Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Widows beware!
Old 03-07-2017, 10:26 AM   #1
Recycles dryer sheets
 
Join Date: Jul 2016
Location: North East
Posts: 172
Widows beware!

Many widows and widowers will retire at an early age on either their own or their spouseís survivor Social Security benefits and then switch to the opposite benefit when they turn 70. This is a very normal and legal process to follow.

The problem is that many who do this only consider their financial picture at the age when they plan to retire early. The fatal flaw comes when they turn 70 and did not plan for that situation in advance.

The problem exists when their increased SS benefits plus their required MRDs push them into the 25% Federal tax bracket.

Assuming that your FRB, Full Retirement Benefits, and you late spouseís FRB are about the same. At age 62 you can retire on about 81% of your survivor benefit at say $20,000, then at age 70 switch to 129% of your own benefit at about $32,000.

Basically, at age 70 you are getting a $12,000 increase in your benefit income plus you are now required to start taking Minimum Required Distributions (MRDs) from your taxable traditional IRA accounts. The annual percentage for the MRDs increases with age, starting at age 70 that is 3.65%, 3.77%, 3.91%, 4.05%, 4.20% continuing to increase each year.

At the beginning of your personal 25% Federal bracket, the basis for the taxation of your Social Security benefits probably puts you in the 85% taxability bracket. This means that a $100 withdraw from a taxable source, your IRA, results in an additional $85 of your SSB also becoming taxable income. You will pay an additional 25% of $185 or $46.25 for each additional $100 you withdraw, each $100 of MRD.

The important thing to consider here is that you should do the math, donít just calculate what your income and taxes will be at age 62, but also calculate what they will probably be at age 70 and beyond. Once you have this information you will know in advance if you need to take steps before the age of 70 to avoid paying the 46.25% marginal tax rate.
__________________

Sandy & Shirley is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 03-07-2017, 10:37 AM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Sunset's Avatar
 
Join Date: Jul 2014
Location: Spending the Kids Inheritance and living in Chicago
Posts: 7,196
A nice explanation of the reason for the steps.

The steps you are probably alluding to would be to convert some IRA money to ROTH accounts as early as possible within the 15% tax bracket (or even higher if you have a lot and big SS coming).
__________________

Sunset is offline   Reply With Quote
Old 03-07-2017, 10:55 AM   #3
Moderator Emeritus
W2R's Avatar
 
Join Date: Jan 2007
Location: New Orleans
Posts: 42,525
Quote:
Originally Posted by PapaGeek View Post
The important thing to consider here is that you should do the math, donít just calculate what your income and taxes will be at age 62, but also calculate what they will probably be at age 70 and beyond.
Good advice, even for those of us who are not widows or widowers. Those who delay SS to age 70 need to remember that RMD's hit at age 70 1/2, too. It's a "tax bomb" of sorts.
__________________
"D*** THE TORPEDOES, FULL SPEED AHEAD!"

--- Admiral David Farragut during the battle of Mobile Bay, paraphrased
W2R is offline   Reply With Quote
Old 03-07-2017, 11:05 AM   #4
Recycles dryer sheets
 
Join Date: Feb 2017
Posts: 153
That makes me think that I'll be better to take my SS at 62 and the same for my wife who is 5 years behind me. Am I missing something?
nativenewenglander is offline   Reply With Quote
Old 03-07-2017, 11:11 AM   #5
Moderator Emeritus
W2R's Avatar
 
Join Date: Jan 2007
Location: New Orleans
Posts: 42,525
Quote:
Originally Posted by nativenewenglander View Post
That makes me think that I'll be better to take my SS at 62 and the same for my wife who is 5 years behind me. Am I missing something?
Yes, that there are many, many reasons to take SS or not at various ages. This is only one factor of many.
__________________
"D*** THE TORPEDOES, FULL SPEED AHEAD!"

