SS at FRA vs. at 70 - Unexpected results

[BBQ-Nut]

Personally, I find the decision for when to take SS much harder cuz I think one should factor in other variables such as what would taxes do at FRA vs 70 when RMDs hit. Depending on deferred account balances, that 'double whammy' could be a factor - maybe, just maybe it makes more sense to draw SS at FRA so that your payment is lower and at age 70 your AGI won't bump you into the next marginal tax bracket when RMDs hit.

And how does what age you select SS effect your WR?

Maybe, just maybe it makes more sense given ones savings vs expenses to take SS earlier to reduce your WR and what effect that will have on savings longevity.


Still...at this point I'm with the other lemmings - going to file and suspend -start at 70.

 

[ducky911]

I am 63 and deferring my ss. During this time I am enjoying zero taxes on dividends (large amount close to the limit when including rental income). I fear that if I had SS income now that I would be paying 15% taxes on these dividends.

 

[nuke_diver]

Interesting discussion. I think I need to build a spreadsheet to try and figure out some of this for myself. Lots of good things to consider like have BBQ-Nut suggests.

 

[pb4uski]

I wonder if it would be easier and more reliable to simply run different scenarios (62, FRA, 70) in firecalc, QLP or your favorite retirement planning tools and look at comparative success rates, ending balances, etc rather than building a spreadsheet since spreadsheets are notorious for having errors.

 

[nuke_diver]

I thought that as well but a quick run yesterday and I wasn't sure if it was handling things correctly (and IIRC firecalc does not do taxes/tax rates). Also I don't think it will give you a crossover point. But granted I did not use fixed numbers yesterday. Then again it will look like I'm working when really I am not

 

[athena53]

Been there, done that.

I hit the "withdrawal rate above my comfort threshold" in late 2008 and filed for SS at age 62. I'd planned to wait until FRA or later, but the market gods had other plans.

That plan is in the back of my mind, too. I've been through some bad market drops and have seen the recoveries. When I was employed I had the advantage of being able to invest new money at bargain-basement valuations. That's not true anymore. I'm profoundly grateful the market has co-operated since I retired last year at 61 but if we have a major "correction" I could see filing for SS early on the assumption that it's better than taking money out of investments in a bad market.

 

[pb4uski]

I thought that as well but a quick run yesterday and I wasn't sure if it was handling things correctly (and IIRC firecalc does not do taxes/tax rates). Also I don't think it will give you a crossover point. But granted I did not use fixed numbers yesterday. Then again it will look like I'm working when really I am not

Agree that firecalc will not give you a crossover point, it will just let you know which scenario is more successful or results in higher minimum, average and maximum balances.

What-if in QLP will show you a crossover point as it displays a line for each of two scenarios and you can see where they cross.

 

[pixelville]

As others have pointed out, taking taxation into effect is very important since it would change your "take home".
For those not aware of the unexpectedly high marginal tax rates that are different from your tax bracket, see the Bogleheads wiki
Taxation of Social Security benefits - Bogleheads

I have seen so many cases in my TaxAide volunteering where seniors are not aware of this as they take their IRA distributions and end up with surprising tax liabilities.
Hope congress will smoothen taxation of SS benefits at some point instead of these cliffs.

 

[Bikerdude]

I have seen so many cases in my TaxAide volunteering where seniors are not aware of this as they take their IRA distributions and end up with surprising tax liabilities.
Hope congress will smoothen taxation of SS benefits at some point instead of these cliffs.

Well since the income limits were set in 1986 and have not been adjusted for inflation I would not hold much hope that they will have a change of heart anytime soon.

 

[athena53]

Personally, I find the decision for when to take SS much harder cuz I think one should factor in other variables such as what would taxes do at FRA vs 70 when RMDs hit. Depending on deferred account balances, that 'double whammy' could be a factor - maybe, just maybe it makes more sense to draw SS at FRA so that your payment is lower and at age 70 your AGI won't bump you into the next marginal tax bracket when RMDs hit.

I know this has been mentioned before but this time I decided to do a calculation of my RMD at age 70 (8 years from now) assuming 6% annual return and that we'll withdraw from only the taxable accounts until then.

Wow. My RMD would be more than I need to live on, all of it taxable as ordinary income, on top of whatever capital gains distributions I'll get from the after-tax accounts and $20K in pensions. Assuming tax rates won't decrease, that makes 85% of my SS taxable at 25%. At least.

I really need to rethink the decision to postpone SS till age 70 given how much of it will disappear in taxes. I may be better off collecting the lower amount starting now.

 

[pb4uski]

I don't see how deferring SS and withdrawing solely from taxable helps you, but if as a result you are in the 15% bracket and can do Roth conversions (or simply withdraw from tax-deferred rather than taxable) to the top of the 15% tax bracket then that should reduce your balances subject to RMDs.

I'm deferring pensions and SS as much as possible in favor of Roth conversions to the top of the 15% tax bracket in the hope of avoiding or at least reducing my time in the 25% tax bracket once RMDs begin.

