How to pay ZERO taxes in retirement with 6-figure expenses

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livesoft
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by livesoft » Fri Jun 13, 2014 7:10 am

I haven't done this, but I will try to answer.

First, the statement is a bit of hyperbole. The "recharacterize" is undoing the Roth conversion. So if one converts $25,000 for one account and $25,000 for another account, then undoes $25,000 late in the year, the total net amount converted is just $25,000. Do you see how converting just $25,000 is probably only half the taxes of converting $50,000?

Second, suppose that one of the amounts loses money. Lots of money. For example, suppose it drops to $10,000. Then one can recharacterize back to a traditional IRA and thus not pay taxes on a $25,000 conversion. The next year, they can convert the $10,000 to a Roth. They have saved taxes on $15,000 of losses.
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ralph124cf
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by ralph124cf » Fri Jun 13, 2014 5:11 pm

misslucy wrote:
Watty wrote:
When they do the Roth conversion in 2012 they could do it in January of 2012 so they could recharacterize it back to a IRA until their filing deadline the next year which if I remember correctly is as late as October 2013 with extensions. With different his and her accounts can they do two Roth conversions in one year and invest one on "black" and the other on "red" and then just recharacterize the one that loses? This would effectively cut the taxes on the Roth conversion in half.
.
I know this is an old thread... but I'm new here.

I'm going to be doing a Roth conversion so I'm curious about the quote above. How does it cut taxes on Roth conversion if you do it in January and then recharacterize in Oct of the following year? I'm single, so this may not apply to me.

Thank you!
This is one time to try high risk/potentially high reward stocks or funds, such as an emerging market stock.

Let's say that you make ten conversions from an IRA to ten different Roth accounts with $5000 each. Now suppose that one stock goes up by a factor of ten, and all others go bankrupt. You sell the high risk stock but keep the money in your Roth, and recharacterize the Roth accounts that now have a zero value to traditional. Thus you would have $50,000 of spendable income in your Roth account, but only pay taxes on $5,000. Note: Most people are not willing the gamble on picking even one out of ten high risk investment, all could go to zero. Most people would more conservatively use funds with lower volatility, such as one bond fund and one total stock market fund. This gives the same type of benefit, but at a lower level of tax savings.

Ralph

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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by Bob's not my name » Fri Jun 13, 2014 5:57 pm

ralph124cf wrote:Most people would more conservatively use funds with lower volatility, such as one bond fund and one total stock market fund. This gives the same type of benefit, but at a lower level of tax savings.
That's what I did for an elderly grantor. I converted into two Roths, one with CDs, the other with stock funds. The stock market went up 20%, the CDs went up 5%. I recharacterized the CD Roth and reconverted it in the following tax year, at a lower tax rate.

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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by zed » Fri Jun 13, 2014 7:06 pm


555
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by 555 » Fri Jun 13, 2014 7:12 pm

misslucy wrote:
Watty wrote:
When they do the Roth conversion in 2012 they could do it in January of 2012 so they could recharacterize it back to a IRA until their filing deadline the next year which if I remember correctly is as late as October 2013 with extensions. With different his and her accounts can they do two Roth conversions in one year and invest one on "black" and the other on "red" and then just recharacterize the one that loses? This would effectively cut the taxes on the Roth conversion in half.
.
I know this is an old thread... but I'm new here.

I'm going to be doing a Roth conversion so I'm curious about the quote above. How does it cut taxes on Roth conversion if you do it in January and then recharacterize in Oct of the following year? I'm single, so this may not apply to me.

Thank you!
http://www.bogleheads.org/wiki/IRA_recharacterization

skibum
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by skibum » Sun Sep 28, 2014 2:43 pm

Eye opening thread, thanks to livesoft and all contributors. First post with a follow up question...

Back up one year, hypothetical couple is 54 years old and one year from ER. AGI of $100k with all tax deferred savings maxed out. Should the couple contribute to Roth IRAs in this final year before ER? Although the couple is in a higher tax bracket, the income taxes are a sunk cost regardless, and the Roth contributions present an opportunity to shift after tax $ into Roth for tax free growth. Flip side is the after tax portfolio has value in ER for living expenses and can be leveraged to cover any tax on conversions up to the top of the 15% tax bracket. Seems like moving $13k from after tax to tax free Roth is a good move before ER, but I feel like I'm overlooking something with the pending lower/zero tax rate.

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livesoft
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by livesoft » Sun Sep 28, 2014 3:02 pm

If AGI is $100K, then are they eligible for a [deductible] traditional IRAs? If not, then they should definitely do Roth IRAs. I assume they contributed $46K or more to 401(k)s.

Also note that if AGI is $100K, taxable income will be even lower.
Last edited by livesoft on Sun Sep 28, 2014 8:05 pm, edited 1 time in total.
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randomguy
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by randomguy » Sun Sep 28, 2014 3:37 pm

skibum wrote:Eye opening thread, thanks to livesoft and all contributors. First post with a follow up question...

