Social Security Tax Hump vs. Tax Torpedo

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aebknb
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Social Security Tax Hump vs. Tax Torpedo

Post by aebknb » Sat Jul 14, 2018 12:43 pm

Is the Social Security Tax Hump: https://www.bogleheads.org/wiki/Social_ ... calculator
the same as the Tax Torpedo?: https://www.cnbc.com/2017/10/29/will-th ... ement.html?

I guess the Torpedo is caused by the Hump, along with RMD's? Do I have this right? Any other causes of the Torpedo?

Thanks,
aebknb

Silk McCue
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Re: Social Security Tax Hump vs. Tax Torpedo

Post by Silk McCue » Sat Jul 14, 2018 1:17 pm

The Tax Torpedo is The Hump as far as I know. Lots of different types of income including Pensions, Tax Deferred withdrawals, Capital Gains, etc as well as Social Security Benefits all participate in driving you towards the the Torpedo/Hump. Regardless of the term used once you enter it you will eventually pass through it if you have enough taxable income in a given year.

Many people with proper planning can limit the impact, others cannot. If you can't its nothing to lose sleep over. If you can with planning then all the better. That's what we are doing as without proper planning my wife and I would eventually pay 22.2% on every additional dollar of taxable income and completely consume the Hump at 40.7% as well. Instead we will have converted our IRA's to Roth's leaving enough to pay our charitable giving using Qualified Charitable Distributions (QCD's)that will be more than what our RMD's would be and as a result pay 0% on all withdrawals from the IRA's once we both reach 70.5.

Both links you provided should give you an excellent understanding of the subject.

Cheers

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David Jay
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Re: Social Security Tax Hump vs. Tax Torpedo

Post by David Jay » Sat Jul 14, 2018 5:42 pm

Silk McCue wrote:
Sat Jul 14, 2018 1:17 pm
Instead we will have converted our IRA's to Roth's leaving enough to pay our charitable giving using Qualified Charitable Distributions (QCD's)that will be more than what our RMD's would be and as a result pay 0% on all withdrawals from the IRA's once we both reach 70.5.
Agree. This is entirely possible for moderate income couples, I wrote up my scenario here: https://bogleheads.org/forum/viewtopic. ... &p=3708276
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

aebknb
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Re: Social Security Tax Hump vs. Tax Torpedo

Post by aebknb » Sat Jul 14, 2018 7:06 pm

Thanks for the input!

aebknb

Silk McCue
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Re: Social Security Tax Hump vs. Tax Torpedo

Post by Silk McCue » Sat Jul 14, 2018 7:16 pm

aebknb wrote:
Sat Jul 14, 2018 7:06 pm
Thanks for the input!

aebknb
You are welcome! And by the way, welcome to Bogleheads! There is alot that can be learned here.

Cheers

The Wizard
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Re: Social Security Tax Hump vs. Tax Torpedo

Post by The Wizard » Sat Jul 14, 2018 8:08 pm

These are two separate issues.
I'm well beyond the Tax Hump zone, with 85% of my Divorced Spouse SS Benefit being taxed presently.

If I ignored future planning, then i could experience that wonderful Tax Torpedo effect at age 70 ( in two years) when maximal personal SS and RMDs start.
My AGI would jump by around $30k per year and I'd pay an additional $7200 in Federal income tax.

But I've not ignored this. I've been doing moderate Roth conversions since start of retirement, getting my AGI up closer and closer to what it will be in 2020 and beyond...
Attempted new signature...