--- Admiral David Farragut during the battle of Mobile Bay, paraphrased
W2R is offline   Reply With Quote
Old 03-07-2017, 11:12 AM   #6
Thinks s/he gets paid by the post
2017ish's Avatar
 
Join Date: Apr 2012
Posts: 1,851
Quote:
Originally Posted by PapaGeek View Post
....

At the beginning of your personal 25% Federal bracket, the basis for the taxation of your Social Security benefits probably puts you in the 85% taxability bracket. This means that a $100 withdraw from a taxable source, your IRA, results in an additional $85 of your SSB also becoming taxable income. You will pay an additional 25% of $185 or $46.25 for each additional $100 you withdraw, each $100 of MRD, for the $5806 dollars between AGI of $49,900 and 55,706 (assuming standard deduction and no dependents).

The important thing to consider here is that you should do the math, donít just calculate what your income and taxes will be at age 62, but also calculate what they will probably be at age 70 and beyond. Once you have this information you will know in advance if you need to take steps before the age of 70 to avoid paying the 46.25% marginal tax rate.
Source: https://www.bogleheads.org/wiki/Taxa...urity_benefits

At least it is transitory. Compared to paying 25%, that's an extra $1233.78 in taxes at the maximum.
__________________
OMY * 3 2ish Done 7.28.17
2017ish is offline   Reply With Quote
Old 03-07-2017, 12:06 PM   #7
Recycles dryer sheets
 
Join Date: Jul 2016
Location: North East
Posts: 172
Quote:
Originally Posted by 2017ish View Post
Source: https://www.bogleheads.org/wiki/Taxa...urity_benefits

At least it is transitory. Compared to paying 25%, that's an extra $1233.78 in taxes at the maximum.
If you re going to look at that bogleheads page, SMILE, look at mine also!

https://www.bogleheads.org/wiki/Soci...act_calculator

As to what exactly to do, it is totally a personal thing based on your own personal situation.

In our case we are delaying my GFs annuity, using her TIRA and Roth converting the rest. Her tax levels will be 0%, 10%, 15% and 22.5%.

Also, by delaying her Annuity for 8 years, her annual amount will literally double. And during the delay the death benefit of her annuity will remain at its maximum level.
Sandy & Shirley is offline   Reply With Quote
Widows beware!
Old 03-07-2017, 12:26 PM   #8
Thinks s/he gets paid by the post
 
Join Date: May 2014
Posts: 4,261
Widows beware!

I'm a widow, collecting benefits on late DH's record and planning to file for my own at 70. I know that's a minefield due to RMDs but prefer to maximize the life annuity with the (measly) built-in COLA I get from SS.

Tax laws change, too. I have 6 years to go till I'm 70.
athena53 is offline   Reply With Quote
Old 03-07-2017, 12:57 PM   #9
Thinks s/he gets paid by the post
2017ish's Avatar
 
Join Date: Apr 2012
Posts: 1,851
Quote:
Originally Posted by PapaGeek View Post
If you re going to look at that bogleheads page, SMILE, look at mine also!

https://www.bogleheads.org/wiki/Soci...act_calculator

As to what exactly to do, it is totally a personal thing based on your own personal situation.

...
OUCH! I've looked at that before (and followed some of the threads!); my head started hurting.

Agree on the personal situations varying. Lots of variability; important to know the lay of the land.
__________________
OMY * 3 2ish Done 7.28.17
2017ish is offline   Reply With Quote
Old 03-07-2017, 01:15 PM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 22,661
I see a big tax torpedo coming down when we each reach 70 1/2 the result being that almost all of our SS will go to paying taxes on the extra income plus Medicare part B.

Fortunately our IRAs are only ~10% of our retirement assets.

But we can't really do anything about converting to Roth without paying ~30% tax now on that additional income plus it may drive up Medicare part B. So we'll just wait for that torpedo. Really - all we expect is that it will at least cover the additional taxes and Medicare part B and maybe part D. Neither of our SS income is that large, because we retired very early. We made good money, but not for 35 years.

