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04-05-2012, 12:16 PM
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#1
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Thinks s/he gets paid by the post
Join Date: Feb 2006
Posts: 4,872
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1.6% tax in retirement
I just realized that if you keep your annual income in the 15% tax bracket you pay 0% tax on qualified dividends. I plan to live of $14k rental income and $14k of dividends. Assuming those dividends are all qualifying and I just take the standard deduction and one exemption I end up paying $450 tax.
I take $9500 off my regular income for my standard deduction and one exemption leaving $4500 to be taxed at the 10% level which is $450. There is no tax due on the $14k of qualified dividends as I'm in the 15% tax bracket. Combine this with a ROTH and you can almost say goodbye to taxation.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”
Current AA: 75% Equity Funds / 15% Bonds / 5% Stable Value /2% Cash / 3% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
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04-05-2012, 12:24 PM
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#2
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Moderator
Join Date: Oct 2010
Posts: 10,725
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No traditional IRA with the obligatory distributions?
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04-05-2012, 12:34 PM
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#3
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Thinks s/he gets paid by the post
Join Date: Jun 2005
Posts: 4,391
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Somehow, avoiding taxes by living on very little doesn't seem as appealing as living large and paying some tax.
Am I missing something here ?
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04-05-2012, 12:35 PM
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#4
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Thinks s/he gets paid by the post
Join Date: Feb 2006
Posts: 4,872
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Not for quite a few years.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”
Current AA: 75% Equity Funds / 15% Bonds / 5% Stable Value /2% Cash / 3% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
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04-05-2012, 12:36 PM
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#5
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Thinks s/he gets paid by the post
Join Date: Feb 2006
Posts: 4,872
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 Quote:
Originally Posted by MasterBlaster
Somehow, avoiding taxes by living on very little doesn't seem as appealing as living large and paying some tax.
Am I missing something here ?
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Yes, the ROTH withdrawals
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”
Current AA: 75% Equity Funds / 15% Bonds / 5% Stable Value /2% Cash / 3% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
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04-05-2012, 12:42 PM
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#6
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Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Join Date: Jan 2007
Location: New Orleans
Posts: 47,500
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Quote:
Originally Posted by nun
Yes, the ROTH withdrawals
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Oh, that explains it! I didn't visualize you as someone who would be happy on such a tight budget. The Roth withdrawals will provide a nice supplement.
__________________
Already we are boldly launched upon the deep; but soon we shall be lost in its unshored, harbourless immensities. - - H. Melville, 1851.
Happily retired since 2009, at age 61. Best years of my life by far!
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04-05-2012, 12:47 PM
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#7
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Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Join Date: Jul 2008
Posts: 35,712
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The latter usually involves some w*rk!
Quote:
Originally Posted by MasterBlaster
Somehow, avoiding taxes by living on very little doesn't seem as appealing as living large and paying some tax.
Am I missing something here ?
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__________________
"Old age is the most unexpected of all things that happen to a man" -- Leon Trotsky (1879-1940)
"Those Who Can Make You Believe Absurdities Can Make You Commit Atrocities" - Voltaire (1694-1778)
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04-05-2012, 12:50 PM
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#8
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Recycles dryer sheets
Join Date: Sep 2009
Posts: 160
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Depends on how much one has in the Roth, I suppose. Otherwise, it seems pretty silly to avoid building wealth in order to lessen the tax burden.
Quote:
Originally Posted by nun
Yes, the ROTH withdrawals
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04-05-2012, 12:53 PM
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#9
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Thinks s/he gets paid by the post
Join Date: Feb 2006
Posts: 4,872
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Quote:
Originally Posted by W2R
Oh, that explains it! I didn't visualize you as someone who would be happy on such a tight budget. The Roth withdrawals will provide a nice supplement.
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Actually the 0% dividend rate applies up to the top of the 15% tax bracket so you could make it work with up to $35k. My budgeting shows that I'll be comfortable on $28k, but I can always make ROTH withdrawals and just spend some cash if needed. If I move back to the UK the $28k goes even farther as there's no medical insurance to pay. The UK also has a 0% tax rate on dividends if income is less than $56k.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”
Current AA: 75% Equity Funds / 15% Bonds / 5% Stable Value /2% Cash / 3% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
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04-05-2012, 12:59 PM
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#10
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Thinks s/he gets paid by the post
Join Date: Nov 2011
Posts: 3,902
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Enjoy it while you can since, unless the law is changed, that tax break for qualified dividends goes away in about 9 months.
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04-05-2012, 01:07 PM
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#11
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gone traveling
Join Date: Apr 2009
Location: Eastern PA
Posts: 3,851
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Quote:
Originally Posted by nun
Yes, the ROTH withdrawals
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But then again, you did "prepay" tax on those funds.
