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

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

Post by Epsilon Delta » Fri Dec 23, 2011 12:35 am

livesoft wrote: They have been diligently tax-loss harvesting and the stock market has not done so well in the last few years, so their net gains in the taxable assets are essentially zero. That is, they have enough carryover losses to deduct $3,000 from ordinary income each year for quite a while. If they sell any taxable assets, the net capital gain will be essentially zero for a number of years.
I don't think this is plausible. If they actually have zero net capital gains they have been very unlucky or been poor investors. Since they are 55 they have been investing since 1980 or so. The S&P is currently higher than it has been for all but about 7 of those 30 years, so to have zero net gains their purchases must have been concentrated and very badly timed. Note that tax loss harvesting does not change net gains; compared to not TLH the extra realized losses are offset by extra unrealized gains so no net change due to TLH, it just changes the timing.

So they don't have zero net gains, how much carry over loss do they have? I have worked some numbers and I don't think you can get to a plausible number of more than about 150,000 of carry over losses, unless they were really unlucky or really stupid. And perhaps 85% of their holdings (everything bought before 2009) will have a basis of 700 or less in the S&P. Livesoft has them taking 80,000 of capital per year tax free, and using 3000 per year of capital gains against ordinary income. By my reckoning the carryover losses will run out in the 5th year.

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

Post by hsv_climber » Fri Dec 23, 2011 10:39 am

Epsilon Delta wrote:I don't think this is plausible. If they actually have zero net capital gains they have been very unlucky or been poor investors. Since they are 55 they have been investing since 1980 or so. The S&P is currently higher than it has been for all but about 7 of those 30 years, so to have zero net gains their purchases must have been concentrated and very badly timed. Note that tax loss harvesting does not change net gains; compared to not TLH the extra realized losses are offset by extra unrealized gains so no net change due to TLH, it just changes the timing.
Alternatively, they could also:
- donate their shares (over the years) with most capital gains to the charities while getting a nice tax write off because of that.
- sell some of their shares with long term gains prior to 2007(8) market drop and pay 15% tax on them.

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

Post by Sidney » Fri Dec 23, 2011 10:59 am

Since they are 55 they have been investing since 1980 or so.
Although, it would not be unusual for most of the investing in the early years to be going into tax-deferred accounts and, as earned income builds in later years, taxable investing gets concentrated in the last few years of peak income production. Then the basis for the taxable accounts might be concentrated in later years.

Speaking for myself, most of our investment was poured into deferred accounts (qualified and non-qualified) for many years. My spouse was able to defer 100% of her bonus when she was working and her bonus typically exceeded her base salary. My company allowed you to defer your bonus in an NQ plan.
I always wanted to be a procrastinator.

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

Post by BlueEars » Fri Dec 23, 2011 12:14 pm

livesoft wrote:...(snip)...
Anyways, folks can reproduce my results (or not) before I get the latest version of TurboTax to use in my scenario(s). Comments welcome.
I ran ORP with our situation. It suggested taking large Roth distributions to reduce taxes up to the RMD age. ORP seems to prefer to pay very low taxes in the early years. In our case at least, it seems to fail to take into account that there is pretty high risk of pushing into high marginal tax rates once SS kicks in fully and RMD's kick in. ORP seems to take no account of the likely increases to come in marginal tax rates (my economic/political opinion) in coming years.

So at least in our case, I'd opt to pay some more taxes in the early years (take more out of the Tax Deferred account versus the Roth's) to reduce the Tax Deferred account. This will help once full SS + RMD's kick in.

I agree that using TurboTax to look at marginal tax rate scenarios is a good way to do planning.

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

Post by livesoft » Fri Dec 23, 2011 12:19 pm

I did not show all the ORP output. It showed taxes in the last years (ages above 90) to be in the 15% tax bracket at most even with all the RMDs. A question remains: Should one do Roth conversions in the early years up to the top of the 15% bracket? If so, the couple could convert something like $94,000 in the early even years. In essence, they might have no tax-deferred assets left for RMDs. OTOH, they would not need to convert everything as I think there would always be that 0% tax bracket which will creep upwards due to inflation and indexing of standard deduction and exemptions.
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by BlueEars » Fri Dec 23, 2011 12:29 pm

I'd like to add to my last comment that my bias is to not use the Roth so aggressively to reduce taxes. We don't really know what will happen in the next 20 years to tax policy. Having some Roth money around to cushion blows might be a good idea. In addition, Roth's have special advantages for heirs I believe -- not that I give that terribly high priority.

Also, a thank you to Livesoft because this thread has made me think that I should up our Roth withdrawals (which have been zero up to now) to reduce our tax hit next year. You can't take it with you when you go. :)

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

Post by 555 » Fri Dec 23, 2011 12:59 pm

The taxable investments have already been subject to income tax. This needs to be taken into account.

