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Old 10-11-2017, 10:55 AM   #41
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Originally Posted by Sandy & Shirley View Post
I’m a broken record, but here I go again!

When you take your MRDs, look at the 25% federal bracket and take all that you can up to, but never over that amount. Having the extra cash on hand when a big bill comes along later can save you a lot!

The 25% Federal bracket with the 85% taxability of your SSB creates a marginal rate of 46.25% and if you are pushing dividend income over that limit the initial marginal rate is actually 55.5%. A marginal rate is how much your taxes go up because you take another dollar out of your IRA, it is not the same as your tax bracket, that bracket is only one part of the marginal rate.
You say "When you take your MRDs, look at the 25% federal bracket and take all that you can up to, but never over that amount." Why?

For example, a 70 year old couple has $45,000 of SS and $136,850 of pensions/tIRA withdrawals for total income of $181,850 and takes standard deduction. Their taxable income after the 15% reduction to SS is the top of the 25% tax bracket of $151,900 (in 2016 since TaxCaster is still stuck in 2016) and they pay $29,518 in tax (16% of $181,850 in total income... not all that bad).

Add an additional $10,000 of tIRA withdrawals and they pay $32,318 in tax, additional $2,800 or 28%, which makes sense since they were previously at the top of the 25% tax bracket and the extra $10,000 is in the 28% tax bracket.

So if the person is willing to pay the additional $2,800 why should they "never" go over that amount?

I understand that at some lower levels of income that marginal rates can be onerous as they make more SS taxable, etc but once you are in the 25% bracket it is staight forward.

Quote:
Total Income ? $175,100
Total Deductions ? $15,100
Total Exemptions ? $8,100
Taxable Income ? $151,900
Regular Taxes ? $29,518
Alt. Minimum Tax ? 0
Additional Taxes ? 0
Tax Credits ? 0
Tax Payments ? 0
You Owe ? $29,518
Marginal Tax Rate ? 25%
Quote:
Total Income ? $185,100
Total Deductions ? $15,100
Total Exemptions ? $8,100
Taxable Income ? $161,900
Regular Taxes ? $32,318
Alt. Minimum Tax ? 0
Additional Taxes ? 0
Tax Credits ? 0
Tax Payments ? 0
You Owe ? $32,318
Marginal Tax Rate ? 28%
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Old 10-11-2017, 05:58 PM   #42
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Old 10-12-2017, 10:42 AM   #43
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Quote:
Originally Posted by pb4uski View Post
Quote:
Total Income ? $175,100
Total Deductions ? $15,100
Total Exemptions ? $8,100
Taxable Income ? $151,900
Regular Taxes ? $29,518
Alt. Minimum Tax ? 0
Additional Taxes ? 0
Tax Credits ? 0
Tax Payments ? 0
You Owe ? $29,518
Marginal Tax Rate ? 25%


Quote:
Total Income ? $185,100
Total Deductions ? $15,100
Total Exemptions ? $8,100
Taxable Income ? $161,900
Regular Taxes ? $32,318
Alt. Minimum Tax ? 0
Additional Taxes ? 0
Tax Credits ? 0
Tax Payments ? 0
You Owe ? $32,318
Marginal Tax Rate ? 28%
According to:
https://www.fool.com/retirement/2016...me-how-do.aspx

The average Married Filing Jointly return is for $117,795. Your examples are for Total Income $175,100 and 185,100. That is for Joint returns from 48.65% to 57.14% above the national average.

Yes, you are correct, if your income is well above the national average you are well past the beginning of the 25% bracket. More power to you, you can look in the rear view mirror and just say that 15% of your SSB was tax free.

For the rest of us, the AVERAGE American tax payers, that 25% bracket is something that we have to be aware of and plan to avoid if it is possible to do so.

Added 3 hrs later to show what the AVERAGE tax payer is facing!


Let’s look at the average American couple. Each earning $60,000. That is a total of $120,000 which is close $117,795 mentioned in the article.

Their full retirement age SSB would be $25,360 each and if they were saving 10% of their income for retirement, their standard of living was $108,000.

Joint SSB? $50,720
SOL gap? $57,280
Basis? $82,640 basis for taxable SSB is SSB/2 plus other taxable income
50%? $6,000 half of basis between $32,000 and $44,000
85%? $32,844 85% of basis over $44,000
Taxable SSB? $38,844
AGI? $96,124 SOL gap plus Taxable SSB
Deduction? $12,700
Exemption? $8,100
Both over 65? $2,500
Taxable? $72,824

The 25% bracket starts at $75,900 which is only $3,076 additional dollars of income and at the 85% taxability rate that is only $1,663 of additional taxable income before the 25% bracket starts which is actually a marginal rate of $46.25%.

