Taxation of Social Security Benefits, etc.

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bkweathe
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Joined: Fri Feb 06, 2015 5:02 pm

Taxation of Social Security Benefits, etc.

Post by bkweathe »

Please tell me if I'm understanding this correctly. I don't think I'm going to be paying any federal income tax after I start taking Social Security; at least not for a while. Am I right?

I retired last year. I'm 58 now, so it'll be a few years until we start taking SS. However, for the sake of simplicity, let's imagine I'm doing this now:
We seem to need about $52K/year to meet all of our expenses.
We expect to get about $37K/year from SS.
So, we expect to take about $15K/year ($52K - $37K) from our IRA &/or 401K.
We have no other significant source of income.

Assuming that current rules stay in place:
Our AGI before including SS will be the $15K/year from our IRA
Our provisional income will be $33,500 ($15K + $37K/2)
Our PI exceeds the lower base amount by $1,500 ($33,500 - $32K)
Our taxable SS will be $750 ($1500/2)
Our AGI will be $15,750 ($15K + $750)
Our standard deduction is $24,800
Our taxable income will be $0 ($15,750 < $24,800)
Our tax will be $0
Is all of that correct? What am I missing?

Now, what if I take an extra $9K out of my IRA? I think that would be tax-free, too. Right? Could I convert that to my Roth IRA?

What if I then leave my Roth IRA to my kids? Would they have to take distributions on any particular schedule (e.g. within 10 years of my death)? Would they be taxed on distributions?

I know about the wiki articles www.bogleheads.org/wiki/Taxation_of_Soc ... y_benefits & www.bogleheads.org/wiki/Social_Security ... calculator. It's not clear to me which spreadsheet I should be using.

Any guidance on this topic will be appreciated!

Brad
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FiveK
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Re: Taxation of Social Security Benefits, etc.

Post by FiveK »

bkweathe wrote: Fri Jul 10, 2020 12:25 am I know about the wiki articles www.bogleheads.org/wiki/Taxation_of_Soc ... y_benefits & www.bogleheads.org/wiki/Social_Security ... calculator. It's not clear to me which spreadsheet I should be using.
Of those choices, the one described at this link. Works best in Excel.
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FiveK
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Re: Taxation of Social Security Benefits, etc.

Post by FiveK »

bkweathe wrote: Fri Jul 10, 2020 12:25 am Assuming that current rules stay in place:
Our AGI before including SS will be the $15K/year from our IRA
Our provisional income will be $33,500 ($15K + $37K/2)
Our PI exceeds the lower base amount by $1,500 ($33,500 - $32K)
Our taxable SS will be $750 ($1500/2)
Our AGI will be $15,750 ($15K + $750)
Our standard deduction is $24,800
Our taxable income will be $0 ($15,750 < $24,800)
Our tax will be $0
Is all of that correct?
Yes, if you are both under age 65. Standard deduction goes up at 65.
Now, what if I take an extra $9K out of my IRA? I think that would be tax-free, too.
1. Right?
2. Could I convert that to my Roth IRA?
1. Not quite. With $37K SS, you start incurring federal tax at just a bit over $21K tIRA withdrawal.
2. Yes, you may convert any of your tIRA withdrawals (that aren't Required Minimum Distributions) to Roth.
What if I then leave my Roth IRA to my kids?
1. Would they have to take distributions on any particular schedule (e.g. within 10 years of my death)?
2. Would they be taxed on distributions?
1. Yes.
2. No.
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celia
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Re: Taxation of Social Security Benefits, etc.

Post by celia »

How much will your RMD be when you turn 72? (Assume the account continues growing as it has in the past.)

What tax bracket does that put you in?
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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#Cruncher
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Re: Taxation of Social Security Benefits, etc.