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

Post by livesoft » Fri Dec 23, 2011 1:02 pm

555 wrote:The taxable investments have already been subject to income tax. This needs to be taken into account.
It was.
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by 555 » Fri Dec 23, 2011 1:27 pm

livesoft wrote:
555 wrote:The taxable investments have already been subject to income tax. This needs to be taken into account.
It was.
Here's a question. Would you ever forgo tax-sheltered investing and invest in taxable instead? If so, under what circumstances? Maybe it's a topic for a separate thread.

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

Post by Wagnerjb » Sat Dec 24, 2011 11:35 am

After seeing how the OP with 2 million in assets pays 0 in income taxes, is there anybody who still thinks people should adjust their AA for taxes at a 25 percent rate?
Andy

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

Post by alanf56 » Sat Dec 24, 2011 11:40 am

After just retiring I have been looking at OP and see it seems to be more conservative on what I can spend in retirement than many other calculators and I am not sure why. Any clues to that would be interesting. I am also wondering if I go for the IRA or 401K conversion to Roth IRA's over the years would I have to have one set up this year in order to be able to roll money into one in coming years? I don't currently have any Roth's and next year will not have income in the IRS definition so I wonder if one is able to set one up and roll into it at the same time? If I can't I guess I better get on it right away and set one up since this year I DID have income!

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

Post by livesoft » Sat Dec 24, 2011 12:12 pm

555 wrote:
livesoft wrote:
555 wrote:The taxable investments have already been subject to income tax. This needs to be taken into account.
It was.
Here's a question. Would you ever forgo tax-sheltered investing and invest in taxable instead? If so, under what circumstances? Maybe it's a topic for a separate thread.
The scenario in the OP is special in that there is a taxable account that can be used to pay for expenses for 10 to 15 years before SS benefits begin. This allows the family to shift from tax-deferred to Roth at a low (or zero) tax rate. I think we can assume that the family was putting the maximum allowed into tax-advantaged accounts during their working years.

But you can try to run i-ORP with different scenarios: 50/50 taxable/deferred; 0/100; 100/0, 25/75; 75/25 and see what happens. I don't think there is any reason to forego tax-sheltered investing. One can always SEPP/72(t) withdrawals if retiring early, so one can get at the money penalty-free.
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by retiredjg » Sat Dec 24, 2011 12:57 pm

alanf56 wrote:I don't currently have any Roth's and next year will not have income in the IRS definition so I wonder if one is able to set one up and roll into it at the same time? If I can't I guess I better get on it right away and set one up since this year I DID have income!
You can set up Roth IRA any time by either contributing directly or converting traditional IRA into Roth. No need to rush.

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

Post by DSInvestor » Sat Dec 24, 2011 1:42 pm

retiredjg wrote:
alanf56 wrote:I don't currently have any Roth's and next year will not have income in the IRS definition so I wonder if one is able to set one up and roll into it at the same time? If I can't I guess I better get on it right away and set one up since this year I DID have income!
You can set up Roth IRA any time by either contributing directly or converting traditional IRA into Roth. No need to rush.
If alanf56's 2011 tax situation were such that it would be possible to convert some IRA to Roth for no tax cost, he may want to get that done before Dec 31, 2011.
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by retiredjg » Sat Dec 24, 2011 1:50 pm

DSInvestor wrote:
retiredjg wrote:
alanf56 wrote:I don't currently have any Roth's and next year will not have income in the IRS definition so I wonder if one is able to set one up and roll into it at the same time? If I can't I guess I better get on it right away and set one up since this year I DID have income!
You can set up Roth IRA any time by either contributing directly or converting traditional IRA into Roth. No need to rush.
If alanf56's 2011 tax situation were such that it would be possible to convert some IRA to Roth for no tax cost, he may want to get that done before Dec 31, 2011.
I don't understand. I think alanf56 has traditional 401k and traditional IRA that s/he may eventually convert to Roth. There is income this year, but not next year. How could a conversion be tax free this year? (Assuming no back door this year.)

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

Post by DSInvestor » Sat Dec 24, 2011 1:58 pm

retiredjg wrote:I don't understand. I think alanf56 has traditional 401k and traditional IRA that s/he may eventually convert to Roth. There is income this year, but not next year. How could a conversion be tax free this year? (Assuming no back door this year.)
I don't know when Alanf56 retired. If he retired late in 2011 and had substantial earned income for 2011, he probably wouldn't be able to convert tax free in 2011. If Alan retired in early 2011 and his 2011 tax situation has little or no earned income, no pension income, no social security income, and is living off a taxable account receiving Qualified Dividend Income (QDI) and realizing long term capital gains (LTCG), he may be in a position to make some Roth IRA conversions for little or no tax cost this year.
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by BruceM » Sat Dec 24, 2011 3:17 pm

Like utilites and food, taxes (property, sales and yes, income) are an expense. They should be managed like any other expense. And infusing huge amounts of human energy into eliminating them is about as useful as spending all waking hours going though newspapers, magazines and on-line sources to find enough coupons to cut your food bill to zero. There is a point along the line of diminishing returns that most will not go beyond.

