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Old 11-05-2011, 11:23 AM   #1
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Post retirement tax rate

I was chatting with a retired friend a few days ago about my retirement calculations. He thinks I am being too conservative for one reason: The overall income tax rate (income tax and payroll tax) will drop dramatically when one retires.

I am wondering what others have found? Obviously, I won't be paying SS tax on my investment income that I withdraw. But what about pension payouts? And my understanding is that SS itself is currently not taxed unless one exceeds certain income levels.

He also mentioned that once retired I no longer have to save my current 15% of gross pay for retirement. Good point.
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Old 11-05-2011, 11:46 AM   #2
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Yep, no more payroll tax
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Old 11-05-2011, 12:00 PM   #3
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No more payroll tax, relatively light capital gains in the early years, no more big savings - yeah, our taxes plummeted although they will come back up a bit when we transition to withdrawals from tax deferred accounts. Run some scenarios through Turbo Tax and you should get a good idea of what to expect. Simply plug in your income sources (e.g. pension/SS) and a rough estimate dividends and capitol gains (including any realized gains for equities you will liquidate for withdrawals).
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Old 11-05-2011, 12:03 PM   #4
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The big changes in general income taxes I see are that, for my state, pensions and IRA/401k withdrawals are not taxed by the state. Federal taxes are still paid on pensions and IRA/401k withdrawals but not on Roth IRA withdrawals.

Post Retirement taxable income level may put you in a lower tax bracket and thus your federal income tax on retirement income may be lower. It all depends on $$.
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Old 11-05-2011, 12:22 PM   #5
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My retirement gross income is about 72% of my working income, but my net income is almost 90% of my working income. Losing the medicare tax, along with pension contibution of 14% was most of the change. Federal tax bracket did not change, however. Some state income tax savings did occur, though.
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Old 11-05-2011, 12:43 PM   #6
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I found it hard to believe how low my taxes would be in retirement, too, Chuckanut. I assumed my taxes would be over twice what they turned out to be.

Now that I'm retired, I'm happy to say that for me, state and federal taxes together total only 14% of my income.

A lot is going to depend on the source of your retirement income. Why not run a few test scenarios through Turbotax? That might help.
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Old 11-05-2011, 12:54 PM   #7
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I've been retired for over four years; DW still choses to wo*k, which increases our overall FIT rate.

Total FIT for last year was at 9%, with expected decreases once DW gives up her "day job" .

Luckly, in our state (PA) retirement income (including SS, pensions, and retirement investment withdrawls) are not subject to state nor local income tax.

Regardless of the future of tax rates (which nobody really knows), retirement has been good to us as far as taxes go.

In a bit over a year, I'll also will be able to apply for local real estate and services rate reduction, since I'll be officially an "old phart" of age 65 (not that I'm not an "old phart", today )...
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Old 11-05-2011, 12:57 PM   #8
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The biggest change in my tax rate is the elimination of the payroll tax, as yakers pointed out.

But since I ERed 3 years ago, I have seen other things which lowered my income taxes, mainly the federal income taxes. The first has been being able to deduct at least some of my health insurance premiums on Schedule A (and, sometimes, on my state income tax return). The next has been somewhat more of my investment income being dividends and LT cap gains, both taxable at lower (sometimes zero) rates.

I compared my 2010 taxes to my 2004 taxes, a year in which my overall income was about the same (I worked part-time from 2001-2008). My state income taxes were about the same, as the tax brackets are not indexed and all the nonwage income I have (not pensions or IRA distributions, I am too young to receive them) is treated equally. But my 2010 federal income tax bite was just over half of what it was in 2004. Yes, some of that was due to the indexing of the tax brackets, and there was no 0% tax bracket for dividends and LT cap gains (it was 5% IIRC). But between that and seeing my payroll taxes drop to zero caused my overall federal taxes to drop by nearly 40%!
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Old 11-05-2011, 01:56 PM   #9
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That's why you can do nice Roth conversions when you early retire, filling up your lower tax bracket. Once RMD's hit, with SS and a pension, I'll be back in the higher bracket again.
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Old 11-05-2011, 02:09 PM   #10
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Quote:
Originally Posted by rescueme View Post

In a bit over a year, I'll also will be able to apply for local real estate and services rate reduction, since I'll be officially an "old phart" of age 65 (not that I'm not an "old phart", today )...
A friend of mine did just that. By limiting his IRA withdrawals he is officially a low income retired dude. His property tax went from $2400 a year to $700 a year.

He just bought a new iPhone 4s. Paid about $600 for it. Your former tax dollars at work. :-)
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Old 11-05-2011, 02:30 PM   #11
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While my taxes are somewhat lower now than when traditionally employed, once RMD's start in 7 years, we'll be back fairly close to where we were, at least for FIT.
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Old 11-05-2011, 08:41 PM   #12
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But taxes are just one portion of your retirement expenses.

What about health care, travel, entertainment, etc, etc. These costs may go down for some, but up for others.

My FIT are low as I have kids in college and get deductions. It is all very specific to the individual. State income taxes are higher than FIT for me.

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Old 11-05-2011, 09:41 PM   #13
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Not retired, so it will be a while until I can truly answer the question. However, looking at my current AA, tax free interest on my muni bonds, and using "current income" tax rates for all of my equity dividend income including some NLY and other REITs, all of this coming out of taxable accounts as I cannot participate in my company's 401k and never invested in T-IRAs, and considering the two major itemized deductions I have (property tax at a bit over 10k and tithes and charitable contributions) plus personal exemptions for me and DW, and I end up between 5.5% and just under 7% depending on the projected amounts invested when I stop working. This is combined fed and state.