Back up one year, hypothetical couple is 54 years old and one year from ER. AGI of $100k with all tax deferred savings maxed out. Should the couple contribute to Roth IRAs in this final year before ER? Although the couple is in a higher tax bracket, the income taxes are a sunk cost regardless, and the Roth contributions present an opportunity to shift after tax $ into Roth for tax free growth. Flip side is the after tax portfolio has value in ER for living expenses and can be leveraged to cover any tax on conversions up to the top of the 15% tax bracket. Seems like moving $13k from after tax to tax free Roth is a good move before ER, but I feel like I'm overlooking something with the pending lower/zero tax rate.
Why wouldn't you do the ROTH? You choices if I read your post correctly are
a) stick the 11k in a roth
b) stick into a taxable account.

Converting tIRA is independent of that choice. A is obviously much better. The choice between tIRA and roth would require thinking about your exact situation. Unless you have some cash flow issues you should always be sticking money in a ROTH versus a taxable even if your in the 0% LTGC (or heck even 0% OI range) in pretty much every case imaginable..

skibum
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by skibum » Sun Sep 28, 2014 4:27 pm

Thanks both. After seeing how low the effective tax rate can be in ER, I had some misconception that saving after tax Roth $ while in a higher bracket had some downside. The Roth may be inferior to tax deferred savings in this scenario, but is still an effective strategy after tax deferred is maxed out.
Cheers, skibum

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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by madbrain » Sun Sep 28, 2014 6:26 pm

livesoft wrote:If AGI is $100K, then are they eligible for a traditional IRAs? If not, then they should definitely do Roth IRAs. I assume they contributed $46K or more to 401(k)s.
Anyone with wage income is eligible to contribute to a traditional IRA.
Did you mean that they are eligible to deduct traditional IRA contributions ?

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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by Barefootgirl » Wed Oct 01, 2014 8:11 pm

We get many posters in the accumulation phase of life who don't appreciate the flexibility you have in retirement or early retirement or partial retirement to manipulate the amount and type of income you have.

Excellent point. Where would these uninformed posters go for an overview and further details regarding income flexibility in retirement?

thank you, BFG
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by toto238 » Wed Oct 01, 2014 8:46 pm

I think a good point has been brought up here about not letting the "tax tail" wag the "investment dog".

People often get scared about taxes and see it as a risk they're adding into their portfolio. In reality, the current US tax system in some ways actually works to reduce your overall risk.

Think about other investment factors. The amount of stocks you have in your portfolio can be cyclical with your life. There's a very good chance that one factor, for instance a receding economy, could cause you to lose your income from your job, AND lose a significant portion of your savings if they were in the stock market. Your expenses also increase as you start having to pay your own health insurance, or any other benefits your employer previously provided. So it creates this perfect storm where you lose income, human capital, net worth, and your expenses increase all at the same time.

But taxes act counter-cyclical to that. When your income goes down, your tax rate goes down. When you have a bad year in the stock market, you can harvest those losses to lower your tax expenses. When the economy has a recession, the government often responds by at least temporarily lowering taxes (as occured in the latest large recession).

In all likelihood, when you fall on hard times, your tax bill becomes easier. It's when you're having good times that those tax expenses go up. Counter-cyclical.

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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by livesoft » Wed Nov 26, 2014 8:01 pm

New article today from Michael Kitces about this whole 0% tax rate thing. He has explained a lot of things in his article, so I link the article to extend the discussion:
https://www.kitces.com/blog/understandi ... -in-basis/
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by Novine » Thu Nov 27, 2014 1:41 pm

Thanks for sharing livesoft. That's a great explanation of how the various pieces of income work together to make this possible.I took advantage of this a couple of years ago when I was consolidating my stock holdings. I still have a few stocks out there that have seen a significant appreciation since then and I'll be running the numbers soon to see if it makes sense to sell those this year to take advantage of the option to realize those gains at 0%.

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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by Zedon » Tue Feb 03, 2015 4:49 am

So if you had a sizable pension that puts you into the 25% bracket it throws most of this out? No playing with lower tax brackets, no roth conversions, and once you hit 70, if you have a pension, SS and RMDs it will be even more costly.

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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by livesoft » Tue Feb 03, 2015 7:30 am

Yes, folks with pensions will pay more taxes than folks who live off of capital gains and Roth IRAs.
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by retiredjg » Tue Feb 03, 2015 8:17 am

Zedon wrote:So if you had a sizable pension that puts you into the 25% bracket it throws most of this out? No playing with lower tax brackets, no roth conversions, and once you hit 70, if you have a pension, SS and RMDs it will be even more costly.
You can still consider if Roth conversions are a good idea. If you delay SS, once you get RMDs and SS together you might get pushed into the 28% bracket. You can avoid that by converting up to the top of the 25% bracket each year before reaching 70.