Pay now / pay later. You still have to pay the piper  ...
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04-05-2012, 01:19 PM
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#12
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Thinks s/he gets paid by the post
Join Date: Feb 2006
Posts: 4,872
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Quote:
Originally Posted by rescueme
But then again, you did "prepay" tax on those funds.
Pay now / pay later. You still have to pay the piper ... |
Yes that's true, but as I maxed out my deferal to 457, 403b and 401a my tax rate right now is at 15%. I do as much as I can to reduce that tax on my ROTH contributions.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”
Current AA: 75% Equity Funds / 15% Bonds / 5% Stable Value /2% Cash / 3% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
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04-05-2012, 01:23 PM
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#13
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Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Join Date: Sep 2005
Posts: 5,381
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Our tax code is in love with passive income. So much so, it is quite possible for a retiree living off of a large portfolio to pay almost nothing in taxes. Consider the case of a married couple with a $10MM portfolio, split evenly between muni bonds and individual stocks yielding 3% a piece. That portfolio will generate $300,000 in annual income and a tax payment of just $8,970 . . . for an effective tax rate of 2.9%.
__________________
Retired early, traveling perpetually.
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04-05-2012, 01:30 PM
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#14
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Thinks s/he gets paid by the post
Join Date: Mar 2006
Location: Houston
Posts: 4,337
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Depending on the size of your pre-tax accounts, you may want to take withdrawals from these to lower the balances before RMD time hits even if you have to pay taxes into the 25% range. It's a "fun with your tax software" adventure.
Personally, I believe that the favorable long term capital gains and dividend tax treatment will either get extended or reinstated soon after they expire. I suspect that they will be in place before we do our 2013 taxes. They have been around too long to just get flushed IMHO. Please, no debate here on tax law changes. I am just stating a belief that they really won't disappear this year.
__________________
The object of life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane -- Marcus Aurelius
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04-05-2012, 01:31 PM
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#15
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Thinks s/he gets paid by the post
Join Date: Nov 2011
Posts: 3,902
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$5m at 3% generates $150,000 in dividends. If they are qualified divs they'll be taxed at 15%, which is $22,500 tax. What did I miss?
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04-05-2012, 01:31 PM
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#16
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Thinks s/he gets paid by the post
Join Date: Feb 2006
Posts: 4,872
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Quote:
Originally Posted by GrayHare
Enjoy it while you can since, unless the law is changed, that tax break for qualified dividends goes away in about 9 months.
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Yep it might go up to 15%, but who can tell. Just best to keep up on this stuff and adjust your finances appropriately
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”
Current AA: 75% Equity Funds / 15% Bonds / 5% Stable Value /2% Cash / 3% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
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04-05-2012, 01:32 PM
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#17
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Thinks s/he gets paid by the post
Join Date: Mar 2006
Location: Houston
Posts: 4,337
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Quote:
Originally Posted by Gone4Good
Our tax code is in love with passive income. So much so, it is quite possible for a retiree living off of a large portfolio to pay almost nothing in taxes. Consider the case of a married couple with a $10MM portfolio, split evenly between muni bonds and individual stocks yielding 3% a piece. That portfolio will generate $300,000 in annual income and a tax payment of just $8,970 . . . for an effective tax rate of 2.9%.
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Did you include the AMT in your calculations? Of course, the AMT gets mushed about every year so you never know what it will really be.
__________________
The object of life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane -- Marcus Aurelius
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04-05-2012, 01:37 PM
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#18
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Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Join Date: Sep 2005
Posts: 5,381
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Quote:
Originally Posted by GrayHare
$5m at 3% generates $150,000 in dividends. If they are qualified divs they'll be taxed at 15%, which is $22,500 tax. What did I miss?
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For this married couple the first ~$90K of qualified dividend income is taxed at zero (0% rate up to $69K, plus standard deduction and personal exemption).
__________________
Retired early, traveling perpetually.
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04-05-2012, 01:38 PM
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#19
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Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Join Date: Sep 2005
Posts: 5,381
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Quote:
Originally Posted by 2B
Did you include the AMT in your calculations? Of course, the AMT gets mushed about every year so you never know what it will really be.
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I ran a similar scenario (I think with 2% dividends and 3% muni interest) through Turbo Tax and it said the AMT didn't apply.
__________________
Retired early, traveling perpetually.
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04-05-2012, 01:43 PM
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#20
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Thinks s/he gets paid by the post
Join Date: Nov 2011
Posts: 3,902
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Quote:
Originally Posted by Gone4Good
For this married couple the first ~$90K of qualified dividend income is taxed at zero (0% rate up to $69K, plus standard deduction and personal exemption).
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aha, OK, guess that works provided the couple has no other income, such as from tIRA or SS
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