This is a "too high income" problem, so one is hard pressed to complain. We're well past any "hump".
__________________
Retired since summer 1999.
audreyh1 is offline   Reply With Quote
Old 03-07-2017, 01:33 PM   #11
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Chuckanut's Avatar
 
Join Date: Aug 2011
Location: West of the Mississippi
Posts: 9,127
I know a lot of people who would love to have the 'tax bomb' problem caused by a higher income at 70. The usual complaints are that the SS check is 'not enough to live on'.

For many of us there is not good way to avoid the problem. If possible we convert to Roth IRA and fill up the 15% bracket. But, if one has a descent pension or other source of income, the 15%bracket can fill up before much money can be converted. OTOH, having a descent source of income that fills up most of the 15% bracket is a problem many people would love to have.
__________________
The worst decisions are usually made in times of anger and impatience.
Chuckanut is offline   Reply With Quote
Old 03-07-2017, 01:43 PM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 22,661
Quote:
Originally Posted by Chuckanut View Post
OTOH, having a descent source of income that fills up most of the 15% bracket is a problem many people would love to have.
Yep!
__________________
Retired since summer 1999.
audreyh1 is offline   Reply With Quote
Old 03-07-2017, 01:48 PM   #13
Recycles dryer sheets
 
Join Date: Jul 2016
Location: North East
Posts: 172
Quote:
Originally Posted by athena53 View Post
I'm a widow, collecting benefits on late DH's record and planning to file for my own at 70. I know that's a minefield due to RMDs but prefer to maximize the life annuity with the (measly) built-in COLA I get from SS.

Tax laws change, too. I have 6 years to go till I'm 70.
Iím not an accountant, but what you might want to do is look at what your tax situation will be in 6 years. If you are at or slightly in the 25% Federal, 46.25% marginal, think about withdrawing up to that point from your TIRA every year until that point. Take it out today at 27.75%, 15% * $185, to avoid 46.25% later.

If you just donít need the extra cash today, do a series of Roth Conversions up to that limit, get the extra cash out at the lower rate, store it in Roth were it will grow tax free and you can take it as needed tax free. That is basically what my GF will be doing.

As for the tax laws on taxability of your SS benefits, those laws were written in 1983 and 1993. The single person income limits were set at $25,000 for the 50% bracket in 1983 and $34,000 for the 85% bracket in 1993. They were written in stone with no adjustments for cost of living and have not changed in 34 years!

The average income back in 1983 was less than $20,000 a year and the government ďtruthfullyĒ told us they were only writing those laws to ďtax the richĒ. Iím sure we all agree that anyone earning over $25,000 today is filthy rich!
Sandy & Shirley is offline   Reply With Quote
Old 03-07-2017, 01:52 PM   #14
Thinks s/he gets paid by the post
Fedup's Avatar
 
Join Date: Mar 2014
Location: Southern Cal
Posts: 4,032
Quote:
Originally Posted by Chuckanut View Post
I know a lot of people who would love to have the 'tax bomb' problem caused by a higher income at 70. The usual complaints are that the SS check is 'not enough to live on'.

For many of us there is not good way to avoid the problem. If possible we convert to Roth IRA and fill up the 15% bracket. But, if one has a descent pension or other source of income, the 15%bracket can fill up before much money can be converted. OTOH, having a descent source of income that fills up most of the 15% bracket is a problem many people would love to have.
Even I have problem paying up to 15%. I don't like to pay that much tax up front. Originally I thought of just converting mine and spend down my husband's IRA. Now it looks like I need to do both. But I might have to bite the bullet now or face a bigger bullet later on. Especially all this money will most likely not be used, possibly inheritance money for my kids.
On top of that, people who have rental income, the depreciation will be depleted, i.e. More income on top of income. It sounds nice except when it comes to tax issue.
Fedup is offline   Reply With Quote
Old 03-07-2017, 01:56 PM   #15
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Chuckanut's Avatar
 
