10:26 amHuh... thx for passing that along. I had no idea. It's another data point in deciding whether to get LTC insurance and could alter one's withdrawal strategy in retirement.willthrill81 wrote: ↑Tue Jan 28, 2020 10:18 am No taxes are paid on qualified medical expenses exceeding 10% of your AGI. If you encounter a need for LTC, which can be $100k or more annually, this means that you can cover it with tax-deferred funds and pay very little in taxes on the withdrawals.
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
No one knows where you will be at retirement. Your individual situation can (and probably will change). Tax laws change.
Vanguard has often recommended tax diversification by holding taxable, tax deferred, and tax exempt.
Vanguard has often recommended tax diversification by holding taxable, tax deferred, and tax exempt.
John C. Bogle: “Simplicity is the master key to financial success."
Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
Also important to note that your tax bracket only applies on the margin.
The first portions of your income in retirement won't be taxed at that rate--some or maybe even most will be taxed at a lower rate.
But when you are saving, you are necessarily talking about the margin. So if you can save pre-tax now, you're avoiding the marginal tax rate; but that money is going into a 401k/IRA, and you're going to get to take some of it out at a lower rate--in fact on some, you'll pay no taxes at all.
The first portions of your income in retirement won't be taxed at that rate--some or maybe even most will be taxed at a lower rate.
But when you are saving, you are necessarily talking about the margin. So if you can save pre-tax now, you're avoiding the marginal tax rate; but that money is going into a 401k/IRA, and you're going to get to take some of it out at a lower rate--in fact on some, you'll pay no taxes at all.
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
Oh NO, not this again! Somebody please make it stopTinkerPDX wrote: ↑Tue Jan 28, 2020 10:30 am Also important to note that your tax bracket only applies on the margin.
The first portions of your income in retirement won't be taxed at that rate--some or maybe even most will be taxed at a lower rate.
But when you are saving, you are necessarily talking about the margin. So if you can save pre-tax now, you're avoiding the marginal tax rate; but that money is going into a 401k/IRA, and you're going to get to take some of it out at a lower rate--in fact on some, you'll pay no taxes at all.
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
7.5%willthrill81 wrote: ↑Tue Jan 28, 2020 10:18 am+1mptfan wrote: ↑Tue Jan 28, 2020 9:38 amFirst, it is not a given that taxes must be paid on tax deferred accounts...it is possible to withdraw funds from tax deferred accounts and not have to pay any taxes if your taxable income is below the total of your tax deductions or exemptions or credits. Remember that everyone has a certain amount of taxable income that they can draw each year tax free even before you get into the lowest tax bracket (right now that is 10%). And even if taxes are going to be paid eventually as you withdraw from tax deferred accounts, isn't it better to continue to pay those taxes at a lower rate than the rate you saved when you contributed to the accounts? And even if you (or your heirs) have to pay taxes eventually at the same rate, it's better to continue to defer those taxes for as long as possible to allow the investments to grow tax free. And it's possible that your heirs will be able to withdraw those funds tax free if their taxable income is below the total of their tax deductions and exemptions and credits... and so it goes.
No taxes are paid on qualified medical expenses exceeding 10% of your AGI. If you encounter a need for LTC, which can be $100k or more annually, this means that you can cover it with tax-deferred funds and pay very little in taxes on the withdrawals.
Congress reverted to that again.
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
That was the threshold in 2019. In 2020, it went up to 10%.trueblueky wrote: ↑Tue Jan 28, 2020 10:51 am7.5%willthrill81 wrote: ↑Tue Jan 28, 2020 10:18 am+1mptfan wrote: ↑Tue Jan 28, 2020 9:38 amFirst, it is not a given that taxes must be paid on tax deferred accounts...it is possible to withdraw funds from tax deferred accounts and not have to pay any taxes if your taxable income is below the total of your tax deductions or exemptions or credits. Remember that everyone has a certain amount of taxable income that they can draw each year tax free even before you get into the lowest tax bracket (right now that is 10%). And even if taxes are going to be paid eventually as you withdraw from tax deferred accounts, isn't it better to continue to pay those taxes at a lower rate than the rate you saved when you contributed to the accounts? And even if you (or your heirs) have to pay taxes eventually at the same rate, it's better to continue to defer those taxes for as long as possible to allow the investments to grow tax free. And it's possible that your heirs will be able to withdraw those funds tax free if their taxable income is below the total of their tax deductions and exemptions and credits... and so it goes.