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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by TradingPlaces » Sun Oct 04, 2015 2:13 pm

Bob's not my name wrote:You're solving the wrong problem. Many posters here believe their tax rate in retirement will be over 40%. You need to help them figure out how to get there.
+5000

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Re: How to pay ZERO taxes in retirement with 6-figure expenses

Post by StarsandStripes » Tue Dec 15, 2015 10:06 pm

ThAnk you livesoft for this thought provoking thread. As retiredjg said lots of us spent a lifetime accumulating. Now we have no idea how to unwind the investments for a great retirement.

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Re: How to pay ZERO taxes in retirement with 6-figure expenses

Post by supersecretname » Sun Jul 03, 2016 9:31 am

Great thread.

I'm planning on checking out around 41, and will have many years to convert the 401k/tIRA to Roth at very favorable tax rates. The key (other than to have low expenses) is to have at least 5+ years of expenses in taxable while you are waiting for the Roth conversion to season.

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Re: How to pay ZERO taxes in retirement with 6-figure expenses

Post by goodenyou » Thu Aug 04, 2016 8:59 am

I wonder if someone industrious is working on an automated program that can figure this out for individual circumstances. it would require a program that will change with the changing tax rules. Trying to convert assets to income net of taxes requires an intimate knowledge of the tax code. Figuring out a SWR that you feel comfortable with is complicated enough. The tax aspect takes it to a whole new level.
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by motorcyclesarecool » Mon Feb 13, 2017 10:22 pm

Barefootgirl wrote:[...]Excellent point. Where would these uninformed posters go for an overview and further details regarding income flexibility in retirement?[...]
What she said! Where other than this thread?
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by Lieutenant.Columbo » Sat Sep 23, 2017 9:53 pm

dhodson wrote:
Thu Dec 22, 2011 9:14 am
paying zero taxes isnt the most important part. too many people use the tax scare to sucker people into poor investments such as permanent life insurance. thus one should only care about paying zero taxes if it really provides you with the most money. thus the title should be providing the most income in retirement by reducing taxes to near zero if that is what you plan to show.
Hi livesoft,
dhodson's seems a valid question and I did not see if you addressed it. Do you see a way one may end up with more money even if it's not a "zero taxes" way? Thanks.
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Re: How to pay ZERO taxes in retirement with 6-figure expenses

Post by livesoft » Sat Sep 23, 2017 9:57 pm

^I'm not sure what you mean. I don't pay zero taxes today. I prefer to make Roth conversions up to the top of the 15% marginal income tax bracket and my spouse works full-time. We certainly have more in our portfolio than the starting point of this thread almost 6 years ago.
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by randomguy » Sat Sep 23, 2017 11:30 pm

Lieutenant.Columbo wrote:
Sat Sep 23, 2017 9:53 pm
dhodson wrote:
Thu Dec 22, 2011 9:14 am
paying zero taxes isnt the most important part. too many people use the tax scare to sucker people into poor investments such as permanent life insurance. thus one should only care about paying zero taxes if it really provides you with the most money. thus the title should be providing the most income in retirement by reducing taxes to near zero if that is what you plan to show.
Hi livesoft,
dhodson's seems a valid question and I did not see if you addressed it. Do you see a way one may end up with more money even if it's not a "zero taxes" way? Thanks.
Simple example.
Buy 100k apple stock. Watch it go up 50x. Sell and pay 100k in taxes and spend 400k
Buy 100k of enron stop. Watch it go to 0. Sell and save 25k on taxes

Would you rather be paying 100k in taxes or saving 25k in taxes? Most sane people pick paying taxes.

You can get the same effect with other things. Is it better to buy a bond paying 250 year and paying 50 bucks in taxes or a bond paying 190 dollars an paying 0 dollars in taxes? Obviously you are better off paying taxes.

Most peoples goals are either to maximize their estate or to maximize their spendable income. Minimizing taxes may or may not help with that. But it is only part of the equation.

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livesoft
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Re: How to pay ZERO taxes in retirement with 6-figure expenses

Post by livesoft » Mon Dec 25, 2017 12:28 pm

it's been awhile since there was an update to this thread started about 6 years ago. I have used H&RBlock to do our 2017 return. I am amazed at how things work out even though my spouse is working full-time. I am also amazed at how the tax calculators being used to compare the 2017 to the new 2018 taxes just do not fit our tax situation at all. And that's despite a 2-income couple with a kid which might seem typical.

Here are some numbers:
Gross earned income (2 incomes): ~ $95,000
Dividends: ~ $30,000
Roth conv: ~ $25,553
So that is about $150K of income, but only $125K of beneficial income
The Federal income tax is about $3.8K (includes about $700 in FICA and medicare taxes from self-employed income).

If we did not do the Roth conversion, the Federal income tax would be $228 which includes about $700 in FiCA and medicare taxes.

Of course, most of the gross earned income is not taxed which is why our income taxes are so low. We don't pay state income taxes.