Bottom line is that is how close the AVERAGE American couple is to that massive tax rate. Those in the upper income levels have no idea what the AVERAGE American is facing!


Let me put this another way. If your income pushes you beyond the point where 85% of your SSB has become taxable, you are back in the 25% bracket. If you have a sudden expense of $3,000 you would have to withdraw $4,000, give the IRS $1,000 to have the $3,000 to pay your bill.

If you are just at the start of the 25% bracket and have that same $3,000 expense, you would have to withdraw $5,581 and give the IRS $2,581 to have the same $3,000 to pay your bill.

When you are used to living on $175,000 or more, $4,000 is a minor expense of 2.29% of your normal income. When you are used to living on $120,000, $5,581 is considerable a larger expense of 4.65% of your normal income.
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Old 10-12-2017, 02:05 PM   #44
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Interesting, deflective response. Were you a politician?

I conceded in my post "I understand that at some lower levels of income that marginal rates can be onerous as they make more SS taxable, etc but once you are in the 25% bracket it is staight forward." We've already been down the road of the fact that marginal tax rates can be onerous at certain levels of income.

My post was in response to your post stated "When you take your MRDs, look at the 25% federal bracket and take all that you can up to, but never over that amount." I was just proving that your statement was odd, because the next tax bracket after 25% is 28% and if someone ignores your sage advice and goes beyond the top of the 25% tax bracket that they pay 28%... as one would expect.

Do you care to address that criticism or concede that what you wrote was just wrong or start some further deflection?
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Old 10-12-2017, 03:12 PM   #45
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The problem exists at the start of the 25% bracket, which is currently the transition from 15% to 25%. For a large majority of us the 85% taxability of our SSBs ends within the beginning of the 25% bracket. This causes the start of the 25% bracket to have a marginal rate of 46.25% if you do not have Qualified Dividend income and 55.5% if you do. And yes, at very low SSB levels it ends before you even hit the 25% bracket.

Once 85% of your SSB has been taxed, your marginal rate drops back to the actual bracket of 25%. Maybe my wording could have included an extra three words, “the start of”.

"When you take your MRDs, look at the start of the 25% federal bracket and take all that you can up to, but never over that amount." The problem exists at the start of the 25% bracket, not the end of the 25% bracket.

I will NOT admit that what I wrote was “just wrong”, it was “just misunderstood”! SMILE!
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Old 10-12-2017, 04:11 PM   #46
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Ok, I'll let you off the hook... it was poorly written ... the way it was written suggested taking to the top of the 25% tax bracket but no higher, which is not what you meant as you have now explained.

Even as you have clarified it, it is still unclear how far to go.... "take all that you can up to, but never over that amount".... what is "that amount"?
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Old 10-12-2017, 04:58 PM   #47
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That amount is $37,950 for a single retiree and $75,900 for a retired married couple, unless the proposed new tax code changes the 2017 brackets.

If you do not have LTCG or Qualified Dividends, then you want to limit your taxable income to those levels. If you do have LTCG of Dividends, then you want to limit you taxable income plus the gains and dividends to that level.

Shirley and I are a domestic couple, two singles living as one. We start doing our year end taxes at the start of each year to see how much we can withdraw from our Traditional IRAs and stay below our single limits. As the year goes on, if we approach those limits we make decisions on using Roth or other income sources if necessary. Sometimes we also do Roth Conversions near the end of the year if the market seems right.

We also, while planning for retirement, took advantage of the 2008 and BRexit downturns to do Recharacterizable Roth Conversions. This basically allowed us, for example, to convert what was $10,000, pay the taxes on only $8,500 (its value in the down market), and end up with $12,000 (end of year value) in our Roth at the end of the year. We did each symbol into its own account, waited until December (I know we had until April), determined which symbols had the best returns, and recharacterized (undid) the rest down to the original limit we set for ourselves at the start of the process.
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Old 10-12-2017, 05:09 PM   #48
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Still clear as mud... amounts that you cited are taxable income for the top of the 15% tax bracket for 2017 (or as you say, the start of the 25% tax bracket).

So to use the example we had earlier... let's say a 67 yo married couple has $50k of SS and $10k of qualified dividends/LTCG... how much would you recommend that they do in Roth conversions to optimize? Assume standard deduction.
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Old 10-12-2017, 07:39 PM   #49
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If they are already on Social Security, Roth Conversions can be extremely tricky. Even doing them at the 15% level costs 27.75% with the taxability of their benefits.

The best time for conversions is before you start your benefits. Once started, they are still possible, but like I said, you have to be very careful.