Point is that the tax bite depends on your AA and how you've invested. If my bonds were not munis and were paying similar interest, my taxes would be much higher. If they were corporates paying higher rates my tax bite would be much higher. There is risk, but there is risk in everything.

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Old 11-05-2011, 10:11 PM   #14
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My taxes dropped dramatically six figures my last year of working (it was fluke doing exercising options) to zero the last couple of years, capital gains tax loss carry forward.

With a smart asset allocation, index funds, dividend stocks in the taxable accounts, and bonds in tax deferred portion, you should be able to get your average tax rate down to perhaps 1/2 of your working rate. Even if your net income remains virtually unchanged. Now if you have a large pension say 70% of your final pay you taxes will be higher.
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Old 11-05-2011, 11:03 PM   #15
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Do I understand correctly that one will have to file quarterly in retirement?
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Old 11-05-2011, 11:08 PM   #16
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Do I understand correctly that one will have to file quarterly in retirement?

Yes you do. But if you get your taxes down to zero, you don't file quarterly anymore. (A very small constellation prize for 2008)
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Old 11-05-2011, 11:18 PM   #17
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Yes you do. But if you get your taxes down to zero, you don't file quarterly anymore. (A very small constellation prize for 2008)
Well, you don't actually "file." You just write a check, write "1040 ES" and the year and your SS number on it. Oh yeah...... there's that little quarter page form you can include in the envelope..... When you actually file in the subsequent year, you can send any money you haven't already sent to be added to the estimated payments you already made.

This solves money storage problems. Instead of having to find places to keep money all year and then sending it in by April 15th, you get to empty the bin every quarter and thus don't need such a big bin.
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Old 11-05-2011, 11:44 PM   #18
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Quote:
Originally Posted by Chuckanut View Post
I am wondering what others have found? Obviously, I won't be paying SS tax on my investment income that I withdraw. But what about pension payouts? And my understanding is that SS itself is currently not taxed unless one exceeds certain income levels.
He also mentioned that once retired I no longer have to save my current 15% of gross pay for retirement. Good point.
The feds will tax the taxable portion of your pension. (My father gets two pension checks each month-- one is non-taxable and the other is taxable. I'm not sure why and he no longer remembers.) Most states do not tax federal pensions.

States may not tax some pensions (depending on whether they're federal or state civil service), or where they're earned despite your current residence. Some states are very aggressive about chasing down their escaped relocated retirees to make sure they've taxed them for everything they can get.

Bob Clyatt mentions in "Work Less Live More" that the vast majority of pensioned retirees are in the 15% bracket. Living off your own dividends/cap gains may put you down into the 10% bracket, especially if you can beat the standard deduction. IIRC Trombone Al is a virtuoso of the 10% bracket.

Quote:
Originally Posted by Animorph View Post
That's why you can do nice Roth conversions when you early retire, filling up your lower tax bracket.
Huge advantage for us. We already know now that spouse's pension will kick us back up into the 25% tax bracket, although that bracket may be higher by 2022. (I doubt it'll be lower.) So we've been converting a little bit of conventional IRA every year (up to the top of the 15% bracket). Both of our IRAs should be all Roth by 2015.

Quote:
Originally Posted by Ed_The_Gypsy View Post
Do I understand correctly that one will have to file quarterly in retirement?
It depends on your sources of income. Your total tax bill might be less than $1000, which is below one of the thresholds for filing quarterly taxes. Many pensions will gladly make the income tax withholding for you, so you wouldn't necessarily have to pay quarterly. Some IRA custodians will withhold tax on your RMD.

You can work through the flowchart on page 18 of IRS Pub 505 (http://www.irs.gov/pub/irs-pdf/p505.pdf) or let tax software parse through your income, deductions, & credits.

The federal estimated-tax website allows you to set up an entire year of quarterly payments during one session. Some states aren't quite so sophisticated in their estimated taxes.
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Old 11-06-2011, 04:24 AM   #19
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In the past... I think there has been favorable tax conditions for retirees.

However, the US Fed government and state and local governments are burdened with debt. I believe retiree tax burden looking forward is a little unclear. Some of that tax burden could be increased sales tax and property tax. Plus SS and pensions (which has favorable treatment) might be changed in a progressive manner.

I think it is prudent to plan conservatively and hope for the best!

IMO - The biggest hit for most retirees (IMO) would be VAT or increase sales taxes. Some are proposing consumption oriented taxes.


If you are really well off... they are going to get the taxes!! But it will be at the margins using the current system (progressive).
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Old 11-06-2011, 06:36 AM   #20
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Quote:
Originally Posted by Ed_The_Gypsy View Post
Do I understand correctly that one will have to file quarterly in retirement?
Quote:
Originally Posted by clifp View Post
Yes you do. But if you get your taxes down to zero, you don't file quarterly anymore.
Quote:
Originally Posted by youbet View Post
Well, you don't actually "file." You just write a check, write "1040 ES" and the year and your SS number on it. Oh yeah...... there's that little quarter page form you can include in the envelope.....
Quote:
Originally Posted by Nords View Post
The feds will tax the taxable portion of your pension. (My father gets two pension checks each month-- one is non-taxable and the other is taxable.

It depends on your sources of income. Your total tax bill might be less than $1000, which is below one of the thresholds for filing quarterly taxes...

The federal estimated-tax website allows you to set up an entire year of quarterly payments during one session. Some states aren't quite so sophisticated in their estimated taxes.
We stopped doing DW's quarterlies when she sorta retired. But she gets an earned income stipend from a continuing association with her firm. She pays both the employer and employee portion of SS payroll tax but I have been handling this by increasing the Fed and state tax deductions on my pension. This year she could get a bonus for some extra work she did. If so, could she just file one "quarterly" to make up the difference? If so, where do you get the small form Youbet mentions?
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