No taxes are paid on qualified medical expenses exceeding 10% of your AGI. If you encounter a need for LTC, which can be $100k or more annually, this means that you can cover it with tax-deferred funds and pay very little in taxes on the withdrawals.
Congress reverted to that again.
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
No, it was supposed to go up to 10%. In the Defense bill in December, Congress lowered it (or kept it at 7.5%,depending on your perspective). A number of other tax changes were made at the same time to Kiddie tax, tuition, and other items.willthrill81 wrote: ↑Tue Jan 28, 2020 11:01 amThat was the threshold in 2019. In 2020, it went up to 10%.trueblueky wrote: ↑Tue Jan 28, 2020 10:51 am7.5%willthrill81 wrote: ↑Tue Jan 28, 2020 10:18 am+1mptfan wrote: ↑Tue Jan 28, 2020 9:38 amFirst, it is not a given that taxes must be paid on tax deferred accounts...it is possible to withdraw funds from tax deferred accounts and not have to pay any taxes if your taxable income is below the total of your tax deductions or exemptions or credits. Remember that everyone has a certain amount of taxable income that they can draw each year tax free even before you get into the lowest tax bracket (right now that is 10%). And even if taxes are going to be paid eventually as you withdraw from tax deferred accounts, isn't it better to continue to pay those taxes at a lower rate than the rate you saved when you contributed to the accounts? And even if you (or your heirs) have to pay taxes eventually at the same rate, it's better to continue to defer those taxes for as long as possible to allow the investments to grow tax free. And it's possible that your heirs will be able to withdraw those funds tax free if their taxable income is below the total of their tax deductions and exemptions and credits... and so it goes.
No taxes are paid on qualified medical expenses exceeding 10% of your AGI. If you encounter a need for LTC, which can be $100k or more annually, this means that you can cover it with tax-deferred funds and pay very little in taxes on the withdrawals.
Congress reverted to that again.
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
I see that now, although most sources are still reporting the threshold to be 10%.trueblueky wrote: ↑Tue Jan 28, 2020 11:05 amNo, it was supposed to go up to 10%. In the Defense bill in December, Congress lowered it (or kept it at 7.5%,depending on your perspective). A number of other tax changes were made at the same time to Kiddie tax, tuition, and other items.willthrill81 wrote: ↑Tue Jan 28, 2020 11:01 amThat was the threshold in 2019. In 2020, it went up to 10%.trueblueky wrote: ↑Tue Jan 28, 2020 10:51 am7.5%willthrill81 wrote: ↑Tue Jan 28, 2020 10:18 am+1mptfan wrote: ↑Tue Jan 28, 2020 9:38 am
First, it is not a given that taxes must be paid on tax deferred accounts...it is possible to withdraw funds from tax deferred accounts and not have to pay any taxes if your taxable income is below the total of your tax deductions or exemptions or credits. Remember that everyone has a certain amount of taxable income that they can draw each year tax free even before you get into the lowest tax bracket (right now that is 10%). And even if taxes are going to be paid eventually as you withdraw from tax deferred accounts, isn't it better to continue to pay those taxes at a lower rate than the rate you saved when you contributed to the accounts? And even if you (or your heirs) have to pay taxes eventually at the same rate, it's better to continue to defer those taxes for as long as possible to allow the investments to grow tax free. And it's possible that your heirs will be able to withdraw those funds tax free if their taxable income is below the total of their tax deductions and exemptions and credits... and so it goes.
No taxes are paid on qualified medical expenses exceeding 10% of your AGI. If you encounter a need for LTC, which can be $100k or more annually, this means that you can cover it with tax-deferred funds and pay very little in taxes on the withdrawals.
Congress reverted to that again.
The Sensible Steward
Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
Those >7.5% AGI expenses become itemizable, but itemized deductions still need to be greater than the standard deduction to be useful.willthrill81 wrote: ↑Tue Jan 28, 2020 10:18 am No taxes are paid on qualified medical expenses exceeding [7.5]% of your AGI.
Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
See the first of two Common misconceptions to see why that is not the correct way to look at new contributions.
Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
LTC premiums are deductible as medical expenses, subject to some limitations.willthrill81 wrote: ↑Tue Jan 28, 2020 10:28 am LTC premiums must be paid for with after-tax funds (unless you have a business that can cover them, but that gets complicated), whereas LTC expenses are qualified medical expenses subject to the above deduction. It's a great reason to leave plenty of funds in tax-deferred accounts.
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
This. You put the money in not paying tax at the 24 to 39% brackets and then you can take it out to fill the standard deduction, 0%, 10%, 12% etc brackets so that even if you are incredibly well off and even in retirement hit the top bracket you are STILL getting a lot of money out at lower bracket then you would have paid for it to go into a taxable account.
That said most people are best off with a mixture.
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
Yes, but if you're paying for LTC in a facility, you'll be paying a lot more than $24.4k (if MFJ) for it.FiveK wrote: ↑Tue Jan 28, 2020 11:32 amThose >7.5% AGI expenses become itemizable, but itemized deductions still need to be greater than the standard deduction to be useful.willthrill81 wrote: ↑Tue Jan 28, 2020 10:18 am No taxes are paid on qualified medical expenses exceeding [7.5]% of your AGI.
The Sensible Steward
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
I wasn't aware of this. What are the limitations?Chip wrote: ↑Tue Jan 28, 2020 11:40 amLTC premiums are deductible as medical expenses, subject to some limitations.willthrill81 wrote: ↑Tue Jan 28, 2020 10:28 am LTC premiums must be paid for with after-tax funds (unless you have a business that can cover them, but that gets complicated), whereas LTC expenses are qualified medical expenses subject to the above deduction. It's a great reason to leave plenty of funds in tax-deferred accounts.
The Sensible Steward
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
willthrill81 wrote: ↑Tue Jan 28, 2020 11:53 amI wasn't aware of this. What are the limitations?Chip wrote: ↑Tue Jan 28, 2020 11:40 amLTC premiums are deductible as medical expenses, subject to some limitations.willthrill81 wrote: ↑Tue Jan 28, 2020 10:28 am LTC premiums must be paid for with after-tax funds (unless you have a business that can cover them, but that gets complicated), whereas LTC expenses are qualified medical expenses subject to the above deduction. It's a great reason to leave plenty of funds in tax-deferred accounts.
Big limitations. If qualified LTC premiums (combined with other medical expenses) are over 10% of AGI (for 2020) you can deduct the part OVER that 10% threshold. Then there is a cap for what portion of LTC premiums are qualified based on age. Unlikely to be deductible or substantial for the vast majority of people.
Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
Both statements are true.willthrill81 wrote: ↑Tue Jan 28, 2020 11:52 amYes, but if you're paying for LTC in a facility, you'll be paying a lot more than $24.4k (if MFJ) for it.
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
Please see IRS instructions for Schedule A, dated January 16, 2020.michaeljc70 wrote: ↑Tue Jan 28, 2020 11:57 amwillthrill81 wrote: ↑Tue Jan 28, 2020 11:53 amI wasn't aware of this. What are the limitations?Chip wrote: ↑Tue Jan 28, 2020 11:40 amLTC premiums are deductible as medical expenses, subject to some limitations.willthrill81 wrote: ↑Tue Jan 28, 2020 10:28 am LTC premiums must be paid for with after-tax funds (unless you have a business that can cover them, but that gets complicated), whereas LTC expenses are qualified medical expenses subject to the above deduction. It's a great reason to leave plenty of funds in tax-deferred accounts.
Big limitations. If qualified LTC premiums (combined with other medical expenses) are over 10% of AGI (for 2020) you can deduct the part OVER that 10% threshold. Then there is a cap for what portion of LTC premiums are qualified based on age. Unlikely to be deductible or substantial for the vast majority of people.
Page A-1: the threshold for deducting medical expenses is 7.5% of AGI.
Chart on Page A-2: the cap on deduction for LTC insurance is based on your age at the end of 2019.
$420. Age 40 or younger.