But heck, if figuring out how to drive a normal household expense to zero is what you love to do and you have the time to do it, then maybe thats what you should be doing :)

BruceM

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

Post by livesoft » Sat Dec 24, 2011 3:45 pm

That's an interesting comment there BruceM. Are you saying that you would rather pay an extra $2000 a year in taxes for the rest of your life?

One aspect of this thread is that many folks incorrectly believe they will be in the 25% tax bracket or higher during retirement. If this thread opens their eyes to possibilities, then I think it has accomplished one goal that I set out for it. And it is also surprising how little effort is does take to do all this.
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alanf56
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by alanf56 » Sat Dec 24, 2011 3:52 pm

DSInvestor wrote:
retiredjg wrote:I don't understand. I think alanf56 has traditional 401k and traditional IRA that s/he may eventually convert to Roth. There is income this year, but not next year. How could a conversion be tax free this year? (Assuming no back door this year.)
I don't know when Alanf56 retired. If he retired late in 2011 and had substantial earned income for 2011, he probably wouldn't be able to convert tax free in 2011. If Alan retired in early 2011 and his 2011 tax situation has little or no earned income, no pension income, no social security income, and is living off a taxable account receiving QDI and realizing LTCG, he may be in a position to make some Roth IRA conversions for little or no tax cost this year.
I retired on December 1 this year so I do have considerable income. My intention is to start converting over to Roth IRA's next year and the ORP lays out a plan for amounts to convert per year. I still am perplexed as to why the amount per year the ORP suggests is quite a bit less than other calcs I have run.

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

Post by livesoft » Sat Dec 24, 2011 3:54 pm

Do you mean the amount to convert? Or the amount allow to withdraw from your portfolio per year for expenses?
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by Sidney » Sat Dec 24, 2011 3:55 pm

BruceM wrote:Like utilities and food, taxes (property, sales and yes, income) are an expense. They should be managed like any other expense. And infusing huge amounts of human energy into eliminating them is about as useful as spending all waking hours going though newspapers, magazines and on-line sources to find enough coupons to cut your food bill to zero. There is a point along the line of diminishing returns that most will not go beyond.

But heck, if figuring out how to drive a normal household expense to zero is what you love to do and you have the time to do it, then maybe that's what you should be doing :)

BruceM
True enough. I don't spend too much time on the nickels and dimes of taxes. But for many, taxes will be the largest (cumulative) expense of their lives (or beyond) and seemingly "trivial" decisions can make a big difference. One of the benefits (maybe the major benefit) of doing one's own taxes is understanding how taxes work and being able to make smart decisions going forward. To some extent, modern tax software diminishes that benefit by making it fairly easy to prepare a return without really having a clue what you are doing. Yet, at the same time, due to the interrelationships of the various schedules and the tax tables, relying only on the tax rate table printed in Pub 17 to make a marginal decision could be a real disaster.
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by alanf56 » Sat Dec 24, 2011 4:03 pm

livesoft wrote:Do you mean the amount to convert? Or the amount allow to withdraw from your portfolio per year for expenses?
Sorry I wasn't clear on that in that post. I meant the amount it allows me to withdraw per year.

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

Post by 555 » Sat Dec 24, 2011 4:04 pm

Everyone needs to be informed and analyse their own situation. I'm pretty sure that when I get to the Roth conversion phase, (post-retirement, pre-RMD) I would at least fill the 10% bracket, and go into the 15% enough so that anticipated RMD's don't go into the 25% bracket. But that's a situation where I'd start with mostly Trad, a bit of Roth, and no taxable. My extra complication is I'll have kids in college at this time, and I'm yet to understand how the FAFSA-tax works.

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

Post by 555 » Sat Dec 24, 2011 4:05 pm

Sidney, you're right, but tax software can be used as a learning tool if you want to use it that way.

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

Post by letsgobobby » Sat Dec 24, 2011 4:19 pm

I can see how all this is possible, but that does not mean it is likely. This will not be our case at all. I'll have to run some numbers at home but I suspect S.S. plus R.M.D.s alone will push us into the 25% bracket.

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

Post by DSInvestor » Sat Dec 24, 2011 4:24 pm

I think I read in of BruceM's posts that he has a pension. Folks with pensions or substantial amounts of ordinary income may find it difficult to lower their tax liability. Folks who are retired with taxable accounts and without much or any ordinary income will find it much easier to lower their tax liability.

If folks have no taxable accounts, no pensions, no social security, it would take some pretty large withdrawals from IRA/401k to have an effective tax rate of 25% on those withdrawals. Taxcaster shows that for a married couple both age 65 (std deduction and 2 exemptions) with 100K IRA/401k withdrawal and no other income, the total fed tax is $11,931 and the couple is in the 25% bracket. This is an effective tax rate of 11.9% on 100K of gross income.