Join Date: Aug 2011
Location: West of the Mississippi
Posts: 9,127
Quote:
Originally Posted by PapaGeek View Post

As for the tax laws on taxability of your SS benefits, those laws were written in 1983 and 1993. The single person income limits were set at $25,000 for the 50% bracket in 1983 and $34,000 for the 85% bracket in 1993. They were written in stone with no adjustments for cost of living and have not changed in 34 years!
What about the supposed rich and powerful AARP? What the heck are they doing about this if anything? I would rather they tackled this issue than send me more 'invitations' to buy life insurance that I don't need.

And, the powers-that-be tactfully avoid mentioning this fact. A tax increase due to inflation. Aren't we lucky!!!!!
__________________
The worst decisions are usually made in times of anger and impatience.
Chuckanut is offline   Reply With Quote
Old 03-07-2017, 02:15 PM   #16
Recycles dryer sheets
 
Join Date: Dec 2009
Posts: 452
A lot of suddenly widow or widower filers could find themselves bumped from the 15% to 25% bracket simply because they would go from filing "Married Filing Jointly" to filing "Single".

That could happen at any age.
zedd is offline   Reply With Quote
Old 03-07-2017, 02:41 PM   #17
Thinks s/he gets paid by the post
Philliefan33's Avatar
 
Join Date: Oct 2014
Posts: 1,065
Quote:
Originally Posted by zedd View Post
A lot of suddenly widow or widower filers could find themselves bumped from the 15% to 25% bracket simply because they would go from filing "Married Filing Jointly" to filing "Single".

That could happen at any age.


We have had that situation a couple of times this year at our AARP tax prep site. Widows come in to have their taxes done and can't understand why they owe income tax this year when they haven't owed in the past ten years. It takes us a few extra minutes to explain the difference in standard deduction and having one fewer exemption.
Philliefan33 is offline   Reply With Quote
Old 03-07-2017, 03:08 PM   #18
Thinks s/he gets paid by the post
2017ish's Avatar
 
Join Date: Apr 2012
Posts: 1,851
Quote:
Originally Posted by zedd View Post
A lot of suddenly widow or widower filers could find themselves bumped from the 15% to 25% bracket simply because they would go from filing "Married Filing Jointly" to filing "Single".

That could happen at any age.
Yep. That is what is makes me unhesitant about our conversion strategy. Still unlikely to get any survivor below the 28% bracket, but will minimize the amount taxed in excess of that when RMDs hit. Granted, a nice problem to have.
__________________
OMY * 3 2ish Done 7.28.17
2017ish is offline   Reply With Quote
Old 03-07-2017, 03:08 PM   #19
Thinks s/he gets paid by the post
 
Join Date: May 2014
Posts: 4,261
Yeah, I'm gonna get killed next year when I file as Single for 2017, but at least I see it coming. I'm
athena53 is offline   Reply With Quote
Old 03-07-2017, 03:10 PM   #20
Recycles dryer sheets
 
Join Date: Dec 2009
Posts: 452
Quote:
Originally Posted by athena53 View Post
Yeah, I'm gonna get killed next year when I file as Single for 2017, but at least I see it coming. I'm
OMG! We lost Athena mid-sentence
__________________

zedd is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Do widows adjust better than widowers? imoldernu Health and Early Retirement 49 07-03-2015 09:36 PM
Medicare Widows Benefits PERSonalTime FIRE and Money 16 03-14-2015 12:31 AM
Medicare widows benefits PERSonalTime Health and Early Retirement 0 03-09-2015 01:16 PM
Anyone know of a forum for widows? WM Other topics 9 10-08-2008 05:51 PM
Social Security for Widows question bubba FIRE and Money 20 06-08-2007 07:36 PM

» Quick Links

 
All times are GMT -6. The time now is 01:51 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2019, vBulletin Solutions, Inc.