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Taxes in retirement
Old 06-09-2007, 11:29 AM   #1
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Taxes in retirement

I hate appearing like such a novice in this question, but I am in my serious planning stages, and need to be certain of what I am doing. As I have mentioned in earlier posts, I do not have any tax advantaged accounts. (NO IRA, 401, etc) All my money has been in real estate, which I am liquidating now (including my own home) When I am done, I should have in the neighborhood of $1,500,000 after taxes (IRS bite)

In about 9 more months I will start receiving social security of about $20,000 a year. I am planning on living as conservatively as I can, and figure I need another $20,000 a yr. to cover expences. Now that figure does not include taxes, so here lies my question. I am trying to get a handle on what my taxes might actually be - given the type of portfolio I would like to have. My preferred split would be something like this.

Bucket # 1 (not planning on spending down, but living on interest)
$400,000 at 5% = $20,000 (My needed living expences)

Bucket #2
$500,0000 at 6% using bonds (not bond funds) Reits, maybe MLP's
Income: $30,000 (probably less as Reit div are low now)

Bucket #3,
$600,000 equities though I would like $300,000 in Div. Stocks)
Income $9,000

Social Security $17,000 (taxed at ordinary tax rate) (only 85% of it taxed)
Bucket #1 $20,000 (taxed at ordinary tax rate)
Bucket #2 $30,000 (taxed at ordinary tax rate)
Bucket #3 9,000 (taxed at $15% cap gains)
_______
$76,000 income

My taxes would have to come out of bucket #2 each year, but that should only take away about $10,000 of what it earns, with the remaining amount left to grow for when I need to take additional income. Bucket #3 remains untouched until I die.

Looking at the 2006 tax schedule, if I did it right, it appears my taxes under this scenerio would be about $9,187. Does this appear right to you?
Are there any ways you could cut this tax liabillity. I know if I were to sell a losing stock in my bucket #3, this would lessen it, but the idea there is to leave it alone. Is there anything that I am missing or don't understand?
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Old 06-09-2007, 01:17 PM   #2
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You should purchase a copy of TurboTax and feed in YOUR numbers. I use my 2006 TT every month or so.
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Old 06-09-2007, 01:23 PM   #3
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Married? Over 65?

You need to earn some qualified dividends instead of dividends taxed as ordinary income. That would save you 40% of the tax on the on those dividends.
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Old 06-09-2007, 01:31 PM   #4
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Another suggestion is to use a low-cost variable annuity to shelter those REIT dividends from taxes.
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Old 06-09-2007, 05:52 PM   #5
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The idea of annuity goes against my needs which is to leave as much as I can to my son when I die. I don't know any other vehicles to shield this income as you suggest.

What qualified dividends besides stock dividends are you referring to?
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Old 06-09-2007, 06:02 PM   #6
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The tax treatment of the source of your retirement funds is key.

In Canada a retiree could minimize taxes by funding as much as possible through dividend withdrawals. The best case scenario: on $50K of dividend income from Canadian companies, the tax payable for someone living in Ontario would be only $914.29. The income tax calculator at Walter Harder & Associates Home Page is very useful in simulating scenarios. I have looked but have not been able to locate a similar calculator for the US.
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Old 06-09-2007, 08:06 PM   #7
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Quote:
Originally Posted by modhatter View Post
The idea of annuity goes against my needs which is to leave as much as I can to my son when I die. I don't know any other vehicles to shield this income as you suggest.

What qualified dividends besides stock dividends are you referring to?
I'm not talking about an immediate annuity, but a variable annuity that would be passed onto heirs. Vanguard and TIAA-CREF can help out with these. Var annuities are one of those "last-resort" things that folks with other tax-deferrred accounts would not want to have, but you ain't got no tax-deferred accounts, so perhaps you might be a good candidate for a low-cost variable annuity from Vanguard. Maybe some others can comment on this suggestion?

Qualified dividends are stock dividends, so no besides. You have selected an asset allocation with lots and lots of fixed income. Perhaps, you want to revisit that decision and have more ETFs and funds that pay qualified dividends?
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Old 06-09-2007, 08:28 PM   #8
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I have used a Vanguard variable annuity since 2002 to hide some of my after tax investments from taxes. You don't have to convert it to an annuity, you can withdraw from it just like you can from an IRA, only paying taxes on the gains just like a regular IRA.

You can pick and choose among VG funds, and yes the expenses are a little higher but I have calculated the returns myself every year and they have been quite acceptable. I have 65% in VG bond index and 35% in VG stock index.

My personal returns have been

2002 12.63%
2003 9.94%
2004 6.46%
2005 3.55%
2006 8.02%
2007 (est.)4.13%
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Old 06-09-2007, 09:43 PM   #9
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I guess I don't know enough about them then. I will have to read up and educate myself better. Thank you very much for the suggestion.
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Old 06-10-2007, 07:30 AM   #10
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I gave my input into tax consequences of retirement investing in your "bucket" thread here:
New bucket approach

I think that your income orientation not only punishes you heavily tax-wise, but it makes you vulnerable to inflation.

Audrey
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