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corn18
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Re: Social Security Tax Hump vs. Tax Torpedo

Post by corn18 » Sat Jul 14, 2018 8:27 pm

I-ORP really helped me figure out how to avoid the hump. I can get all my 401k converted before 70.5 and avoid rmd’s.

aebknb
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Re: Social Security Tax Hump vs. Tax Torpedo

Post by aebknb » Sun Jul 15, 2018 1:49 pm

OK, more good input. Thx!

aebknb
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Re: Social Security Tax Hump vs. Tax Torpedo

Post by aebknb » Sun Jul 15, 2018 2:41 pm

I just came across this article from the Journal of Financial Planning on Tax Torpedo: https://www.onefpa.org/journal/Pages/JU ... irees.aspx

The authors of that article developed this software to optimize issues related to torpedo: https://www.incomestrategy.com/

Similar software by Laurence Kotlikoff's company: https://maxifiplanner.com/

bberris
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Re: Social Security Tax Hump vs. Tax Torpedo

Post by bberris » Mon Jul 16, 2018 9:43 am

aebknb wrote:
Sun Jul 15, 2018 2:41 pm
I just came across this article from the Journal of Financial Planning on Tax Torpedo: https://www.onefpa.org/journal/Pages/JU ... irees.aspx

The authors of that article developed this software to optimize issues related to torpedo: https://www.incomestrategy.com/

Similar software by Laurence Kotlikoff's company: https://maxifiplanner.com/
Strategy for minimizing the torpedo amounts to delaying claiming social security and converting to Roth while delaying. This seems a little surprising to some because it's sometimes called the SS tax torpedo (or hump). Despite the torpedo/hump, SS is taxed at a lower rate than other income, no matter how much your income. So maximizing SS income minimizes your taxes.

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David Jay
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Re: Social Security Tax Hump vs. Tax Torpedo

Post by David Jay » Mon Jul 16, 2018 10:11 am

bberris wrote:
Mon Jul 16, 2018 9:43 am
Despite the torpedo/hump, SS is taxed at a lower rate than other income, no matter how much your income.
This is not true with MAGI within the region of the tax hump. Even though only 85% of SS is taxed, the tax rate is so high (46.25%) that the effect (46.25*.85 = 39.3%) is higher taxation than I would pay (22%) without SS.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

Chip
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Re: Social Security Tax Hump vs. Tax Torpedo

Post by Chip » Mon Jul 16, 2018 10:57 am

David Jay wrote:
Mon Jul 16, 2018 10:11 am
This is not true with MAGI within the region of the tax hump. Even though only 85% of SS is taxed, the tax rate is so high (46.25%) that the effect (46.25*.85 = 39.3%) is higher taxation than I would pay (22%) without SS.
I don't think you're framing this correctly.

Take any given tax situation, then add $1000 of social security income to it. I think you'll see that bberris is correct -- the additional tax will be no more than 85% multiplied by the marginal tax bracket multiplied by $1000. Edit: Perhaps the better way to do this is to add $1000 of social security income vs. adding $850 of ordinary income to the same scenario. The tax on the social security scenario will always be equal or less than the the ordinary income scenario.

The tax hump has more to do with other ordinary income and its effects on SS taxation rather than social security itself.

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FiveK
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Re: Social Security Tax Hump vs. Tax Torpedo

Post by FiveK » Mon Jul 16, 2018 2:04 pm

Chip wrote:
Mon Jul 16, 2018 10:57 am
...the additional tax will be no more than 85% multiplied by the marginal tax bracket multiplied by $1000.
Yes. Marginal tax rates depend on the specific type of income under study.

wrongfunds
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Re: Social Security Tax Hump vs. Tax Torpedo

Post by wrongfunds » Mon Jul 16, 2018 2:17 pm

I wonder if people would prefer if SS payments were taxed 100% like any other taxable income to begin with! If that were the case, there would be no tax hump or no tax torpedo. It is a case of looking if the glass is half full or half empty.

bberris
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Re: Social Security Tax Hump vs. Tax Torpedo

Post by bberris » Tue Jul 17, 2018 6:40 am

wrongfunds wrote:
Mon Jul 16, 2018 2:17 pm
I wonder if people would prefer if SS payments were taxed 100% like any other taxable income to begin with! If that were the case, there would be no tax hump or no tax torpedo. It is a case of looking if the glass is half full or half empty.
ACA also introduces some very high marginal rates. Going over the income cliff can produce rates of 120,000 %. Typically it can be 30 % (state, fed and subsidy loss) on a fairly modest income. Still, I'm better off with it than without it. The marginal rate calculation is necessary for decisions on Roth conversions and where to withdraw.