Thus, this thread is just as valid as it always was.
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bhsince87
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Re: How to pay ZERO taxes in retirement with 6-figure expenses

Post by bhsince87 » Mon Dec 25, 2017 12:45 pm

The new tax bill seems to make this even more workable. The new standard deduction is huge!

I hope to put this to the test very soon. :beer
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Re: How to pay ZERO taxes in retirement with 6-figure expenses

Post by sandramjet » Mon Dec 25, 2017 2:59 pm

Unfortunately, to us the new tax law at best breaks even.... and since (unlike livesoft), nearly all of my income is taxable (either W-2 salary, pensions or tIRA), and no TLH losses (whatever I do have in small taxable accounts show very large gains), we are seemingly on the opposite end of the spectrum. :annoyed

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teen persuasion
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Re: How to pay ZERO taxes in retirement with 6-figure expenses

Post by teen persuasion » Tue Dec 26, 2017 6:11 pm

livesoft wrote:
Mon Dec 25, 2017 12:28 pm
it's been awhile since there was an update to this thread started about 6 years ago. I have used H&RBlock to do our 2017 return. I am amazed at how things work out even though my spouse is working full-time. I am also amazed at how the tax calculators being used to compare the 2017 to the new 2018 taxes just do not fit our tax situation at all. And that's despite a 2-income couple with a kid which might seem typical.

Here are some numbers:
Gross earned income (2 incomes): ~ $95,000
Dividends: ~ $30,000
Roth conv: ~ $25,553
So that is about $150K of income, but only $125K of beneficial income
The Federal income tax is about $3.8K (includes about $700 in FICA and medicare taxes from self-employed income).

If we did not do the Roth conversion, the Federal income tax would be $228 which includes about $700 in FiCA and medicare taxes.

Of course, most of the gross earned income is not taxed which is why our income taxes are so low. We don't pay state income taxes.

Thus, this thread is just as valid as it always was.
Livesoft, what happens when youngest child is no longer a dependent and in college?

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livesoft
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Re: How to pay ZERO taxes in retirement with 6-figure expenses

Post by livesoft » Tue Dec 26, 2017 6:29 pm

My youngest is a dependent and in college. That's a $2500 tax credit for 4 years.

You should ask: What happens when child graduates from college and is no longer a dependent? :)
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Re: How to pay ZERO taxes in retirement with 6-figure expenses

Post by Juice3 » Tue Dec 26, 2017 7:56 pm

Thank you Livesoft for an great thread.
livesoft wrote:
Tue Dec 26, 2017 6:29 pm
My youngest is a dependent and in college. That's a $2500 tax credit for 4 years.

You should ask: What happens when child graduates from college and is no longer a dependent? :)
I am curious if you can update us on your tax picture. My simple math suggests your dividend income may be pushed into the 15% tax with potential tax increase of about 4,500 / yr (30K*.15). This is offset with lower income tax rates but also lower itemized deductions and exemptions. I have ignored the AOTC as it is the same under either system. All of this basically boils down to what were your Itemized deduction and Exemptions and will you be forced into standard deduction in the new.

I think is crazy in situations like yours that losing the 4,050 exemptions forces divs into .15% tax, making the new 500 credit worth 100 less for the kid and 600 less for you and your partner. Very sneaky way to increase taxes.

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Re: How to pay ZERO taxes in retirement with 6-figure expenses

Post by livesoft » Tue Dec 26, 2017 8:20 pm

Juice3 wrote:
Tue Dec 26, 2017 7:56 pm
I am curious if you can update us on your tax picture. My simple math suggests ....
I posted a little bit about our tax situation in old / new in this post which discusses standard deduction and exemption differences: viewtopic.php?p=3679923#p3679923

We have exquisite control over some of our taxes because we choose the amounts and timing of
1. Charitable contributions
2. Roth conversions
3. Payment of property taxes.

Normally, 2017 would have been a standard deduction year for us since we itemized for 2016, but I chose to move some deductible things from 2018 into 2017. Also not appearing in these threads are untaxed return of capital.

In the future, my spouse can always quit working, too, which would drop her earned income and open up more room for Roth conversions. I don't see a problem staying in the 0% QDI / LTCG tax bracket for many years.
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Re: How to pay ZERO taxes in retirement with 6-figure expenses

Post by Mike Scott » Tue Dec 26, 2017 8:42 pm

I seems that this is something each individual/family must work toward on their own. It's a conceptual goal with built in balancing acts. It is not a formula. No one else knows your circumstances as well as you do and no one else can do the planning ahead for you. Then things change and you have to adjust on the fly. It's easier to just go along and pay the toll but it may be less expensive to spend some time figuring out how the system works.

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teen persuasion
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Re: How to pay ZERO taxes in retirement with 6-figure expenses

Post by teen persuasion » Tue Dec 26, 2017 9:25 pm

livesoft wrote:
Tue Dec 26, 2017 6:29 pm
My youngest is a dependent and in college. That's a $2500 tax credit for 4 years.