Let's change the scenario so that the couple has 80K pension and no other income. The base tax is $7959. If we add 20K of IRA withdrawal to bring AGI up to 100K to match the earlier scenario, the fed tax increases to $11,931. The extra 20K of ordinary income increased tax by $3,972. The effective or average tax on the 20K IRA withdrawal approaches 20%.

Let's change the scenario again so the couple has 80K of QDI and no other income. The base tax is ZERO. Adding 20K of IRA withdrawal increases the Fed Tax to $1,455. 100K gross has $1,455 Total Fed Tax! This couple with the taxable account didn't have to do much other than place their investments in a tax efficient manner and receive their QDI. The heavy lifting was done by EGTRRA and JGTRRA. I concede that after the QDI tax rates expire at the end of 2012, this scenario will be just like the scenario with 80K pension/ordinary income. While tax rates for capital gains are also expected to rise in 2013, taxable investors who have capital loss carryovers can offset gains and avoid the higher CG tax rates.
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by letsgobobby » Sat Dec 24, 2011 5:27 pm

What is q.d.I.?

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

Post by retiredjg » Sat Dec 24, 2011 5:31 pm

letsgobobby wrote:I can see how all this is possible, but that does not mean it is likely. This will not be our case at all. I'll have to run some numbers at home but I suspect S.S. plus R.M.D.s alone will push us into the 25% bracket.
This is a good reason not to be converting to Roth when you are in the 28%, 33% and 35% bracket (which I believe is part of the purpose of this thread).

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

Post by DSInvestor » Sat Dec 24, 2011 6:04 pm

letsgobobby wrote:What is q.d.I.?
Qualified Dividend Income
Here's a wikipedia page showing tax rates for dividends (ordinary and Qualified).
http://en.wikipedia.org/wiki/Qualified_dividend
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by letsgobobby » Sat Dec 24, 2011 8:15 pm

What about a more typical dual high-earner scenario?

Two adults earning just over the SS max each year, from age 30-70. They contribute a total of $40,000 per year, inflation-adjusted, to their 401ks (with match). They earn 4% real year after year. At retirement they have $3.8 million, real. Their RMD is $138,000, real. They get $6000 per month in SS income, real. Their annual SS income is $72,000. Their annual income is now over $200,000, and except for a small portion of their SS income it is all taxable at regular rates. Their kids are grown and out of college, so only 2 exemptions and no qualified educational expenses. They've paid off their mortgage, so only the standard deduction. Correct me if I'm wrong, but don't they have taxable income of something like $180,000? And if they own a little rental property, some taxable investments, some bank accounts, etc., it could be much higher. They are far into the 28% bracket, nearly into the 33% bracket, and highly vulnerable to AMT.

This seems a more plausible scenario to me...

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

Post by livesoft » Sat Dec 24, 2011 9:07 pm

They are in the 0.1% and deserve to be taxed to the fullest extent of the law.

Of course, they could be donating half their income or more to charity, so then they can get back into the 1% and pay zero taxes.

Or perhaps they should've retired at age 45?
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by Wagnerjb » Sat Dec 24, 2011 9:18 pm

letsgobobby wrote:What about a more typical dual high-earner scenario?

Two adults earning just over the SS max each year, from age 30-70. They contribute a total of $40,000 per year, inflation-adjusted, to their 401ks (with match). They earn 4% real year after year. At retirement they have $3.8 million, real. Their RMD is $138,000, real. They get $6000 per month in SS income, real. Their annual SS income is $72,000. Their annual income is now over $200,000, and except for a small portion of their SS income it is all taxable at regular rates. Their kids are grown and out of college, so only 2 exemptions and no qualified educational expenses. They've paid off their mortgage, so only the standard deduction. Correct me if I'm wrong, but don't they have taxable income of something like $180,000? And if they own a little rental property, some taxable investments, some bank accounts, etc., it could be much higher. They are far into the 28% bracket, nearly into the 33% bracket, and highly vulnerable to AMT.

This seems a more plausible scenario to me...
I struggle to see this as a common scenario. If this two-income couple is retiring on $200,000 a year in income (RMD + SS), they presumably have been spending $200,000 in their working years. OK, that means they earned $240,000 during their working years and saved only $40,000 a year. People I know with this kind of income save more than $40,000 a year.

If this two-income couple earned $150,000 and saved $40,000...they would be able to retire well before age 70 on their pre-retirement spending level.

The family that spends $200,000 per year probably has a sizable itemized deduction. They either pay high property taxes or state income taxes and they donate a decent amount. If they retire before 70 and have a portion of their nest egg in taxable accounts, they can easily be in the 25% incremental bracket, paying an average tax rate of 16%.

Best wishes.
Andy

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

Post by Random Poster » Sat Dec 24, 2011 10:10 pm

Wagnerjb wrote:
letsgobobby wrote:What about a more typical dual high-earner scenario?