 

[pixelville]

I know this has been mentioned before but this time I decided to do a calculation of my RMD at age 70 (8 years from now) assuming 6% annual return and that we'll withdraw from only the taxable accounts until then.

Wow. My RMD would be more than I need to live on, all of it taxable as ordinary income, on top of whatever capital gains distributions I'll get from the after-tax accounts and $20K in pensions. Assuming tax rates won't decrease, that makes 85% of my SS taxable at 25%. At least.

I really need to rethink the decision to postpone SS till age 70 given how much of it will disappear in taxes. I may be better off collecting the lower amount starting now.

Also check if converting IRA to Roth before RMDs while delaying SS makes more sense in your case.

 

[unno2002]

[FONT=&quot]If I was still working, I might consider holding off on collecting SS.[/FONT]
[FONT=&quot]Being retired, my intent is to file for payments as soon as I can.[/FONT]
[FONT=&quot] [/FONT]
[FONT=&quot]My opinion, if I can get the money, and don’t need it, then I can collect it and invest it somewhere that provides us a greater benefit then the purported difference between “early” and “full” retirement dates. [/FONT]
[FONT=&quot] [/FONT]
[FONT=&quot]Heck, I’m not THAT positive I’ll live to full retirement, or that some other aspect might prevent any SS payment from being received by us.[/FONT]

 

[athena53]

Also check if converting IRA to Roth before RMDs while delaying SS makes more sense in your case.

I need to play with the numbers some more. I'd planned to do the Roth conversion up to the top of the 15% tax bracket every year and I can see that taking SS will reduce the amount I can take out of my IRA and convert to a Roth. Too many variables! Fortunately, not a decision I need to make immediately.

 

[pb4uski]

Yes, that is the principal reason I am deferring SS and pensions to maximize roth conversions before RMDs begin and pay 15% rather than 25% or more. The longevity insurance aspect of taking SS late is an added bonus.

 

[latexman]

Yes, that is the principal reason I am deferring SS and pensions to maximize roth conversions before RMDs begin and pay 15% rather than 25% or more. The longevity insurance aspect of taking SS late is an added bonus.

Is there a penalty (10%?) if these converted Roth monies are withdrawn in less than 5 years? Or, if the Roth IRA was set up 5 years prior, can the monies be withdrawn penalty free immediately?

 

[pb4uski]

If you are over 59 1/2 and the Roth account is over 5 years old you can withdraw at any time with no penalty. Other than that, it is a bit complicated, see the table below for details.

Roth IRA Distribution Table

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD NOT MET

Contributions: Tax-No; Penalty-No
Conversions: Tax-No; Penalty-Yes (Taxable Portion)
Conversions: Tax-No ;Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-Yes

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD MET

Contributions: Tax-No; Penalty-No
Conversions: Tax-No; Penalty-No (Taxable Portion)
Conversions: Tax-No; Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-Yes

OVER AGE 59.5
LESS THAN FIVE YEARS SINCE OPENING FIRST ROTH IRA

Contributions: Tax-No ;Penalty-No
Conversions: Tax-No; Penalty-No (Taxable Portion)
Conversions: Tax-No; Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-No

OVER AGE 59.5
FIVE YEARS OR MORE SINCE OPENING FIRST ROTH IRA

All Distributions Are Qualified

 

[bingybear]

If you are over 59 1/2 and the Roth account is over 5 years old you can withdraw at any time with no penalty. Other than that, it is a bit complicated, see the table below for details.

I have a question on the following.... (just trying to figure this stuff out myself)

OVER AGE 59.5
FIVE YEARS OR MORE SINCE OPENING FIRST ROTH IRA

If you have a roth and then roll over an IRA to the Roth later, I think this will restart the 5 year rule even if you are over 59.5 years old. If so, I'd assume you don't have complete penalty free withdraws. However, I think (not sure ... asking here) that in that case one could withdraw all contributions... including the rollover without being taxed. Is this correct?

 

[pb4uski]

My understanding is if you over 59 1/2 that you can withdraw an amount equal to your contributions and rollovers penalty and tax free. If you are over 59 1/2 the only limitation is that growth/earnings are penalty-free but are taxable unless you have had a Roth account for 5 years.

 

[ERD50]

...
I'm deferring pensions and SS as much as possible in favor of Roth conversions to the top of the 15% tax bracket in the hope of avoiding or at least reducing my time in the 25% tax bracket once RMDs begin.

Also check if converting IRA to Roth before RMDs while delaying SS makes more sense in your case.

I need to play with the numbers some more. I'd planned to do the Roth conversion up to the top of the 15% tax bracket every year and I can see that taking SS will reduce the amount I can take out of my IRA and convert to a Roth. Too many variables! Fortunately, not a decision I need to make immediately.

I'm sure this has been discussed before, but I need to get on the stick and check this out. Does anyone have a spreadsheet that can help in the decision?

