Am I Headed for a Retirement Tax Bomb?

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TomatoTomahto
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Re: Am I Headed for a Retirement Tax Bomb?

Post by TomatoTomahto » Sat Jun 27, 2020 12:58 pm

CashFlo wrote:
Sat Jun 27, 2020 11:43 am
...On a side note, there was some confusion about Roths. We have none. All of our funds are in 401k's, IRA's and cash (post-tax brokerage) accounts.
A suggestion is that you use the convention of a lowercase t or r to indicate traditional or Roth. Very few BH posters do this, and much confusion ensues.

So, I have a high balance tIRA which prohibits me from doing a backdoor Roth into a rIRA without suffering the tax effects of the proRata rule. My wife doesn’t, so every year she puts $7k into a tIRA and then immediately transfers it to her rIRA (a backdoor Roth). She started contributing to her r401k when we became aware of the tax bomb, but her employer’s match has to go to her t401k.
Okay, I get it; I won't be political or controversial. The Earth is flat.

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Leif
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Re: Am I Headed for a Retirement Tax Bomb?

Post by Leif » Sat Jun 27, 2020 2:02 pm

CashFlo wrote:
Wed Jun 24, 2020 8:23 pm
We've been very disciplined to get where we are. I don't want tax ignorance to screw us up when we start accessing the fruits of our labor.
CF
About 20 years before retirement I was warned by a financial advisor about taxes. I was told be careful, you may have your head handed to you.

Unfortunately, I did not listen to the advise. I continued to max out my 401K accounts. So I over saved in the wrong account.

About 10 years ago I woke up and thought about RMDs, SS, pensions, etc. for my post retirement life. So I opened a Roth 401K. I paid more in taxes, but was able to build up my Roth.

I retired about 3 years ago. Since then I've been doing Roth conversions. However, with SS@70, RMDs@72, pension income, my taxes will go up. Perhaps I should convert more given now tax rates are relatively low. I did increase my conversions while we were in the bear market. Per my IPS I will do that again if we drop back into a bear.

Not directly related to the OP, but I've advised my daughter to invest inside a Roth 401K, fortunately offered by her employer. I told her she can revisit that decision in a mid to late career timeframe, when presumably she is making more and in a higher bracket. But while she is young I want her to invested in a tax free account with the maximum available time for compounding until retirement.

Robert20
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Re: Am I Headed for a Retirement Tax Bomb?

Post by Robert20 » Sat Jun 27, 2020 2:44 pm

Leif wrote:
Sat Jun 27, 2020 2:02 pm
CashFlo wrote:
Wed Jun 24, 2020 8:23 pm
We've been very disciplined to get where we are. I don't want tax ignorance to screw us up when we start accessing the fruits of our labor.
CF
About 20 years before retirement I was warned by a financial advisor about taxes. I was told be careful, you may have your head handed to you.

Unfortunately, I did not listen to the advise. I continued to max out my 401K accounts. So I over saved in the wrong account.

About 10 years ago I woke up and thought about RMDs, SS, pensions, etc. for my post retirement life. So I opened a Roth 401K. I paid more in taxes, but was able to build up my Roth.

I retired about 3 years ago. Since then I've been doing Roth conversions. However, with SS@70, RMDs@72, pension income, my taxes will go up. Perhaps I should convert more given now tax rates are relatively low. I did increase my conversions while we were in the bear market. Per my IPS I will do that again if we drop back into a bear.

Not directly related to the OP, but I've advised my daughter to invest inside a Roth 401K, fortunately offered by her employer. I told her she can revisit that decision in a mid to late career timeframe, when presumably she is making more and in a higher bracket. But while she is young I want her to invested in a tax free account with the maximum available time for compounding until retirement.
Vow. this is serious thing to reconsider 401 contributions then!!.

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Leif
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Re: Am I Headed for a Retirement Tax Bomb?

Post by Leif » Sat Jun 27, 2020 3:05 pm

Robert20 wrote:
Sat Jun 27, 2020 2:44 pm
Vow. this is serious thing to reconsider 401 contributions then!!.
I've had people disagree with me (in a different post) when I recommended someone young, in a lower bracket, put their money in a Roth. They recommended a tIRA or t401K. But your future income growth, and what you "think" will happen with tax rates, plays a big role in how you decide.