Post by #Cruncher »

FiveK wrote: Fri Jul 10, 2020 1:09 am
bkweathe wrote: Fri Jul 10, 2020 12:25 amNow, what if I take an extra $9K out of my IRA? I think that would be tax-free, too.
Not quite. With $37K SS, you start incurring federal tax at just a bit over $21K tIRA withdrawal.
That's right. You could only increase the traditional IRA withdrawal $6,033 to $21,033 before incurring tax. This is because each $1 of additional tIRA withdrawal makes another $0.50 of SS taxable. [6,033 = (24800 - 15750) / 1.5]. With an additional $9,000 tIRA withdrawal you'd owe $445 in tax. This can be seen with the following taken from the Compare sheet of my Marginal Tax Rates Excel workbook:

Code: Select all

Social Security 50% threshhold    32,000   -------------->
Social Security 85% threshhold    44,000   -------------->
Social Security Benefit           37,000   -------------->
Non-SS Ordinary Income            15,000   21,033   24,000
SS Relevant Income                33,500   39,533   42,500
50% SS taxable                       750    3,767    5,250
85% SS taxable                       -        -        -  
Total SS taxable                     750    3,767    5,250
Adjusted gross income             15,750   24,800   29,250
Deductions plus Exemptions        24,800   24,800   24,800
Taxable Income                       -        -      4,450
Tax at 10%                           -        -        445

Code: Select all

Increased income                       6,033    2,967
Increased taxable SS                   3,017    1,484
Increased tax                            -        445
Marginal SS taxable                   50.00%   50.00%
Marginal tax rate                      0.00%   15.00%
Here are the various "break points" of Non-SS income for a 2020 joint tax return with $37,000 of SS and a $24,800 standard deduction. It is taken from the Wiki sheet of the same Excel workbook, and is the same layout as the Boglehead Wiki's examples.

Code: Select all

                                              Additional
                  Adjusted                      SS Taxed
Non SS   Taxable     Gross   Taxable      Tax   for each  Marginal
Income        SS    Income    Income  Bracket  $1 Income  Tax Rate
------   -------    ------    ------  -------  ---------  --------
13,500         0    13,500         0       0%       0.50      0.0%
21,033     3,767    24,800         0      10%       0.50     15.0%
25,500     6,000    31,500     6,700      10%       0.85     18.5%
32,554    11,996    44,550    19,750      12%       0.85     22.2%
55,441    31,450    86,891    62,091      12%       0.00     12.0%
73,600    31,450   105,050    80,250      22%       0.00     22.0%
neilpilot
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Re: Taxation of Social Security Benefits, etc.

Post by neilpilot »

celia wrote: Fri Jul 10, 2020 4:47 am How much will your RMD be when you turn 72? (Assume the account continues growing as it has in the past.)

What tax bracket does that put you in?
Site does not encourage speculation on what the tax brackets will be in 2034-5.
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celia
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Re: Taxation of Social Security Benefits, etc.

Post by celia »

neilpilot wrote: Fri Jul 10, 2020 8:23 am
celia wrote: Fri Jul 10, 2020 4:47 am How much will your RMD be when you turn 72? (Assume the account continues growing as it has in the past.)

What tax bracket does that put you in?
Site does not encourage speculation on what the tax brackets will be in 2034-5.
The OP can still estimate the RMD to see if it is more or less than his/her wages were. (S)he can "speculate" privately, considering that we currently have historically low tax rates. We also know what the tax brackets were in 2017. And they can choose other possible high and low brackets that might apply. No need to post here. This is meant to call a potential problem to their attention instead of waiting until they can't do anything about it.

And high RMDs will make 85% of their SS be taxed, if nothing else.

:beer
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
petulant
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Re: Taxation of Social Security Benefits, etc.

Post by petulant »

neilpilot wrote: Fri Jul 10, 2020 8:23 am
celia wrote: Fri Jul 10, 2020 4:47 am How much will your RMD be when you turn 72? (Assume the account continues growing as it has in the past.)

What tax bracket does that put you in?
Site does not encourage speculation on what the tax brackets will be in 2034-5.
There's a difference between speculating about political changes to the tax brackets in the future and estimating what bracket a certain amount of income would place the investor in based on current law, which I take to be the intent of the question.
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