$790. Age 41-50
$1580. Age 51-60
$4220. Age 61-70
$5270. Age 71 and above
The cap is per person. If one spouse is 68 and the other is 72, they can claim $4220 and $5270 respectively, total $9490. If one spouse does not use the whole amount (say, only $4000, instead of $4220), the remainder cannot be used by the other (still limited to $5270).
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
+1. The more people are saving as a percentage of income, the more likely they are to be in a lower tax bracket.retiredjg wrote: ↑Wed May 16, 2018 6:40 pmPeople who are filling all those accounts are actually living on a much lower amount than their income. When the time comes for retirement, unless their expenses go up a lot, they will need/take a much lower income than they had while working. Thus....the lower tax bracket in retirement.CnC wrote: ↑Wed May 16, 2018 6:31 pm But the people they are talking to on this site are maxing out their 401k's, IRA's and funding 529's, HSA's or taxable accounts.
These are not the "typical people" that will be in a lower tax bracket in retirement. Having 25x annual expenses is considered a risky retirement here.
Do not confuse wealth with high income. A person can be very wealthy and have a low income (and a low tax bracket).
Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
I've started to rethink this myself. We have been pretty modest earners but recently went back to a 2 person income and live in a VHCOL area and finally bumped out of the 12% bracket, well into the 22% and switched away from ROTH. The case for ROTH seems to be strongest when you consider tax rates will only go up in the future - 2 reasons - we can't support current levels of government including SS with current tax rates and tax rates under current law are already scheduled to increase in about 5 years. Therefore perhaps paying the tax now when the rates are lower is better.
Secondly, even though I don't expect to be uber wealthy, when you look at the income from $1.2M - $3.5M (depending on how early I retire) and then add in social security for myself + spouse (not insignificant in my eye based on the estimates) and strip away your current deductions like 401k, HSA one may wish they had some mix of ROTH funds.
Secondly, even though I don't expect to be uber wealthy, when you look at the income from $1.2M - $3.5M (depending on how early I retire) and then add in social security for myself + spouse (not insignificant in my eye based on the estimates) and strip away your current deductions like 401k, HSA one may wish they had some mix of ROTH funds.
Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
CMD1,CMD1 wrote: ↑Tue Jan 28, 2020 12:35 pm I've started to rethink this myself. We have been pretty modest earners but recently went back to a 2 person income and live in a VHCOL area and finally bumped out of the 12% bracket, well into the 22% and switched away from ROTH. The case for ROTH seems to be strongest when you consider tax rates will only go up in the future - 2 reasons - we can't support current levels of government including SS with current tax rates and tax rates under current law are already scheduled to increase in about 5 years. Therefore perhaps paying the tax now when the rates are lower is better.
Secondly, even though I don't expect to be uber wealthy, when you look at the income from $1.2M - $3.5M (depending on how early I retire) and then add in social security for myself + spouse (not insignificant in my eye based on the estimates) and strip away your current deductions like 401km HSA one may wish they had some mix of ROTH funds.
1) Globally, when the government needs more money/taxes, it decreases the income taxes and increases the consumption/sales/GST/VAT.
<<Secondly, even though I don't expect to be uber wealthy, when you look at the income from $1.2M - $3.5M >>
2) When you take those numbers and divide by 25 to get your income, it is a small number.
3) The tax bracket is adjusted upward by inflation every year.
KlangFool
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
trueblueky wrote: ↑Tue Jan 28, 2020 12:28 pmPlease see IRS instructions for Schedule A, dated January 16, 2020.michaeljc70 wrote: ↑Tue Jan 28, 2020 11:57 amwillthrill81 wrote: ↑Tue Jan 28, 2020 11:53 amI wasn't aware of this. What are the limitations?Chip wrote: ↑Tue Jan 28, 2020 11:40 amLTC premiums are deductible as medical expenses, subject to some limitations.willthrill81 wrote: ↑Tue Jan 28, 2020 10:28 am LTC premiums must be paid for with after-tax funds (unless you have a business that can cover them, but that gets complicated), whereas LTC expenses are qualified medical expenses subject to the above deduction. It's a great reason to leave plenty of funds in tax-deferred accounts.
Big limitations. If qualified LTC premiums (combined with other medical expenses) are over 10% of AGI (for 2020) you can deduct the part OVER that 10% threshold. Then there is a cap for what portion of LTC premiums are qualified based on age. Unlikely to be deductible or substantial for the vast majority of people.