Two adults earning just over the SS max each year, from age 30-70. They contribute a total of $40,000 per year, inflation-adjusted, to their 401ks (with match). They earn 4% real year after year. At retirement they have $3.8 million, real. Their RMD is $138,000, real. They get $6000 per month in SS income, real. Their annual SS income is $72,000. Their annual income is now over $200,000, and except for a small portion of their SS income it is all taxable at regular rates. Their kids are grown and out of college, so only 2 exemptions and no qualified educational expenses. They've paid off their mortgage, so only the standard deduction. Correct me if I'm wrong, but don't they have taxable income of something like $180,000? And if they own a little rental property, some taxable investments, some bank accounts, etc., it could be much higher. They are far into the 28% bracket, nearly into the 33% bracket, and highly vulnerable to AMT.

This seems a more plausible scenario to me...
I struggle to see this as a common scenario. If this two-income couple is retiring on $200,000 a year in income (RMD + SS), they presumably have been spending $200,000 in their working years. OK, that means they earned $240,000 during their working years and saved only $40,000 a year. People I know with this kind of income save more than $40,000 a year.

If this two-income couple earned $150,000 and saved $40,000...they would be able to retire well before age 70 on their pre-retirement spending level.

The family that spends $200,000 per year probably has a sizable itemized deduction. They either pay high property taxes or state income taxes and they donate a decent amount. If they retire before 70 and have a portion of their nest egg in taxable accounts, they can easily be in the 25% incremental bracket, paying an average tax rate of 16%.

Best wishes.
Or the couple could have been quite frugal during their working years, and upon retirement decided to spend everything traveling first class around the world staying in 5-star hotels and the like. I don't really see how one's retirement income is, or should be, necessarily linked to one's working-years income.

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

Post by livesoft » Sat Dec 24, 2011 10:21 pm

It is true that letsgobobby's couple could be the same couple as in the OP ... except they didn't retire at 55 but instead kept working until age 70. The couple in the OP could've been in the 33% marginal income tax bracket for a number years before retiring.

This elderly couple should have a large taxable account that they can leave to their heirs since they did not need to access it in early retirement. Yes, they will pay more income taxes than if they retired earlier, but that was their choice.
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by letsgobobby » Sun Dec 25, 2011 12:34 am

Wagnerjb wrote:
letsgobobby wrote:What about a more typical dual high-earner scenario?

Two adults earning just over the SS max each year, from age 30-70. They contribute a total of $40,000 per year, inflation-adjusted, to their 401ks (with match). They earn 4% real year after year. At retirement they have $3.8 million, real. Their RMD is $138,000, real. They get $6000 per month in SS income, real. Their annual SS income is $72,000. Their annual income is now over $200,000, and except for a small portion of their SS income it is all taxable at regular rates. Their kids are grown and out of college, so only 2 exemptions and no qualified educational expenses. They've paid off their mortgage, so only the standard deduction. Correct me if I'm wrong, but don't they have taxable income of something like $180,000? And if they own a little rental property, some taxable investments, some bank accounts, etc., it could be much higher. They are far into the 28% bracket, nearly into the 33% bracket, and highly vulnerable to AMT.

This seems a more plausible scenario to me...
I struggle to see this as a common scenario. If this two-income couple is retiring on $200,000 a year in income (RMD + SS), they presumably have been spending $200,000 in their working years. OK, that means they earned $240,000 during their working years and saved only $40,000 a year. People I know with this kind of income save more than $40,000 a year.

If this two-income couple earned $150,000 and saved $40,000...they would be able to retire well before age 70 on their pre-retirement spending level.

The family that spends $200,000 per year probably has a sizable itemized deduction. They either pay high property taxes or state income taxes and they donate a decent amount. If they retire before 70 and have a portion of their nest egg in taxable accounts, they can easily be in the 25% incremental bracket, paying an average tax rate of 16%.

Best wishes.
If they made $110,000 each and saved $17,000 each per year, they're living on maybe $160k after taxes and they're paying off a mortgage, education for their kids, etc. They will probably see a significant increase in their disposable income at retirement, which is kind of my point. My scenario paints it likely that they will be in at least as high if not higher an income bracket at retirement than they were during their working years, and all they did was save 15% of their income each year in a 401k. Hardly superhuman. Barely noteworthy. They did save regularly and presumably they invested well.

If they saved additional taxable or IRA money beyond their 401ks, their situation will be even worse. They'll owe taxes on dividends, qualified or not, and maybe cap gains taxes, too (not everyone was lucky enough to TLH hundreds of thousands of dollars in the last decade).

And I disagree with livesoft that this makes them in the 'top 0.1%'. Their 2 earner income makes them closer to the 95-96%ile throughout their working years. Hey, they're part of the 99%! This scenario seems probable for a large number of affluent but not rich 2 earner households who save regularly and for long periods of time.

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

Post by edge » Sun Dec 25, 2011 12:44 am

Really? 200k/yr makes you part of the 0.1%? When did we let those plebeians in?

Optimizing taxes is fine but I suggest we optimize revenue first and plan our tax situation around that instead.