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Harry Livermore
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Re: Am I Headed for a Retirement Tax Bomb?

Post by Harry Livermore » Sun Jun 28, 2020 9:33 am

Watty wrote:
Thu Jun 25, 2020 10:05 am

Keep in mind is that the RMDs start out at less than 4 percent at age 72 and you will not have to actually start drawing down your IRA until the RMD percentage is greater than the percentage that your investments are growing. If you can earn 7%, with inflation, then you will not need to actually start drawing down your IRA until the RMD is greater than 7% when you are 86.
Watty, that's a good point.
Say you are 72, and are supposed to withdraw 3.63%, but your IRA grew by 6%, so even after your RMD, you still have a larger balance. Of course, that gets harder as you get older, which could make a case for increasing your stock allocation within your IRA, for example.
Admittedly I have not delved much yet into the topic of RMDs as it's a long way off, and I have some tax diversification that hopefully gives me options later.
We are not supposed to speculate about future legislation, but I will simply say that the uncertainty of that makes planning a challenge...
Cheers

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Watty
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Re: Am I Headed for a Retirement Tax Bomb?

Post by Watty » Sun Jun 28, 2020 9:54 am

Robert20 wrote:
Sat Jun 27, 2020 2:44 pm
Leif wrote:
Sat Jun 27, 2020 2:02 pm
CashFlo wrote:
Wed Jun 24, 2020 8:23 pm
We've been very disciplined to get where we are. I don't want tax ignorance to screw us up when we start accessing the fruits of our labor.
CF
About 20 years before retirement I was warned by a financial advisor about taxes. I was told be careful, you may have your head handed to you.

Unfortunately, I did not listen to the advise. I continued to max out my 401K accounts. So I over saved in the wrong account.

About 10 years ago I woke up and thought about RMDs, SS, pensions, etc. for my post retirement life. So I opened a Roth 401K. I paid more in taxes, but was able to build up my Roth.

I retired about 3 years ago. Since then I've been doing Roth conversions. However, with SS@70, RMDs@72, pension income, my taxes will go up. Perhaps I should convert more given now tax rates are relatively low. I did increase my conversions while we were in the bear market. Per my IPS I will do that again if we drop back into a bear.

Not directly related to the OP, but I've advised my daughter to invest inside a Roth 401K, fortunately offered by her employer. I told her she can revisit that decision in a mid to late career timeframe, when presumably she is making more and in a higher bracket. But while she is young I want her to invested in a tax free account with the maximum available time for compounding until retirement.
Vow. this is serious thing to reconsider 401 contributions then!!.
Before you get too excited about a Roth something to keep in mind is that an over 65 couple can have over $100K in taxable income and still be in the 12% federal tax bracket.

Along with a paid off house that is enough to provide a pretty high standard of living if you are not in an ultra high cost of living area.

People do spend more than that but you need to consider how likely it is that you will be living that lifestyle when you retire.

lomarica01
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Re: Am I Headed for a Retirement Tax Bomb?

Post by lomarica01 » Sun Jun 28, 2020 11:55 am

great post here is what I did

work out your future income and distributions and you will be able to estimate your future taxes.

It is really not that hard and just use reasonable assumptions for your future rate of return and tax rates. I did this in excel and every year add a bit more detail to it. For example you can estimate your total income and taxes in say five year increments starting from now to say age 80 this will give you a big picture view, then you can input more years for starting ss and the rmd's etc...

finally there are many websites/software that can hep with spending and expenses including taxes firecacl, iorp, cfirecim, flexible retirement planner and the grand daddy excel Retirement Portfolio Model many of these have their own threads

good luck

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Johnsson
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Re: Am I Headed for a Retirement Tax Bomb?

Post by Johnsson » Sun Jun 28, 2020 1:11 pm

bearwithbear wrote:
Sat Jun 27, 2020 9:40 am
LeeMKE,

About how much did you save in total taxes?
Which meant that you spent how much on taxes now to save how much later?

Thanks,
Bear
I'm not LeeMKE (obviously), but... We are planning to retire in 2021. Running i-ORP many different ways, I second Lee's comments. Our tax savings was about $120k by starting conversions as soon as we retire (at age 59, for 10+ years, NOT limiting income/conversions for ACA subsidies), as opposed to waiting conversions until age 65 (and limiting income prior to that to allow ACA subsidies).