Page A-1: the threshold for deducting medical expenses is 7.5% of AGI.
Chart on Page A-2: the cap on deduction for LTC insurance is based on your age at the end of 2019.
$420. Age 40 or younger.
$790. Age 41-50
$1580. Age 51-60
$4220. Age 61-70
$5270. Age 71 and above
The cap is per person. If one spouse is 68 and the other is 72, they can claim $4220 and $5270 respectively, total $9490. If one spouse does not use the whole amount (say, only $4000, instead of $4220), the remainder cannot be used by the other (still limited to $5270).
Please refer to my post. I said for 2020 and you referred to instructions that are for the 2019 tax year. It is also not just a threshold. It is only the amount that exceeds the 7.5% (2019) or 10% (2020) of AGI that can be deducted.
Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
Applies to 2020 also.michaeljc70 wrote: ↑Tue Jan 28, 2020 12:59 pm Please refer to my post. I said for 2020 and you referred to instructions that are for the 2019 tax year. It is also not just a threshold. It is only the amount that exceeds the 7.5% (2019) or 10% (2020) of AGI that can be deducted.
SEC. 103. REDUCTION IN MEDICAL EXPENSE DEDUCTION FLOOR.
(a) In General.–Section 213(f) is amended to read as follows:
“(f) Temporary Special Rule.–In the case of taxable years beginning before January 1, 2021, subsection (a) shall be applied with respect to a taxpayer by substituting `7.5 percent’ for `10 percent’.”.
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
Okay. I stand corrected. Was that part of the year end bill? I still would guess that the percent of people getting the LTC deduction are in the low single digits.FiveK wrote: ↑Tue Jan 28, 2020 1:19 pmApplies to 2020 also.michaeljc70 wrote: ↑Tue Jan 28, 2020 12:59 pm Please refer to my post. I said for 2020 and you referred to instructions that are for the 2019 tax year. It is also not just a threshold. It is only the amount that exceeds the 7.5% (2019) or 10% (2020) of AGI that can be deducted.
SEC. 103. REDUCTION IN MEDICAL EXPENSE DEDUCTION FLOOR.
(a) In General.–Section 213(f) is amended to read as follows:
“(f) Temporary Special Rule.–In the case of taxable years beginning before January 1, 2021, subsection (a) shall be applied with respect to a taxpayer by substituting `7.5 percent’ for `10 percent’.”.
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Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
Then LTC premiums alone won't bring a person or couple even close to exceeding the standard deduction. As such, it seems that very few people will be able to deduct LTC premiums.trueblueky wrote: ↑Tue Jan 28, 2020 12:28 pmPlease see IRS instructions for Schedule A, dated January 16, 2020.michaeljc70 wrote: ↑Tue Jan 28, 2020 11:57 amwillthrill81 wrote: ↑Tue Jan 28, 2020 11:53 amI wasn't aware of this. What are the limitations?Chip wrote: ↑Tue Jan 28, 2020 11:40 amLTC premiums are deductible as medical expenses, subject to some limitations.willthrill81 wrote: ↑Tue Jan 28, 2020 10:28 am LTC premiums must be paid for with after-tax funds (unless you have a business that can cover them, but that gets complicated), whereas LTC expenses are qualified medical expenses subject to the above deduction. It's a great reason to leave plenty of funds in tax-deferred accounts.
Big limitations. If qualified LTC premiums (combined with other medical expenses) are over 10% of AGI (for 2020) you can deduct the part OVER that 10% threshold. Then there is a cap for what portion of LTC premiums are qualified based on age. Unlikely to be deductible or substantial for the vast majority of people.
Page A-1: the threshold for deducting medical expenses is 7.5% of AGI.
Chart on Page A-2: the cap on deduction for LTC insurance is based on your age at the end of 2019.
$420. Age 40 or younger.
$790. Age 41-50
$1580. Age 51-60
$4220. Age 61-70
$5270. Age 71 and above
The cap is per person. If one spouse is 68 and the other is 72, they can claim $4220 and $5270 respectively, total $9490. If one spouse does not use the whole amount (say, only $4000, instead of $4220), the remainder cannot be used by the other (still limited to $5270).