JoeRetire
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Re: Social Security Tax Hump vs. Tax Torpedo

Post by JoeRetire » Tue Jul 17, 2018 7:00 am

bberris wrote:
Tue Jul 17, 2018 6:40 am
ACA also introduces some very high marginal rates. Going over the income cliff can produce rates of 120,000 %. Typically it can be 30 % (state, fed and subsidy loss) on a fairly modest income. Still, I'm better off with it than without it. The marginal rate calculation is necessary for decisions on Roth conversions and where to withdraw.
Focusing on this type of "marginal rate" is a mistake. Instead focus on the dollar amount when making decisions.

If you pay $0 today and $1 tomorrow what is the marginal rate? Yet it's only $1 difference.

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corn18
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Re: Social Security Tax Hump vs. Tax Torpedo

Post by corn18 » Tue Jul 17, 2018 8:08 am

JoeRetire wrote:
Tue Jul 17, 2018 7:00 am
bberris wrote:
Tue Jul 17, 2018 6:40 am
ACA also introduces some very high marginal rates. Going over the income cliff can produce rates of 120,000 %. Typically it can be 30 % (state, fed and subsidy loss) on a fairly modest income. Still, I'm better off with it than without it. The marginal rate calculation is necessary for decisions on Roth conversions and where to withdraw.
Focusing on this type of "marginal rate" is a mistake. Instead focus on the dollar amount when making decisions.

If you pay $0 today and $1 tomorrow what is the marginal rate? Yet it's only $1 difference.
As I learned in another thread, the marginal rate is undefined, not infinite. :oops:

JoeRetire
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Re: Social Security Tax Hump vs. Tax Torpedo

Post by JoeRetire » Tue Jul 17, 2018 8:38 am

corn18 wrote:
Tue Jul 17, 2018 8:08 am
JoeRetire wrote:
Tue Jul 17, 2018 7:00 am
bberris wrote:
Tue Jul 17, 2018 6:40 am
ACA also introduces some very high marginal rates. Going over the income cliff can produce rates of 120,000 %. Typically it can be 30 % (state, fed and subsidy loss) on a fairly modest income. Still, I'm better off with it than without it. The marginal rate calculation is necessary for decisions on Roth conversions and where to withdraw.
Focusing on this type of "marginal rate" is a mistake. Instead focus on the dollar amount when making decisions.

If you pay $0 today and $1 tomorrow what is the marginal rate? Yet it's only $1 difference.
As I learned in another thread, the marginal rate is undefined, not infinite. :oops:
Okay, how about going from $0.000001 to $1? That way it's not undefined.

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corn18
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Re: Social Security Tax Hump vs. Tax Torpedo

Post by corn18 » Tue Jul 17, 2018 8:44 am

JoeRetire wrote:
Tue Jul 17, 2018 8:38 am
corn18 wrote:
Tue Jul 17, 2018 8:08 am
JoeRetire wrote:
Tue Jul 17, 2018 7:00 am
bberris wrote:
Tue Jul 17, 2018 6:40 am
ACA also introduces some very high marginal rates. Going over the income cliff can produce rates of 120,000 %. Typically it can be 30 % (state, fed and subsidy loss) on a fairly modest income. Still, I'm better off with it than without it. The marginal rate calculation is necessary for decisions on Roth conversions and where to withdraw.
Focusing on this type of "marginal rate" is a mistake. Instead focus on the dollar amount when making decisions.