You should ask: What happens when child graduates from college and is no longer a dependent? :)
:oops: That's what I thought I was asking, but I see I worded it badly! Although my badly phrased version is a distinct possibility, too - that's the way it has eventually shifted with each of our oldest 3 kids, so far. Dependent/not in college -> dependent/in college -> not dependent/in college -> not dependent/not in college. DS4 is still both in college and a dependent, for now.

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Re: How to pay ZERO taxes in retirement with 6-figure expenses

Post by Bacchus01 » Tue Dec 26, 2017 10:10 pm

livesoft wrote:
Mon Dec 25, 2017 12:28 pm
it's been awhile since there was an update to this thread started about 6 years ago. I have used H&RBlock to do our 2017 return. I am amazed at how things work out even though my spouse is working full-time. I am also amazed at how the tax calculators being used to compare the 2017 to the new 2018 taxes just do not fit our tax situation at all. And that's despite a 2-income couple with a kid which might seem typical.

Here are some numbers:
Gross earned income (2 incomes): ~ $95,000
Dividends: ~ $30,000
Roth conv: ~ $25,553
So that is about $150K of income, but only $125K of beneficial income
The Federal income tax is about $3.8K (includes about $700 in FICA and medicare taxes from self-employed income).

If we did not do the Roth conversion, the Federal income tax would be $228 which includes about $700 in FiCA and medicare taxes.

Of course, most of the gross earned income is not taxed which is why our income taxes are so low. We don't pay state income taxes.

Thus, this thread is just as valid as it always was.
How do you have that much earned income and only $228 in fed taxes?

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Re: How to pay ZERO taxes in retirement with 6-figure expenses

Post by Lieutenant.Columbo » Tue Dec 26, 2017 11:27 pm

Bacchus01 wrote:
Tue Dec 26, 2017 10:10 pm
livesoft wrote:
Mon Dec 25, 2017 12:28 pm
it's been awhile since there was an update to this thread started about 6 years ago. I have used H&RBlock to do our 2017 return. I am amazed at how things work out even though my spouse is working full-time. I am also amazed at how the tax calculators being used to compare the 2017 to the new 2018 taxes just do not fit our tax situation at all. And that's despite a 2-income couple with a kid which might seem typical.

Here are some numbers:
Gross earned income (2 incomes): ~ $95,000
Dividends: ~ $30,000
Roth conv: ~ $25,553
So that is about $150K of income, but only $125K of beneficial income
The Federal income tax is about $3.8K (includes about $700 in FICA and medicare taxes from self-employed income).

If we did not do the Roth conversion, the Federal income tax would be $228 which includes about $700 in FiCA and medicare taxes.

Of course, most of the gross earned income is not taxed which is why our income taxes are so low. We don't pay state income taxes.

Thus, this thread is just as valid as it always was.
How do you have that much earned income and only $228 in fed taxes?
harvested tax losses, I presume?
Lt. Columbo: Well, what do you know. Here I am talking with some of the smartest people in the world, and I didn't even notice!

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Re: How to pay ZERO taxes in retirement with 6-figure expenses

Post by livesoft » Wed Dec 27, 2017 7:22 am

Bacchus01 wrote:
Tue Dec 26, 2017 10:10 pm
How do you have that much earned income and only $228 in fed taxes?
This was covered in detail in the earlier thread: Taxes on family with $200,000 income, but I will show again here for completeness:

Code: Select all

Approximate $ amounts in thousands, rounded
$+95    Earned income
$+ 5    Non-qualified dividends
$-29    401(k) contributions
$- 2.5  FSA
$- 5    Health, vision, dental insurance
$- 3    Net capital loss deducted from ordinary income
$-12.2  3 exemptions
$- 8.3  Property taxes
$-15.3  Charitable giving
$- 1.4  Sales tax deduction
====== 
$+23.3   Net taxable income
======
$+ 2.56  Tax on above income
$- 2.5   American Opportunity Tax Credit
$- 1     Foreign tax credit
==================
$- 0.9  Net income tax
Note that for us qualified dividend income is not taxed and neither is return-of-capital, so they are not shown in the above numbers.
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Juice3
Posts: 154
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Re: How to pay ZERO taxes in retirement with 6-figure expenses

Post by Juice3 » Wed Dec 27, 2017 9:00 am

livesoft wrote:
Wed Dec 27, 2017 7:22 am
Bacchus01 wrote:
Tue Dec 26, 2017 10:10 pm
How do you have that much earned income and only $228 in fed taxes?
This was covered in detail in the earlier thread: Taxes on family with $200,000 income,
Note that for us qualified dividend income is not taxed and neither is return-of-capital, so they are not shown in the above numbers.
This data improves my simple math. I think livesoft must be including tax credits. I am getting this result ....