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

Post by Wagnerjb » Sun Dec 25, 2011 1:02 am

letsgobobby wrote:If they saved additional taxable or IRA money beyond their 401ks, their situation will be even worse. They'll owe taxes on dividends, qualified or not, and maybe cap gains taxes, too (not everyone was lucky enough to TLH hundreds of thousands of dollars in the last decade).
You are pointing out that an (IMO) rather extreme situation of high earners with no taxable account or Roth will make tax optimization very difficult in retirement, especially if they don't retire until 70 years of age. I agree that this couple will pay high taxes.

People I know in this situation have a fair amount in a taxable account. If you received employee stock options and realized gains from exercising, this money is in your taxable account. If you inherited money, these assets are in your taxable account. If you saved beyond the 401K limit (or the match), you saved in a taxable account. If the opportunity presented itself, you may have converted an IRA to a Roth. If the opportunity presented itself, you may have TLH'ed. And these guys certainly aren't working until 70 years of age.

I think we can probably agree that the more the individual looks like your example, the fewer tax optimization options available to him...and the more tax he will pay. But we must acknowledge that the individual with $2 million and $100,000 in expenses can pay virtually zero federal income tax if he manages his withdrawals well.

Best wishes.
Andy

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

Post by hsv_climber » Sun Dec 25, 2011 1:11 am

Couple in letsgobobby's scenario will be either hit with income taxes or estate taxes, since they won't live long enough to spend all that money according to their spending levels.
But the main question is - does it matter if that couple pays 30%-40% in taxes or not? The couple in the OP's post has a need to avoid taxes to live a happy life. They have a need to pay 0% taxes in order to maintain their lifestyle.
But couple in letsgobobby's scenario has no need not to pay taxes. So, they can either donate money to charities or pay taxes. What is the difference? US government actually contributes $$$$ to various charities, like Red Cross, as well. There were several threads on this forum discussing that.

If they'd want to leave money to their kids then they should've started doing that earlier by giving small (less than $13K) gifts over a long period of time. Actually, estate planning should be the same for both couples.

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

Post by letsgobobby » Sun Dec 25, 2011 2:25 am

Wagnerjb wrote:
letsgobobby wrote:If they saved additional taxable or IRA money beyond their 401ks, their situation will be even worse. They'll owe taxes on dividends, qualified or not, and maybe cap gains taxes, too (not everyone was lucky enough to TLH hundreds of thousands of dollars in the last decade).
You are pointing out that an (IMO) rather extreme situation of high earners with no taxable account or Roth will make tax optimization very difficult in retirement, especially if they don't retire until 70 years of age. I agree that this couple will pay high taxes.

People I know in this situation have a fair amount in a taxable account. If you received employee stock options and realized gains from exercising, this money is in your taxable account. If you inherited money, these assets are in your taxable account. If you saved beyond the 401K limit (or the match), you saved in a taxable account. If the opportunity presented itself, you may have converted an IRA to a Roth. If the opportunity presented itself, you may have TLH'ed. And these guys certainly aren't working until 70 years of age.

I think we can probably agree that the more the individual looks like your example, the fewer tax optimization options available to him...and the more tax he will pay. But we must acknowledge that the individual with $2 million and $100,000 in expenses can pay virtually zero federal income tax if he manages his withdrawals well.

Best wishes.
ok, but wouldn't the taxable money make their situation even worse? They'd still have the RMDs and SS, and now they'd have capital gains and dividend income, as well. It's the fact that RMDs + SS alone can push one's retirement tax bracket to the same level as the one inhabited during the accumulation years. It does not matter that the couple may not need the money to live on; the inflexibility of SS and RMD dictates their taxation.

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

Post by DSInvestor » Sun Dec 25, 2011 4:27 am

Wagnerjb wrote:People I know in this situation have a fair amount in a taxable account. If you received employee stock options and realized gains from exercising, this money is in your taxable account. If you inherited money, these assets are in your taxable account. If you saved beyond the 401K limit (or the match), you saved in a taxable account. If the opportunity presented itself, you may have converted an IRA to a Roth. If the opportunity presented itself, you may have TLH'ed. And these guys certainly aren't working until 70 years of age.
letsgobobby wrote:ok, but wouldn't the taxable money make their situation even worse? They'd still have the RMDs and SS, and now they'd have capital gains and dividend income, as well. It's the fact that RMDs + SS alone can push one's retirement tax bracket to the same level as the one inhabited during the accumulation years. It does not matter that the couple may not need the money to live on; the inflexibility of SS and RMD dictates their taxation.
SS and RMD may be inflexible for retirees who are 70+ years of age but SS/RMD are not in the income picture for early retirees.
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by livesoft » Sun Dec 25, 2011 10:08 am

in the spirit of the season, letsgobobby's couple can give away $120K or more a year to charity (perhaps donate appreciated equities) and pay around $11K a year in taxes. They will not be paying 33% or 28% of their income in federal income taxes if they do this.
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by Wagnerjb » Sun Dec 25, 2011 10:11 am

DSInvestor wrote:SS and RMD may be inflexible for retirees who are 70+ years of age but SS/RMD are not in the income picture for early retirees.
Exactly. If the individual retires at 55 (as in the example given by the OP) then he has 15 years to manage his cash flows and distributions to optimize taxes. A key part of that optimization may be converting IRA funds to Roth, and withdrawing as much pre-tax IRA/401k money as possible while staying under the personal tax target. The target in the OP's example is 0% tax, while it may be staying in the 15% or 25% bracket for a guy with more assets and a higher spending level.