If you pay $0 today and $1 tomorrow what is the marginal rate? Yet it's only $1 difference.
As I learned in another thread, the marginal rate is undefined, not infinite. :oops:
Okay, how about going from $0.000001 to $1? That way it's not undefined.
I should have used the sarcasm emoji but I don't know which one it is. I like beer, so maybe that is a good substitute. :sharebeer

eli80
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Re: Social Security Tax Hump vs. Tax Torpedo

Post by eli80 » Tue Jul 17, 2018 8:55 am

aebknb wrote:
Sun Jul 15, 2018 2:41 pm
I just came across this article from the Journal of Financial Planning on Tax Torpedo: https://www.onefpa.org/journal/Pages/JU ... irees.aspx

The authors of that article developed this software to optimize issues related to torpedo: https://www.incomestrategy.com/

Similar software by Laurence Kotlikoff's company: https://maxifiplanner.com/
Does anyone have any experience with the software mentioned? Is there any real value to it?

SGM
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Re: Social Security Tax Hump vs. Tax Torpedo

Post by SGM » Tue Jul 17, 2018 8:56 am

No SS tax hump for me as I will always have 85% of it taxed. The big tax change I was concerned about was RMDs at 70 1/2. I-orp agreed with what I was already planning which was a complete conversion of all tax deferred accounts over several years after retiring or working a few hours a week. ACA tax and increased Medicare premiums secondary to a high MAGI have been unavoidable. I will shortly start delayed SS and the following year I would have been subject to RMDs if I had not converted. I will attempt to calculate the current savings after age 70 1/2. Of course nothing can be done about it after the fact. It has been a few years since the last conversion. It is nice that the market decided to go up a lot after I made my conversions. I will take luck any day of the week. :D

A slight side benefit of the conversions was to have less in taxable accounts. So my ongoing dividends were smaller in taxable and greater in the Roth accounts.

JoeRetire
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Re: Social Security Tax Hump vs. Tax Torpedo

Post by JoeRetire » Tue Jul 17, 2018 9:03 am

corn18 wrote:
Tue Jul 17, 2018 8:44 am
I should have used the sarcasm emoji but I don't know which one it is. I like beer, so maybe that is a good substitute. :sharebeer
I like beer too. That emoji is marginally better.

aebknb
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Re: Social Security Tax Hump vs. Tax Torpedo

Post by aebknb » Fri Oct 26, 2018 10:17 pm

Another article with Tax Torpedo definition: https://www.onefpa.org/journal/Pages/JU ... irees.aspx

spammagnet
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Re: Social Security Tax Hump vs. Tax Torpedo

Post by spammagnet » Sat Oct 27, 2018 7:28 am

aebknb wrote:
Sun Jul 15, 2018 2:41 pm
I just came across this article from the Journal of Financial Planning on Tax Torpedo: https://www.onefpa.org/journal/Pages/JU ... irees.aspx

The authors of that article developed this software to optimize issues related to torpedo: https://www.incomestrategy.com/

Similar software by Laurence Kotlikoff's company: https://maxifiplanner.com/
Incomestrategy (and i-ORP) suggest optional Roth conversions; Maxifiplanner does not. Incomestrategy is much more expensive than Maxifiplanner. I-ORP is free but the user interface is not as user-friendly.

spammagnet
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Re: Social Security Tax Hump vs. Tax Torpedo

Post by spammagnet » Sat Oct 27, 2018 7:36 am

eli80 wrote:
Tue Jul 17, 2018 8:55 am
Does anyone have any experience with the software mentioned? Is there any real value to it?
I have personal experience with both and, in my opinion, both have real value.

I continue to use Maxifiplanner. I have not continued my subscription to Incomestrategy because it costs more than I'm willing to pay for the information it provides. You may find that information and fuctionality useful and worthwhile. It's a month-to-month subscription so it's easy to try it out and cancel if you wish.

If you search the forum for the program names you'll find a number of discussions on the topic.

hulburt1
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Re: Social Security Tax Hump vs. Tax Torpedo

Post by hulburt1 » Sat Oct 27, 2018 8:26 am

It's hard to pay the tax's now with using a Roth but I know in 4 years it will pay off. Would you move lets say $50000 from S&P IRA to S&P Roth and have your cash in IRA that you live on for the year. Or everything that you need to the Roth at the start of the year and take out as needed from Roth. I live on 3000 a month, not taking SS until 70, and have 1.1m in IRA and 100000 in Roth.

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