Shirley and I are both single, so let me give you an example of what I am trying to pass on.

If each SSB is $35,000, $32,120 of other taxable income would cause $17,777 of that SSB to be taxable. The AGI would be $49,897 with $6,350 standard deduction plus $1,550 for being over 65 and $4,050 for our exemption, this gives us a taxable income of $37,947 which is $3 less than the $37,950 15% max.

Each of our gross incomes could be $67,120, $134,240 together without crossing into the 25% / 46.25% tax bracket. If we needed more we would have the Roth that we created before we started our SSB.

The 46.25% bracket would end when 85% of our SSB was taxable. This would happen when our other taxable income reached $46,200 at which time our tax bracket would drop back to 25%. The size of the 46.25% bracket would be $14,080 ($46,200 minus $32,120) for each of us. The taxes due on that $14,080 would be $6,512 so we would each only be able to spend $7,568 of the $14,080 that we withdrew from, for example, our IRA.

You need $6,500 to pay for a cruise you want to take and you have to withdraw $14,000 to get it! That is gross and what I want everyone to be aware of. All of the background math is complex. The key to all of this is to plan in advance what your retirement budget will be and where that money will come from. Do the tax calculations and plan in advance where your needed income will come from so that you can avoid the 25% standard tax bracket.
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Old 10-13-2017, 12:52 AM   #50
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Currently my RMDs are about what I would otherwise take from my 401(k) for expenses. BUT RMDs accelerate AND if one is lucky, the value of the 401(k) (or tIRA, etc.) can increase due to good results. Hence, I may eventually be taking much more in RMDs than I need. A good problem to have, I suppose.

My problem with investing the excess outside of tIRA/401(k) is that the book keeping can be more complicated (keeping track of trades, what's taxable at what level, keeping paper work, etc.) So, I could see me dumping the excess into CDs or worse just to avoid dealing with the book keeping. I know some of you thrive on this stuff but I hate it. I've always used an accountant for my taxes, but even then, I have to keep track of all the bits and pieces of paper that come in. YMMV
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Old 10-13-2017, 05:35 AM   #51
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Very different from my experience... I have both taxable and tax-deferred accounts... they operate the same other than tax reporting and Vanguard does all the "bookkeeping".

The only real difference for me is that when I sell the taxable accounts I have to decide which lots to sell for tax purposes.
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Old 10-13-2017, 08:02 AM   #52
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My problem with investing the excess outside of tIRA/401(k) is that the book keeping can be more complicated (keeping track of trades, what's taxable at what level, keeping paper work, etc.) So, I could see me dumping the excess into CDs or worse just to avoid dealing with the book keeping. I know some of you thrive on this stuff but I hate it. I've always used an accountant for my taxes, but even then, I have to keep track of all the bits and pieces of paper that come in. YMMV
Pieces of paper? Maybe you are thinking of the time before brokerages had to keep track basis, then I can understand some of the pain you are talking about. If you trade in simple stuff (MF, ETF, Stocks) for tax reporting you should just need the 1099-composite for your taxes. I would recommend taking MRD in cash as I'm not sure how well tracking basis and date would work when moving from IRA to after tax. You would want the basis on the day of MRD and purchase on that date.
If you're concerned more with real time info so you can decide which lots to sell (to know date, basis, embedded gain/loss, etc), both brokers I use (schwab & fidelity) have simple web tools to sort that out.
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Old 10-13-2017, 08:12 AM   #53
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Currently my RMDs are about what I would otherwise take from my 401(k) for expenses. BUT RMDs accelerate AND if one is lucky, the value of the 401(k) (or tIRA, etc.) can increase due to good results. Hence, I may eventually be taking much more in RMDs than I need. A good problem to have, I suppose.

My problem with investing the excess outside of tIRA/401(k) is that the book keeping can be more complicated (keeping track of trades, what's taxable at what level, keeping paper work, etc.) So, I could see me dumping the excess into CDs or worse just to avoid dealing with the book keeping. I know some of you thrive on this stuff but I hate it. I've always used an accountant for my taxes, but even then, I have to keep track of all the bits and pieces of paper that come in. YMMV
As pb4 says, just let Vanguard or Fido or any other place track it for you.

People here may make it sound more complicated by talking about selling by specific ID, tax loss harvesting, etc, but 1) this really isn't too complicated or 2) you can just choose FIFO as your cost basis method and it will probably make very little difference.

All these places will send you a consolidated 1099 at the end of the year that has all your dividends and trades on it, including the cost basis info, so you just hand that document to your accountant just like you'd hand them your interest statement on the CDs.
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