Trump rules itemized (assumes bunching and same itemized as listed)
Taxable income = 38,500
Tax 4,843
Credit 500 (dep)
Net Tax = 4,343

Trump rules standard (odd years)
Taxable income = 44,500
Tax 5,743
Credit 500 (dep)
Net Tax = 5,243

Old Rules
Taxable Income = 26,350
Tax = 3,025

So the new tax rules without changing the inputs are going to cost about 1,300 a bunched year and 2,200 in odd years. This is pretty big hit given the talk something like 9 of 10 returns will pay less tax, a 2.3% of Wage or nearly a 160% of tax.

There was mention of the AOTC credit. This would reduce the tax liability by 2,500, making old rules tax about 500 close to the reported number.

The new tax rules have also reduced the "headroom" in the 15% bracket by about 12K in bunched years and 18k in odd years. This headroom could be used to realize CG at 0% or Roth conversions at 15% (now 12% in new rules).

The worst part of all this, is that the rules changes have him at the edge of the CG cliff. He can not increase his wage income without getting hit with a 27% tax on the increase. Increases will trigger 12% income and push qdiv, LTCG into 15% for a net increase of 27%, crazy.

Topic Author
livesoft
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Re: How to pay ZERO taxes in retirement with 6-figure expenses

Post by livesoft » Wed Dec 27, 2017 9:50 am

^That should help me convince my spouse to stop working. :) But in reality she would give away her entire paycheck to charity if I let her, so I suspect something like that will happen before she stops working.
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Bacchus01
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Re: How to pay ZERO taxes in retirement with 6-figure expenses

Post by Bacchus01 » Wed Dec 27, 2017 11:14 am

livesoft wrote:
Wed Dec 27, 2017 7:22 am
Bacchus01 wrote:
Tue Dec 26, 2017 10:10 pm
How do you have that much earned income and only $228 in fed taxes?
This was covered in detail in the earlier thread: Taxes on family with $200,000 income, but I will show again here for completeness:

Code: Select all

Approximate $ amounts in thousands, rounded
$+95    Earned income
$+ 5    Non-qualified dividends
$-29    401(k) contributions
$- 2.5  FSA
$- 5    Health, vision, dental insurance
$- 3    Net capital loss deducted from ordinary income
$-12.2  3 exemptions
$- 8.3  Property taxes
$-15.3  Charitable giving
$- 1.4  Sales tax deduction
====== 
$+23.3   Net taxable income
======
$+ 2.56  Tax on above income
$- 2.5   American Opportunity Tax Credit
$- 1     Foreign tax credit
==================
$- 0.9  Net income tax
Note that for us qualified dividend income is not taxed and neither is return-of-capital, so they are not shown in the above numbers.
Thanks. I didn't follow the whole thread, but this makes sense. I didn't think about the fact you are still investing (401k) and other section 125 expenses. The Charitable Giving is admirable.

SobeCane
Posts: 263
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Re: How to pay ZERO taxes in retirement with 6-figure expenses

Post by SobeCane » Wed Dec 27, 2017 11:38 am

livesoft wrote:
Wed Dec 27, 2017 7:22 am
Bacchus01 wrote:
Tue Dec 26, 2017 10:10 pm
How do you have that much earned income and only $228 in fed taxes?
This was covered in detail in the earlier thread: Taxes on family with $200,000 income, but I will show again here for completeness:

Code: Select all

Approximate $ amounts in thousands, rounded
$+95    Earned income
$+ 5    Non-qualified dividends
$-29    401(k) contributions
$- 2.5  FSA
$- 5    Health, vision, dental insurance
$- 3    Net capital loss deducted from ordinary income
$-12.2  3 exemptions
$- 8.3  Property taxes
$-15.3  Charitable giving
$- 1.4  Sales tax deduction
====== 
$+23.3   Net taxable income
======
$+ 2.56  Tax on above income
$- 2.5   American Opportunity Tax Credit
$- 1     Foreign tax credit
==================
$- 0.9  Net income tax
Note that for us qualified dividend income is not taxed and neither is return-of-capital, so they are not shown in the above numbers.

Livesoft,

I've read your posts for years and am shocked that you would hold a fund that has $5k of non-qualified dividends in a taxable position.

If i had to guess you just hold a lot of Vanguard Total International based on the size of the FTC and the fact that it's dividends are roughly 25% non-qualified.

Topic Author
livesoft
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Re: How to pay ZERO taxes in retirement with 6-figure expenses

Post by livesoft » Wed Dec 27, 2017 11:48 am

SobeCane wrote:
Wed Dec 27, 2017 11:38 am
I've read your posts for years and am shocked that you would hold a fund that has $5k of non-qualified dividends in a taxable position.

If i had to guess you just hold a lot of Vanguard Total International based on the size of the FTC and the fact that it's dividends are roughly 25% non-qualified.
I do not hold Total International at all, but you are right, I hold some other foreign funds that do not pay 100% qualified dividends. So when I give shares away to charity, I give shares purchased in March or April 2009 that have some non-qualified dividends and huge capital gains. I repurchase in my Roth IRAs if I can.

