Changing Roth Strategy

[pb4uski]

$12,000 of qualified dividends + $27,000 of SS income (single, standard deduction) + $24,000 of tIRA distributions.

What do you get for $12,000 of qualified dividends + $27,000 of SS income (single, standard deduction) plus $24,100 of tIRA distributions?

How much did the tax increase for the extra $100 income, and what is that as a percentage increase?....

For $12,000+$27,000+$24,000>>>$5,087 in tax
For $12,000+$27,000+$24,100>>>$5,144 in tax
So $57 increase in tax on that last $100 in tIRA withdrawals

However, the example is flawed in that even with $24,000 in tIRA withdrawals it is in that high marginal tax rate.

At a $20,932 tIRA withdrawal the tax is $3,380 and the top of the 15% tax bracket... at $100 less ($20,832 tIRA withdrawal) the tax is $3,358 so the marginal tax rate is 22% (15% *185%).

If you then add $100 the tax is $3,438...$58 higher or 58% (some rounding going on)... so in theory the taxpayer should have stopped tIRA withdrawals at $20,932 since any additional withdrawals were so heavily taxed.

 

[joeea]

For $12,000+$27,000+$24,000>>>$5,087 in tax
For $12,000+$27,000+$24,100>>>$5,144 in tax
So $57 increase in tax on that last $100 in tIRA withdrawals

However, the example is flawed in that even with $24,000 in tIRA withdrawals it is in that high marginal tax rate.

At a $20,932 tIRA withdrawal the tax is $3,380 and the top of the 15% tax bracket... at $100 less ($20,832 tIRA withdrawal) the tax is $3,358 so the marginal tax rate is 22% (15% *185%).

If you then add $100 the tax is $3,438...$58 higher or 58% (some rounding going on)... so in theory the taxpayer should have stopped tIRA withdrawals at $20,932 since any additional withdrawals were so heavily taxed.

If $57 in additional taxes is going to break you, then you have bigger problems than tIRA withdrawals.

 

[RunningBum]

Actually, I view it as people in the middle income category have a chance to avoid this problem. The middle income people might fall into this problem for years when they need the extra money.
The suffering "Rich" people are totally screwed and pay the extra every year as there is no way to avoid it.

Bingo. It's not a "woe is us" thing, it's a "be aware" thing. If you're subject to the hump, it may be avoidable if you can avoid other income in retirement. The main way is to convert your tIRA to a Roth before collecting SS. BTW, this is a good reason to defer on collecting SS benefits, so that you have more time to convert, but again, make sure you are actually subject to the hump before taking steps to avoid it. It doesn't affect everyone.

High income people aren't paying less in SS tax, it's just spread out more so that they don't have this short window of income with a very high marginal tax rate.

 

[pb4uski]

If $57 in additional taxes is going to break you, then you have bigger problems than tIRA withdrawals.

It's not the $57... it's the 57% marginal tax rate.

 

[RunningBum]

If $57 in additional taxes is going to break you, then you have bigger problems than tIRA withdrawals.

Why not avoid it if you can, by converting to a Roth before taking SS? It also helps to be aware of it if you are thinking of taking on a PT job in retirement. If you're right at the point of the hump, an extra $2K of income would net you less than $900, so you might decide it's not worth it.

 

[SevenUp]

For $12,000+$27,000+$24,000>>>$5,087 in tax
For $12,000+$27,000+$24,100>>>$5,144 in tax
So $57 increase in tax on that last $100 in tIRA withdrawals

However, the example is flawed in that even with $24,000 in tIRA withdrawals it is in that high marginal tax rate.

At a $20,932 tIRA withdrawal the tax is $3,380 and the top of the 15% tax bracket... at $100 less ($20,832 tIRA withdrawal) the tax is $3,358 so the marginal tax rate is 22% (15% *185%).

If you then add $100 the tax is $3,438...$58 higher or 58% (some rounding going on)... so in theory the taxpayer should have stopped tIRA withdrawals at $20,932 since any additional withdrawals were so heavily taxed.

Not sure what would be "flawed" - it's just an example of a situation in which there is a high marginal rate.

The chart in post #23 shows the range over which it applies.

Exact tax calculations, using the tax tables, will indeed have "noisy" marginal rates due to the $50 increments used. Perhaps that is why the $20,932 example shows only a 22% marginal rate, instead of the 27.75% that it "should" show...?

 

[Sunset]

The truly rich don't give a damn about Roth. I'm sure they have many ways to avoid tax.