Best wishes.
Andy

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

Post by letsgobobby » Sun Dec 25, 2011 6:23 pm

good points. However, it seems to argue that one *should* reduce working hours (and working income) during one's mid-late career to use the lower brackets to get money out of highly taxed 401k-style accounts (including converting IRAs to Roth IRAs). Wouldn't that individual end up farther behind (net-net) than if s/he had just stayed gainfully employed for the duration?

I think the point of this thread is that it is very possible to have a lot of income and pay zero or almost zero in taxes. The corollary seems to be that converting to a Roth IRA (or taking the Roth option in an IRA or 401k) is often a bad idea, since one's future average tax rate will be substantially less than one's current marginal rate. It is a good illustration. But many people will not be so lucky and it's unclear when one would know they weren't going to be this lucky and furthermore, what reasonable steps one could take to counteract their unluckiness.

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

Post by DSInvestor » Sun Dec 25, 2011 6:31 pm

letsgobobby wrote:good points. However, it seems to argue that one *should* reduce working hours (and working income) during one's mid-late career to use the lower brackets to get money out of highly taxed 401k-style accounts (including converting IRAs to Roth IRAs). Wouldn't that individual end up farther behind (net-net) than if s/he had just stayed gainfully employed for the duration?

I think the point of this thread is that it is very possible to have a lot of income and pay zero or almost zero in taxes. The corollary seems to be that converting to a Roth IRA (or taking the Roth option in an IRA or 401k) is often a bad idea, since one's future average tax rate will be substantially less than one's current marginal rate. It is a good illustration. But many people will not be so lucky and it's unclear when one would know they weren't going to be this lucky and furthermore, what reasonable steps one could take to counteract their unluckiness.
Sure the retiree may accumulate more assets if he/she doesn't retire. We're talking about the folks who have enough assets who want to retire. Not everyone wants to work into their 70s if they have accumulated enough by age 55.

The title of the thread is "How to pay ZERO taxes in retirement with 6-figure expenses". For a retiree age 55 with assets in taxable, it may not even require 6 digit income to meet 6 digit expenses. If 100K cash was required to meet expenses at age 55, 20K may come from dividends from the taxable account and 80K may come from selling shares. The amount of "income" on the tax return will depend on the cost basis of shares sold and availability of capital loss carryovers. If there is 70K basis, the gain would be 10K. AGI would 30K.

If there are assets in taxable, no pension, no social security, no RMDs, the retiree can live very comfortably off the taxable account with very little tax liability. The lower the AGI in this early phase of retirement, the greater the opportunity for tax free or near tax free Roth conversions to help reduce RMDs later.
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by livesoft » Sun Dec 25, 2011 6:53 pm

I have to ask letsgobobby why his couple has chosen to work to age 70. It seems they will have the same spendable income from age 55 to 70 if they stop working at age 55. :) At age 54, the couple in the OP has the same income as letsgobobby's couple, but they chose to forego $40K of [income, FICA, medicare] taxes or more per year and $56K of retirement plan contributions going forward and retire at 55.
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by Bob's not my name » Sun Dec 25, 2011 7:21 pm

I never find the "but what if I end up rich?" pro-Roth argument compelling. A young person choosing between pre-tax and post-tax savings may indeed end up rich and love working so much they want to keep working even after becoming rich, in which case choosing pre-tax may turn out to be a mistake, but it will be a mistake you can either avoid or afford. On the other hand, if the ensuing half century brings death, disability, unemployment, or income lower than expectations, having chosen post-tax (that is, voluntarily paying tax up front instead of deferring) may turn out to be a mistake you couldn't afford and can't change.

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

Post by Wagnerjb » Sun Dec 25, 2011 8:10 pm

Epsilon Delta wrote:I don't think this is plausible. If they actually have zero net capital gains they have been very unlucky or been poor investors. Since they are 55 they have been investing since 1980 or so. The S&P is currently higher than it has been for all but about 7 of those 30 years, so to have zero net gains their purchases must have been concentrated and very badly timed. Note that tax loss harvesting does not change net gains; compared to not TLH the extra realized losses are offset by extra unrealized gains so no net change due to TLH, it just changes the timing.
Sure it is. Many people see their taxable accounts grow only later in life. Early in one's career - with a lower salary - one may only be able to afford to save the tax-deferred max amounts (401k, IRA). However, if one's salary grows through promotions or higher income one may be more able to contribute to taxable accounts later in life. You are more likely to inherit money later in life too. And if you get stock options, they are more likely to be received and exercised later in one's career. This all points to a taxable account that grows substantially later in one's career.