Those non-qualified dividends are a PITA, but if I said that publicly people would hate me.
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randomguy
Posts: 8600
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Re: How to pay ZERO taxes in retirement with 6-figure expenses

Post by randomguy » Wed Dec 27, 2017 12:26 pm

Bacchus01 wrote:
Wed Dec 27, 2017 11:14 am
livesoft wrote:
Wed Dec 27, 2017 7:22 am
Bacchus01 wrote:
Tue Dec 26, 2017 10:10 pm
How do you have that much earned income and only $228 in fed taxes?
This was covered in detail in the earlier thread: Taxes on family with $200,000 income, but I will show again here for completeness:

Code: Select all

Approximate $ amounts in thousands, rounded
$+95    Earned income
$+ 5    Non-qualified dividends
$-29    401(k) contributions
$- 2.5  FSA
$- 5    Health, vision, dental insurance
$- 3    Net capital loss deducted from ordinary income
$-12.2  3 exemptions
$- 8.3  Property taxes
$-15.3  Charitable giving
$- 1.4  Sales tax deduction
====== 
$+23.3   Net taxable income
======
$+ 2.56  Tax on above income
$- 2.5   American Opportunity Tax Credit
$- 1     Foreign tax credit
==================
$- 0.9  Net income tax
Note that for us qualified dividend income is not taxed and neither is return-of-capital, so they are not shown in the above numbers.
Thanks. I didn't follow the whole thread, but this makes sense. I didn't think about the fact you are still investing (401k) and other section 125 expenses. The Charitable Giving is admirable.

So the question is this good or bad tax planning? What are the odds you are getting the money out of the 401(k) at lower rates than what you could pay today? In 10 year we are going to read the livesoft post about how how bad RMDs are:)

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triceratop
Posts: 5838
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Re: How to pay ZERO taxes in retirement with 6-figure expenses

Post by triceratop » Wed Dec 27, 2017 12:31 pm

randomguy wrote:
Wed Dec 27, 2017 12:26 pm
Bacchus01 wrote:
Wed Dec 27, 2017 11:14 am
livesoft wrote:
Wed Dec 27, 2017 7:22 am
Bacchus01 wrote:
Tue Dec 26, 2017 10:10 pm
How do you have that much earned income and only $228 in fed taxes?
This was covered in detail in the earlier thread: Taxes on family with $200,000 income, but I will show again here for completeness:

Code: Select all

Approximate $ amounts in thousands, rounded
$+95    Earned income
$+ 5    Non-qualified dividends
$-29    401(k) contributions
$- 2.5  FSA
$- 5    Health, vision, dental insurance
$- 3    Net capital loss deducted from ordinary income
$-12.2  3 exemptions
$- 8.3  Property taxes
$-15.3  Charitable giving
$- 1.4  Sales tax deduction
====== 
$+23.3   Net taxable income
======
$+ 2.56  Tax on above income
$- 2.5   American Opportunity Tax Credit
$- 1     Foreign tax credit
==================
$- 0.9  Net income tax
Note that for us qualified dividend income is not taxed and neither is return-of-capital, so they are not shown in the above numbers.
Thanks. I didn't follow the whole thread, but this makes sense. I didn't think about the fact you are still investing (401k) and other section 125 expenses. The Charitable Giving is admirable.

So the question is this good or bad tax planning? What are the odds you are getting the money out of the 401(k) at lower rates than what you could pay today? In 10 year we are going to read the livesoft post about how how bad RMDs are:)
The 401(k) contributions allow him to Roth convert existing tax-deferred assets, so it is good tax planning. The only real alternative is for livesoft's SO not to work, which doesn't look likely.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

Topic Author
livesoft
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Re: How to pay ZERO taxes in retirement with 6-figure expenses

Post by livesoft » Wed Dec 27, 2017 12:35 pm

randomguy wrote:
Wed Dec 27, 2017 12:26 pm
So the question is this good or bad tax planning? What are the odds you are getting the money out of the 401(k) at lower rates than what you could pay today? In 10 year we are going to read the livesoft post about how how bad RMDs are:)
Indeed, that is the question. But we are doing Roth conversions up to the point where we would have to pay 30% marginal rate which are kinda like the equivalent of putting the 401(k) contribution into a Roth 401(k). Our 401(k)s are mostly bond funds and thus not increasing as much in value as our Roth IRAs are. If my spouse quit work, we could convert even more to Roths at a very low rate.

But then again, QCDs here we come!
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Bacchus01
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Re: How to pay ZERO taxes in retirement with 6-figure expenses

Post by Bacchus01 » Wed Dec 27, 2017 1:41 pm

livesoft wrote:
Wed Dec 27, 2017 12:35 pm
randomguy wrote:
Wed Dec 27, 2017 12:26 pm
So the question is this good or bad tax planning? What are the odds you are getting the money out of the 401(k) at lower rates than what you could pay today? In 10 year we are going to read the livesoft post about how how bad RMDs are:)
Indeed, that is the question. But we are doing Roth conversions up to the point where we would have to pay 30% marginal rate which are kinda like the equivalent of putting the 401(k) contribution into a Roth 401(k). Our 401(k)s are mostly bond funds and thus not increasing as much in value as our Roth IRAs are. If my spouse quit work, we could convert even more to Roths at a very low rate.