Some rich folks do care about a Roth:

"
Max Levchin, chairman of San Francisco-based Yelp, reported 2.7 million shares of the company’s Class B Common Stock in his Roth IRA, according to this year’s proxy statement. Class B shares of Yelp are convertible at any time by the holder into shares of Class A on a one-to-one basis, according to the filing.
Yelp shares closed at $76.54 in New York ..... That comes out to about $206 million worth of Yelp shares in his Roth account.
At the time of the company’s S-1 filing in February 2012, Levchin reported 3.9 million shares in his Roth account."


https://www.bloomberg.com/news/arti...in-9-000-u-s-taxpayers-with-romney-sized-iras

 

[Fedup]

Some rich folks do care about a Roth:

"
Max Levchin, chairman of San Francisco-based Yelp, reported 2.7 million shares of the company’s Class B Common Stock in his Roth IRA, according to this year’s proxy statement. Class B shares of Yelp are convertible at any time by the holder into shares of Class A on a one-to-one basis, according to the filing.
Yelp shares closed at $76.54 in New York ..... That comes out to about $206 million worth of Yelp shares in his Roth account.
At the time of the company’s S-1 filing in February 2012, Levchin reported 3.9 million shares in his Roth account."


https://www.bloomberg.com/news/arti...in-9-000-u-s-taxpayers-with-romney-sized-iras

Roth conversion strategy to minimize tax is what we are discussing. How many people get to fund their Roth IRA with pre IPO money? Because the limit per year for contribution is $6500 and that's if your salary is under a certain bracket. I see this as one of the many ways for the rich to avoid paying tax.

 

[Sunset]

Roth conversion strategy to minimize tax is what we are discussing. .......

That is not what you said earlier.
I simply replied to what you said as it was wrong.

 

[Fedup]

That is not what you said earlier.
I simply replied to what you said as it was wrong.

My post was respond to your post above it where you said the suffering rich will pay extra tax every year. So yeah, there was tax in that comment.

 

[2017ish]

.... I see this as one of the many ways for the rich to avoid paying tax.

There apparently aren't too many "rich" taking advantage of the "many ways" to avoid paying tax. (Unless the desired outcome is for all after tax income to be less than some specified amount, perhaps.)

• The share of income earned by the top 1 percent of taxpayers rose to 20.6 percent in 2014. Their share of federal individual income taxes also rose, to 39.5 percent....
• The top 1 percent paid a greater share of individual income taxes (39.5 percent) than the bottom 90 percent combined (29.1 percent).
• The top 1 percent of taxpayers paid a 27.1 percent [average/effective] individual income tax rate, which is more than seven times higher than taxpayers in the bottom 50 percent (3.5 percent).

https://taxfoundation.org/summary-latest-federal-income-tax-data-2016-update/ The Pew Research Center has similar numbers: High-income Americans pay most income taxes, but enough to be 'fair'? | Pew Research Center

 

[Koolau]

I'm not even thinking in terms of new tax rates at this point since they are unknowable. I'll wait to the end of the year, therefore to see if I want to convert any more tIRA to Roth. I'm already taking RMDs, but (stated elsewhere) my goal is to prevent being RMD'd into higher Medicare "contribution" and any other currently means-tested issues. By getting "rid" of some tIRA money now, I just might never get bumped up on Medicare. The total tax I pay will most likely be almost the same whether I covert or not. I think my tax bracket will remain the same unless it is changed by law. YMMV

 

[Chuckanut]

These “basis points” are not COLA adjusted, they have not changed since 1983 and 1993.

Remember that. The lack of a COLA on the earning amounts results in a small tax increase every year on social security earnings for many people. IOW, an ever increasing tax on SS income is already baked into the system for those of even a moderate income.

 

[Chuckanut]

One of the biggest reasons, IMHO, to convert some tIRA money to Roth IRA money is to have some withdrawal flexibility in the future should one need to withdraw a much larger than normal amount for some reason. That said, I still can't recommend that anybody pay 25% or more to the Feds to beef up the Roth account. That's a tough pill to swallow.

 

[Fedup]

There apparently aren't too many "rich" taking advantage of the "many ways" to avoid paying tax. (Unless the desired outcome is for all after tax income to be less than some specified amount, perhaps.)

• The share of income earned by the top 1 percent of taxpayers rose to 20.6 percent in 2014. Their share of federal individual income taxes also rose, to 39.5 percent....
• The top 1 percent paid a greater share of individual income taxes (39.5 percent) than the bottom 90 percent combined (29.1 percent).
• The top 1 percent of taxpayers paid a 27.1 percent [average/effective] individual income tax rate, which is more than seven times higher than taxpayers in the bottom 50 percent (3.5 percent).

https://taxfoundation.org/summary-latest-federal-income-tax-data-2016-update/ The Pew Research Center has similar numbers: High-income Americans pay most income taxes, but enough to be 'fair'? | Pew Research Center

I agree with your post. But I think the truly rich is not the same as the top 1%, not in my head. Top 1% can be people making $500k-$1 miliion per year. They are nice income, like two professionals, but not as truly rich in my book. I think the truly rich people are the one who could afford $50-$100 million painting from Christy's auction house without flinching.

 

[ducky911]

Not a big fan here on conversions to roths. Personally hate ANY increase in today's taxes and would prefer to pay more later if that be the case. I would advise not doing anything yet this year as we are awaiting a tax overhaul. It is possible taxes will be less in our later years.