That means that it is far easier to deduct LTC expenses incurred (those exceeding 7.5% of AGI) than LTC insurance premiums.
The Sensible Steward
Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
A small number to you maybe, not to me. Adding in SS much of that range would yield a six figure income (using the 25 rule), which quite frankly is ahead of what I live on today after considering kids, retirement and other things that don't generally exist in retirement. Meanwhile a quarter of retirees live on less than $20k a year.KlangFool wrote: ↑Tue Jan 28, 2020 12:49 pmCMD1,CMD1 wrote: ↑Tue Jan 28, 2020 12:35 pm I've started to rethink this myself. We have been pretty modest earners but recently went back to a 2 person income and live in a VHCOL area and finally bumped out of the 12% bracket, well into the 22% and switched away from ROTH. The case for ROTH seems to be strongest when you consider tax rates will only go up in the future - 2 reasons - we can't support current levels of government including SS with current tax rates and tax rates under current law are already scheduled to increase in about 5 years. Therefore perhaps paying the tax now when the rates are lower is better.
Secondly, even though I don't expect to be uber wealthy, when you look at the income from $1.2M - $3.5M (depending on how early I retire) and then add in social security for myself + spouse (not insignificant in my eye based on the estimates) and strip away your current deductions like 401km HSA one may wish they had some mix of ROTH funds.
1) Globally, when the government needs more money/taxes, it decreases the income taxes and increases the consumption/sales/GST/VAT.
<<Secondly, even though I don't expect to be uber wealthy, when you look at the income from $1.2M - $3.5M >>
2) When you take those numbers and divide by 25 to get your income, it is a small number.
3) The tax bracket is adjusted upward by inflation every year.
KlangFool
As for tax rates, that may be true but the reality is compared to this country's historical norms rates are very low and under current law are scheduled to increase.
Last edited by CMD1 on Tue Jan 28, 2020 2:03 pm, edited 1 time in total.
Re: Why do so many people quote "You will likely be in a lower tax bracket in retirement"
CMD1,CMD1 wrote: ↑Tue Jan 28, 2020 1:54 pmA small number to you maybe, not to me. Adding in SS much of that range would yield a six figure income (using the 25 rule), which quite frankly is ahead of what I live on today after considering kids, retirement and other things that don't generally exist in retirement.KlangFool wrote: ↑Tue Jan 28, 2020 12:49 pmCMD1,CMD1 wrote: ↑Tue Jan 28, 2020 12:35 pm I've started to rethink this myself. We have been pretty modest earners but recently went back to a 2 person income and live in a VHCOL area and finally bumped out of the 12% bracket, well into the 22% and switched away from ROTH. The case for ROTH seems to be strongest when you consider tax rates will only go up in the future - 2 reasons - we can't support current levels of government including SS with current tax rates and tax rates under current law are already scheduled to increase in about 5 years. Therefore perhaps paying the tax now when the rates are lower is better.
Secondly, even though I don't expect to be uber wealthy, when you look at the income from $1.2M - $3.5M (depending on how early I retire) and then add in social security for myself + spouse (not insignificant in my eye based on the estimates) and strip away your current deductions like 401km HSA one may wish they had some mix of ROTH funds.
1) Globally, when the government needs more money/taxes, it decreases the income taxes and increases the consumption/sales/GST/VAT.
<<Secondly, even though I don't expect to be uber wealthy, when you look at the income from $1.2M - $3.5M >>
2) When you take those numbers and divide by 25 to get your income, it is a small number.
3) The tax bracket is adjusted upward by inflation every year.
KlangFool
As for tax rates, that may be true but the reality is compared to this country's historical norms rates are very low and under current law are scheduled to increase.
<<We have been pretty modest earners but recently went back to a 2 person income and live in a VHCOL area and finally bumped out of the 12% bracket, well into the 22% and switched away from ROTH.>>
<<$1.2M - $3.5M>>
If you are serious about actually calculating the number and make sure that your assumption is correct, please start a new topic and provide numbers. Based on what you posted so far, I seriously doubt that your numbers (1.2M to 3.5M) are accurate.
Please note that only tax-deferred account numbers matter. Your Roth account generates no taxable income during retirement.
KlangFool
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