But then again, QCDs here we come!
This is the stuff that 99.9% of the population will never get. They certainly aren’t getting that advice from their CPA or FA. So thankful for this forum!

Details
Posts: 70
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Re: How to pay ZERO taxes in retirement with 6-figure expenses

Post by Details » Sat Feb 17, 2018 11:27 am

Bacchus01 wrote:
Wed Dec 27, 2017 1:41 pm
livesoft wrote:
Wed Dec 27, 2017 12:35 pm
randomguy wrote:
Wed Dec 27, 2017 12:26 pm
So the question is this good or bad tax planning? What are the odds you are getting the money out of the 401(k) at lower rates than what you could pay today? In 10 year we are going to read the livesoft post about how how bad RMDs are:)
Indeed, that is the question. But we are doing Roth conversions up to the point where we would have to pay 30% marginal rate which are kinda like the equivalent of putting the 401(k) contribution into a Roth 401(k). Our 401(k)s are mostly bond funds and thus not increasing as much in value as our Roth IRAs are. If my spouse quit work, we could convert even more to Roths at a very low rate.

But then again, QCDs here we come!
This is the stuff that 99.9% of the population will never get. They certainly aren’t getting that advice from their CPA or FA. So thankful for this forum!
I'm now trying to figure out whether I should start Roth conversions.
I recently read this article, https://evergreensmallbusiness.com/are- ... good-deal/
It basically says it's about a draw, and goes thru some calculations. I didn't like his 30% tax rate (at least for me)
I ran my own numbers just to check.

Written up previously:
I looked over that page and had to run some numbers myself.
I don't like his 30% tax, but I'll use it, maybe a try percentages later.
I used $10k, 20yrs growth @ 7%, 30% tax rate.

tIRA
$10k for 20yrs @ 7% = $38,696 minus 30% tax = $27,087
Roth IRA
$10k - $3k = $7k for 20yrs @ 7% = $27,087 Oddly the same!
Non tax advantaged
$10k - $3k = $7k for 20yrs @ 7% = $27,087 - cost of $7k = $20,087
$20,087 - 30% taxes = $14,061 + cost of $7k =$21,061
If you need context it's in the article.
(taxed before investment, or taxed at withdawal, or only gain taxed)

I need to rerun these numbers with tax rates other than 30%, reducing it to 12%
(2018) may change things.

The remaining variable is the tax rate applied at investment and withdrawal time.
Because in 2018 I expect to be in the 12% bracket I think it is wise for me to do a Roth conversion
up to the next bracket. 12% up to $77,400, last year I got my AGI down to about $39,000, so
I hope to be able to Roth convert over $35,000. I'll need to do some early income calculations and
tax form work, which is not so easy with qualified and non-dividends and cap gains. I seem to often get
ammended 1099s in the middle of March. :-(
When my wife and I have SS, RMDs and dividends, I expect our rate to be more than 12%.
At least that would be a nice problem to have.

Bongleur
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Re: How to pay ZERO taxes in retirement with 6-figure expenses

Post by Bongleur » Sat Feb 17, 2018 9:53 pm

There is also a value to the ROTH as an insurance policy. Its a pool of tax-free money -- if you need to withdraw a huge amount all at once, you cannot get screwed by being pushed into a high tax bracket.

You can imagine that if you retired into a 0% bracket, but needed $100,000 -- do some guesses as to the future bracket schedule & see how much money you would pay in taxes -- and remember that you need the entire $100,000, so you would be withdrawing more to cover the taxes. Which is also taxed at the highest bracket rate... ad infinitum. Ah, Calculus...

I can easily imagine the taxes being 20%. So does your TIRA under any scenario give 20% more than the ROTH ???
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JBTX
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Re: How to pay ZERO taxes in retirement with 6-figure expenses

Post by JBTX » Sun Feb 18, 2018 1:34 am

......
Last edited by JBTX on Sat Aug 04, 2018 8:52 pm, edited 1 time in total.

Topic Author
livesoft
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Re: How to pay ZERO taxes in retirement with 6-figure expenses

Post by livesoft » Sun Feb 18, 2018 10:55 am

I agree that if one changes the scenario, then things change.

This thread started at the end of 2011. In the 6 years since, the stock market has done quite nicely with VTSAX more than doubling in value. Tax rates in theory have decreased, too.

My recent updates to this thread showed that my spouse was still working and we were still doing Roth conversions and still paying almost no income taxes just like at least 40% of families in the US.

At least this thread has made some people think which was its goal in the first place.
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