The 55-year old did very well in his tax-deferred accounts in the 1980's and 1990's. He then began accumulating in his taxable accounts in the 2000's and during this last decade the market was close to flat. What if you got a huge bonus in late 2008? You put it into stocks immediately, but the market plunged....giving you massive tax losses to carry forward. This isn't poor market timing or bad investing.

Also, an investor with sector funds or individual stocks can squeeze a much greater tax loss out of a portfolio. Even though the overall market may be flat, with smaller investments one can often find tax losses within the portfolio that the TSM investor simply cannot realize.

I find the example of a 55-year old with a treasure chest of Tax Losses to be realistic, although it may only describe an astute investor such as a typical Boglehead.

Best wishes.
Andy

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

Post by nonnie » Tue Dec 27, 2011 7:19 pm

JDCPAEsq wrote:
sscritic wrote:John:

And don't forget taking social security at 62 and then paying it all back and reapplying at 70 if you were still alive. That was taken away just over a year ago.
You're so right, sscritic. I remember thinking that at the time it was being so actively discussed. Too many people taking advantage of a good thing and I'm sure Social Security decided enough is enough.
John
Trust me, you're better off. I went through enough grief with this when I did it in 2008 to last a lifetime. Then more grief in 2009 because 1099's weren't right. I'm still going through it. I repaid my benefits, switched to spousal benefits, and then applied for my own age 70 benefits (a few months early) a month or so ago. First I was told I couldn't switch to my own "because the law was changed" and I'd made a decision to accept spousal benefits. I escalated and was told the record of my earnings had been wiped out since I'd repaid my benefits and the worker couldn't access my records. Escalate again and I was told I wasn't actually eligible for spousal benefits at all and would have to repay them because my marriage only lasted 6 years and the first marriage is the only one that counts! (my second marriage lasted more than 10 years and is what qualified me for spousal benefits).

I *insisted* on applyng for SSA benefits on my own record and next thing I knew I got a copy of my application that had my ex-husband's name wrong, that said he was dead (which actually would have qualified me for his entire benefits) and then further on said he was still alive--which is correct. I called up to correct my sworn application and was told it "didn't matter." Next I got a letter telling me I did not qualify for SSI benefits. Finally, last week I got a letter saying my application for SS benefits had been approved and they'd notify me in January--the month for which I applied- what my benefits would be. I know the postal service is in trouble but really, how hard is it to do the notification with amount in just one letter?

Personally I think they changed the law on this because they couldn't figure out how to train SS workers properly.
Nonnie
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Re: How to pay ZERO taxes in retirement with 6-figure expens

Post by Chuck » Thu Mar 15, 2012 6:28 pm

livesoft wrote:Just a reminder: That money that went into the tax-deferred 401(k) and traditional IRAs was tax-free going in and it appears to be tax-free coming out. That's way better than a Roth IRA and a Roth 401(k). This thread should put to rest which is better: Roth 401(k) or Traditional 401(k).
I thought tfb already put that one to rest.

http://thefinancebuff.com/case-against-roth-401k.html

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

Post by G12 » Thu Mar 15, 2012 7:06 pm

Wagnerjb wrote:
Epsilon Delta wrote:I don't think this is plausible. If they actually have zero net capital gains they have been very unlucky or been poor investors. Since they are 55 they have been investing since 1980 or so. The S&P is currently higher than it has been for all but about 7 of those 30 years, so to have zero net gains their purchases must have been concentrated and very badly timed. Note that tax loss harvesting does not change net gains; compared to not TLH the extra realized losses are offset by extra unrealized gains so no net change due to TLH, it just changes the timing.
Sure it is. Many people see their taxable accounts grow only later in life. Early in one's career - with a lower salary - one may only be able to afford to save the tax-deferred max amounts (401k, IRA). However, if one's salary grows through promotions or higher income one may be more able to contribute to taxable accounts later in life. You are more likely to inherit money later in life too. And if you get stock options, they are more likely to be received and exercised later in one's career. This all points to a taxable account that grows substantially later in one's career.

The 55-year old did very well in his tax-deferred accounts in the 1980's and 1990's. He then began accumulating in his taxable accounts in the 2000's and during this last decade the market was close to flat. What if you got a huge bonus in late 2008? You put it into stocks immediately, but the market plunged....giving you massive tax losses to carry forward. This isn't poor market timing or bad investing.

Also, an investor with sector funds or individual stocks can squeeze a much greater tax loss out of a portfolio. Even though the overall market may be flat, with smaller investments one can often find tax losses within the portfolio that the TSM investor simply cannot realize.

I find the example of a 55-year old with a treasure chest of Tax Losses to be realistic, although it may only describe an astute investor such as a typical Boglehead.

Best wishes.
It was easy to generate 6-figure tax losses in 2008-2009 if one had a sizable taxable account, equity or various types of fixed income. I should have been more active with it in Sept/Oct 2011, too.

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