How do I figure the tax question for retirement?

[kaudrey]

This may be a silly question; if so, please forgive me.

How much do I budget for taxes once my job-related income stops?

My plan is to retire in 15 years at age 52. To figure out how much I would need to retire, I take what I spend today NOT including savings and taxes, increased that by 3% inflation for the next 15 years, and multiplied by 25. (Basically I took my take-home pay, deducted what I save in addition to my 401(k), and assumed that's what I spend. So my tax costs aren't figured in. Should I add those in to my spending number?

I haven't really given this much thought. I assume tax rate would be lower...

So, for example, if I assume I need $86K a year starting in 2021, not including any taxes I might have to pay, what should I assume I REALLY need that year?

I'm assuming all expenses will be paid until 59 1/2 from taxable accounts, so most of it would be long term capital gains tax, I guess. Pension would kick in at 57 too, if that has a tax implication as well.

Thanks, I hope this makes sense.

Karen

 

[LOL!]

With the caveat that we don't know what the tax laws and rates will be next year, much less 15 years from now .....

What I suggest is to open up a new tax return in your TurboTax and plug in your numbers. Let TT figure out the tax for you.

 

[Gone4Good]

I model out my taxes in excel using the current tax tables and deductions. Nothing too fancy because this stuff is all going to change. For example, I don't bother with different tax rates for dividends, cap gains, etc. - everything gets taxed using the regular income tax tables. I then add my tax burden into my other living expenses to come up with a withdrawal rate. Doing it this way, in the same spreadsheet as my net worth calculation, means my tax assumptions automatically adjust whenever I change assumptions that effect my net worth (i.e. higher equity return, means higher portfolio balance, means higher taxes on larger dividend / interest income)

 

[treypar]

Turbo Tax has a tax estimator on their website.

 

[donheff]

If you are going to be meeting living expenses out of taxed investments until 59 1/2 those dollars should not be highly taxed. With reinvestment of dividends etc., you might end up with a third or so gains (others may have better estimates on this). So figure how much of what you will spend will be from that account and multiply * 15% * 1/3 (or *20% * 1/3 if you think the CG rate will go back up). As for pensions, I am guessing you are a teacher or government employee or you wouldn't be talking about them . Assuming you paid in to the retirement system after tax, figure most of the payout as regular income. IRS requires that you distribute the return that was already taxed over your life expectancy - it does add up to much.

 

[kaudrey]

Thanks everyone, that helps. I'll start working on some numbers...

Regarding the pension, yes, I work for the federal gov't. I have for 15 years, and at age 52, it will be 30 years, if I stay that long!

Karen

 

[WilliamG]

One nice thing about being retired is that you usually have a lot of control over how much taxable income you generate each year; eg., the decision to take from taxable or deferred accounts. One strategy I have seen lately makes a lot of sense to me and I am trying to follow it in these early years (age 61). Many advisors say spend first taxable, then taxable deferred, then Roth like investments. The new strategy says spend deferred money up to the threshold of your highest tax bracket (for us 15%) and THEN use taxable accounts to avoid paying more than 15% on this amount. If this means taking more out of your regular IRA than you need, do it any way and invest the difference in taxable savings or Roth conversion. This isn't right for everyone, but seems to make sense if you may otherwise have an IRA balance at 70 1/2 that would force you to withdraw at higher marginal tax rates. The strategy also recognizes that the tax environment is probably more benign now than it will become over the next few years.
bill

 

[cute fuzzy bunny]

What williamg said...I create my tax situation rather than let a calculator tell me what its going to be. Limit your earned income and ordinary dividends. Take advantage of qualified dividends and long term capital gains. Take advantage of any credits, deductions and other ways to dodge the tax man. Contribute to Roths if you can create enough earned income to qualify for that.

3.4% tax last year. Wifes small income and the withholding from that paid for that and we're getting a chunk of the withholding back. Now to fine tune the exemptions on that...

 

[MasterBlaster]

WilliamG:

So if I understand you correctly noting that for a married couple filing jointly with tax rates:

Married Filing Jointly & Qualifying Widow(er)
Tax Rates

2005 Taxable Income
Tax

Up to $14,600
10% of every dollar

$14,600 to $59,400
$1,460 plus 15% of the amount over $14,600



so if I wanted $50k of income, under your method I'd take $14600 out of the qualified(tax deferred) plans and the rest out of after tax (long term capital gains) accounts to minimize taxes.

Is that correct ? Is that what you were posting about ?

or do I take out of the qualified accounts $14600 plus $10000 for standard deduction and $6400 for the couple personal deduction for a total of $31000. So it would be $31k out of the qualified accounts and $19k out of after tax (long term cap gains) accounts ?

please enlighten me

 

[WilliamG]

MasterBlaster - correct on the $31k which will keep you within the 10% bracket. Similarly, you can take out up to $74,800 and stay within the 15% bracket. That is what we are currently doing and putting a little in Roths each year. We are taking more out of deferred because our taxable accounts are pretty drawn down from use when I first retired at 55. Didn't start taking from IRA until 59 1/2... bill

 

[cute fuzzy bunny]

Thats pretty much what we do. Keep the taxable ordinary income under the 10% limit, then take all the qualified dividends and capital gains the funds throw off and spend that. Apply some deductions and credits (the child credits and deductions are niiiice), and voila...very little to the tax man.

 

[MasterBlaster]

I noticed when poking around that there is a $1k savers credit if your AGI is below $50k for a married couple.

Does anyone take that credit. Or am I missing something here

 

[cute fuzzy bunny]

Thats a real one. But IIRC you can only deduct a percentage of what you contribute to a pretax retirement fund; below 30k you can get a credit for 50% of what you contribute up to a limit (which may be 1k); at 50k its only 10%.

This is for really low income people who contribute to a 401k/ira/403b.