Note: A possible concern to be considered is reversion to earlier tax rates (or possibly higher?) in 2026.
'In theory there is no difference between theory and practice. In practice there is.' Yogi Berra

retiredjg
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Re: Am I Headed for a Retirement Tax Bomb?

Post by retiredjg » Sun Jun 28, 2020 2:45 pm

bearwithbear wrote:
Sat Jun 27, 2020 9:40 am
About how much did you save in total taxes?
Which meant that you spent how much on taxes now to save how much later?
This is the wrong question. It does not work that way.

You will almost always pay more tax if you pay it later rather than earlier. This is because your accounts are usually growing. Bigger account = more taxes.

But even if you pay more tax later on, you might end up with more money left in your accounts. So don't ask "how much tax did you save?" You should "ask how much more money was left after taxes?"

Robert20
Posts: 137
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Re: Am I Headed for a Retirement Tax Bomb?

Post by Robert20 » Sun Jun 28, 2020 3:28 pm

retiredjg wrote:
Sun Jun 28, 2020 2:45 pm
bearwithbear wrote:
Sat Jun 27, 2020 9:40 am
About how much did you save in total taxes?
Which meant that you spent how much on taxes now to save how much later?
This is the wrong question. It does not work that way.

You will almost always pay more tax if you pay it later rather than earlier. This is because your accounts are usually growing. Bigger account = more taxes.

But even if you pay more tax later on, you might end up with more money left in your accounts. So don't ask "how much tax did you save?" You should "ask how much more money was left after taxes?"
Even account grows to 3M, yearly distributions matters. We pay taxes on the amount withdrawn.. RIght?

retiredjg
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Re: Am I Headed for a Retirement Tax Bomb?

Post by retiredjg » Sun Jun 28, 2020 3:45 pm

Robert20 wrote:
Sun Jun 28, 2020 3:28 pm
Even account grows to 3M, yearly distributions matters. We pay taxes on the amount withdrawn.. RIght?
I'm not sure what this question means. Taxes depend on what account money is coming out of.

In the context of doing Roth conversions, the money is taxed when it is converted to Roth.

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CashFlo
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Re: Am I Headed for a Retirement Tax Bomb?

Post by CashFlo » Mon Jun 29, 2020 7:40 am

Watty wrote:
Sun Jun 28, 2020 9:54 am
Before you get too excited about a Roth something to keep in mind is that an over 65 couple can have over $100K in taxable income and still be in the 12% federal tax bracket.
I'd like to see an example, with some numbers, on how that works.

Thanks.

flyingaway
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Re: Am I Headed for a Retirement Tax Bomb?

Post by flyingaway » Mon Jun 29, 2020 9:02 am

Leif wrote:
Sat Jun 27, 2020 3:05 pm
Robert20 wrote:
Sat Jun 27, 2020 2:44 pm
Vow. this is serious thing to reconsider 401 contributions then!!.
I've had people disagree with me (in a different post) when I recommended someone young, in a lower bracket, put their money in a Roth. They recommended a tIRA or t401K. But your future income growth, and what you "think" will happen with tax rates, plays a big role in how you decide.
I think everyone's situation is different. For example, in our case, if we put money in Roth 401k (from employers), we would have too much income to qualify for Roth IRA (individuals). So we put money in pre-tax 401K (employers) and in Roth IRA (individuals)

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Watty
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Re: Am I Headed for a Retirement Tax Bomb?

Post by Watty » Mon Jun 29, 2020 9:10 am

CashFlo wrote:
Mon Jun 29, 2020 7:40 am
Watty wrote:
Sun Jun 28, 2020 9:54 am
Before you get too excited about a Roth something to keep in mind is that an over 65 couple can have over $100K in taxable income and still be in the 12% federal tax bracket.
I'd like to see an example, with some numbers, on how that works.

Thanks.
Here is a federal tax estimator web site.

https://www.olt.com/main/home/taxestimator.asp

On the first screen select Married, jointly, and enter 1950(70 years old) as the year of birth for both spouses,

Click the continue button then enter 100000 as the income for one spouse, then select a different box to cause the numbers to be recalculated.