My 401K rollover IRA has really grown, and DW and I have smaller trad IRAs as well. Roughly 2/3rd of our nest egg is deferred, so will be taxed as income when we take it. I turn 60 this year, so 70 1/2 suddenly doesn't seem like some incomprehensibly far-off future event - gotta start planning!

I've done minimal Roth conversions to date, partially because I didn't want to have income above the point where my kid's education credits become limited - but that ends this year anyhow (yeah!). That's a steep slope, and didn't want to risk it, though I could have done more. I recently sold off most of my Hi-Yield bond fund (the ~ 80% that had low cap gains), and bought BRK/B (no dividends) - so now I've substantially reduced my taxable dividends, and that will leave a lot more room for ROTH conversions within the 15% bracket.

Of course, no way to know if trading Hi-Yield for BRK/B is good/bad, but I'll accept that risk.

Are there any other super-low dividend investments?

I'll start a new thread if that is requested, just thought it kind of fit here, and I can probably be pointed to the info.

-ERD50

 

[pb4uski]

This has been debated enough that I'm quite surprised that an old hand like you isn't all over it.

You can get a pretty good inkling if you'll have an issue by taking a proforma tax return assuming that you are now 71 and include SS, pensions if any and RMDs based on your current tax-deferred balances and see what your marginal tax rate is. If it is 25% or more, then I would think it would typically be beneficial to convert to the top of the 15% bracket. In 2014 my incremental tax on my conversion to the top of the 15% bracket was 10% (incremental federal tax divided by conversion amount... state was 3% on top of that but may not apply to many here) so I save 15% compared to if I wait, which for me is real money (savings are about 10% of our current annual living costs).

The conversions is invested in the same ticker in my Roth as it was in my tIRA so what it is invested in doesn't matter to me.

I have created my own spreadsheet that compares out NW with and without Roth conversions but it is very complicated so I would not be comfortable sharing it but it suggests that our age 100 NW would be 17% higher with Roth conversions versus no Roth conversions.

 

[ERD50]

This has been debated enough that I'm quite surprised that an old hand like you isn't all over it. ...

Seems odd, doesn't it? But I have a strong procrastination streak in me, that fights my analytical, 'run the numbers' side. The procrastinator says, 'good idea, but you can do it tomorrow'....

You can get a pretty good inkling if you'll have an issue by taking a proforma tax return assuming that you are now 71 and include SS, pensions if any and RMDs based on your current tax-deferred balances and see what your marginal tax rate is. If it is 25% or more, then I would think it would typically be beneficial to convert to the top of the 15% bracket.

Right, I guess it isn't much (if any) more complex than that.

In 2014 my incremental tax on my conversion to the top of the 15% bracket was 10% (incremental federal tax divided by conversion amount... state was 3% on top of that but may not apply to many here) so I save 15% compared to if I wait, which for me is real money (savings are about 10% of our current annual living costs).

Uh-oh, not sure I'm following this. How was the incremental on the conversion less than 15% - or were you starting in the below 15% bracket? I'm already in the 15%, but maybe not now that I removed the dividend paying bond fund.

Good point on state taxes, I'll check those too.

-ERD50

 

[pb4uski]

....Uh-oh, not sure I'm following this. How was the incremental on the conversion less than 15% - or were you starting in the below 15% bracket? ..

The tax on the conversion ends up being less than 15% because a lot of my income is qualified dividends and LTCG when get taxed at 0% so the Roth conversion gets the benefit of deductions and personal exemptions and the 10% bracket.

So for example, let's say we have $40,000 in qualified dividends and LTCG and take standard deductions. If we do no Roth conversions our tax is nil.

Our income can be as much as $91,400 ($73,800 TI for top of 15% tax bracket + $12,400 std dedn +$7,900 personal exemptions) and still be in the 15% bracket. So after the $40,000 of qualified dividends and LTCG we can do up to $51,400 of Roth conversions. Adding $51,400 of Roth conversions to the $40,000 of qualified dividends and LTCG result in a tax of $4,166 (or 8.1% of the $51,400).

How can this be if we are in the 15% bracket? Because the $51,400 gets some benefit from the standard deduction and personal exemptions and is taxed "first" at lower rates, and the $40,000 is then taxed at 0%.

You can prove this by just taking out the $40,000 but leaving in the Roth conversion... the $4,166 tax doesn't change. Or alternatively, the tax is based on TI of $33,800 ($51,400 Roth conversion - $12,400 std dedn - $7,900 personal exemptions) and applying 10% to the first $18,150 and 15% to the remaining $15,650.

Within a couple bucks anyway.

Sweet, huh!

 

[ERD50]

The tax on the conversion ends up being less than 15% because a lot of my income is qualified dividends and LTCG when get taxed at 0% so the Roth conversion gets the benefit of deductions and personal exemptions and the 10% bracket. ....

Within a couple bucks anyway.

Sweet, huh!

Got it, thanks! I'll add these notes to my file.

-ERD50

 

[latexman]

If you are over 59 1/2 and the Roth account is over 5 years old you can withdraw at any time with no penalty. Other than that, it is a bit complicated, see the table below for details.

May we have the table link/reference?