That will then show you the taxes and if you scroll down to the bottom of the screen you will see the details of which tax bracket you would be in and how much you would pay in taxes in each tax bracket.

Tax Brackets
$19050 x 10%......$1905.00
$54350 x 12%.......$6522.00
$0 x 22%.............$ 0.00

Calculated Tax based on your information using 2018 Tax Brackets is $8427.00 .Your maximum tax bracket is 12%.

The convoluted way that Social Security is taxed complicates this and you can enter similar numbers with Social Security then add $100 to your income to see how much that increases your taxes and your effective tax bracket.

https://www.bogleheads.org/wiki/Taxatio ... y_benefits

If you go through a similar process for an over 65 couple that has $40K in Social Security and $20K in taxable income then you will see that they would pay no federal income tax. I live in a medium to low cost of living area with a paid off house that is enough to pay for an above average middle class lifestyle here.

Compared to many of the posters here I am pretty middle class and that is roughly my retirement spending target along with a bit of money in Roths and taxable accounts for occasional large expenses. My state does not tax Social Security and has a retirement income exclusion so I will also not have to pay any state income taxes.

If my numbers work out just right then some years I may be able to not pay any state or federal income taxes once we are both getting Social Security.

If you are married it would also be good to look at your possible taxes as if one of your survives the other and files taxes as single.
Last edited by Watty on Mon Jun 29, 2020 9:28 am, edited 1 time in total.

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grabiner
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Re: Am I Headed for a Retirement Tax Bomb?

Post by grabiner » Mon Jun 29, 2020 9:16 am

CashFlo wrote:
Mon Jun 29, 2020 7:40 am
Watty wrote:
Sun Jun 28, 2020 9:54 am
Before you get too excited about a Roth something to keep in mind is that an over 65 couple can have over $100K in taxable income and still be in the 12% federal tax bracket.
I'd like to see an example, with some numbers, on how that works.

Thanks.
"Taxable income" is the wrong term here; "Income subject to tax" would be better. (Taxable income is the number on your Form 1040 on which you compute the tax, after taking all deductions and adjustments.)

A married couple over 65 with income subject to tax of $107,650 takes a standard deduction of $27.400, which puts their taxable income at $80,250, the top of the 12% tax bracket.

And if that income subject to tax includes $40,000 of Social Security, then their total income is $113,650, because only 85% of the Social Security is taxable. However, this couple did have marginal tax rates of 15%, 18%, and 22.2% on lower amounts of income in the phase-in of Social Security taxation; the marginal rate went back down to 12% after they hit the maximum taxable amount. This is the example in Taxation of Social Security benefits on the wiki.
Wiki David Grabiner

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Leif
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Re: Am I Headed for a Retirement Tax Bomb?

Post by Leif » Mon Jun 29, 2020 9:39 am

flyingaway wrote:
Mon Jun 29, 2020 9:02 am
Leif wrote:
Sat Jun 27, 2020 3:05 pm
Robert20 wrote:
Sat Jun 27, 2020 2:44 pm
Vow. this is serious thing to reconsider 401 contributions then!!.
I've had people disagree with me (in a different post) when I recommended someone young, in a lower bracket, put their money in a Roth. They recommended a tIRA or t401K. But your future income growth, and what you "think" will happen with tax rates, plays a big role in how you decide.
I think everyone's situation is different. For example, in our case, if we put money in Roth 401k (from employers), we would have too much income to qualify for Roth IRA (individuals). So we put money in pre-tax 401K (employers) and in Roth IRA (individuals)
Agreed. And no one knows what will happen with taxes short term, not to mention long term. For example, one recent tax change, compressing the stretch IRA (inherited IRA) from a life time to 10 years, adds even more to the Roth direction. Also with what I believe are tax rates that are low relative to the future, I think a Roth 401K is a great way to save, if available to you. My daughter has her Roth 401K and a Roth IRA. Probably some time in the future she will have a Traditional 401K/IRA, as her tax bracket and tax rates increase.

bearwithbear
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Re: Am I Headed for a Retirement Tax Bomb?

Post by bearwithbear » Mon Jun 29, 2020 2:06 pm

retiredjg,

You are correct. Amount of money left after taxes is the way to look at this.

Thanks,
Bear

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