Withdrawal Rates and Taxes

[walkinwood]

i opened your spreadsheet and what i noticed right off the bat was that you werent paying any taxes on your taxable account and that aint right. you still have to pay taxes on the gain in the taxable account.

Thanks. I forgot to account for that.

 

[smjsl]

My taxes were less than 16% of AGI, not of total or gross income. That is, my effective tax rate would be even lower if I included the 401(k) contributions.

In that case, can you clarify how you reduced your at least $44828 on line 44 of your 1040 (to be in 33% bracket) + whatever AMT tax you have on next line by at least 12800 on lines that follow. You said you did not have child credits. This only leaves foreign tax credit deductions - is that it? You had ~13k in foreign credit deductions? (which by the way means you actually paid at least that much in foreign taxes via your foreign funds / companies)

You can hold CDs in IRAs rather easily. If you don't have an IRA, then get one.

My IRA is very small. I did not qualify for deductible IRAs due to my income. Couple of years ago I started putting 5k max into non-deductible ones to convert them to Roth, but honestly, 5k/year is not going to make much difference for a long while... sure 10 years from now I will have 50k (and with 4% CD interest, ~62k.) - but it's nothing to write home about...

I also realize that most of the tax-savings tips amount to giving away your money to someone besides the IRS. Either way that leaves you with less to spend on yourself.

Exactly... I am actually trying to maximize my after-tax savings, not minimize them

As some point, your portfolio income should exceed your W2 income. This is why you want to be set up tax-efficiently now, so that you don't have to move things around in the future with the associated tax costs.

I do realize that not everyone can use some of the things I use, but many people put bonds in taxable and stocks in 401(k)s. That's bass-ackwards and costs them in extra taxes.

Good points

 

[clifp]

and just what were your AGI and deductions? if you dont make that kind of income then you wont be paying that kind of taxes. i am not saying it is common for retired people on this board to pay that kind of taxes but then they arent making that kind of money either (and of course it makes a difference how you get that income, whether it is tax favored (like LTCG and dividends) or not favored (like interest or STCG)). just becauase you arent making that kind of income doesnt mean someone else isnt. remember the high interest rates of the early '80s? if someone investing a million back then was concerned about investing in the stock market so s/he invested in bonds (and other loan type instruments) s/he could have been pulling down 16% interest on the million and thus been paying that amount in taxes (especially since tax rates were higher). and just because you dont get that kind of a taxable return on your money now doesnt mean nobody does.

yes i picked an extreme example (16% taxable income) to make my point but that doesnt mean it is invalid, instead it just shows off my point. what if you were getting 12% instead of 16%?.

Ok, I went back and looked at some returns after my transitions years (99-2000) my AGI ranged from 80K-125K and the tax ranged from $5,400 to 12,400. So roughly 7-10% and of course this year with my AGI dropping to 50K my tax dropped to $116 so I actually paid negative taxes. I didn't get the $200 ($300?) stimulus check but Turbo Tax says I now qualify. Deductions ranged from the standard deduction to around 15K. (mortgage interest, property taxes, contributions)

Of course most of my income is qualified dividends, MLPs, some tax exempt bonds, and capital gains. But it isn't by accident that my IRA consists mostly of bonds, REITs, and a couple of non-dividend stocks like Berkshire.
Where as my taxable account has only a GNMA fund and smattering of money markets/CDs that is taxed at regular income rates and most everything else is index funds, dividend paying stocks which are taxed lightly

My point is that retirees often overestimate the amount of taxes they owe in retirement. I know I did. I found I have far more control over the taxes I pay as retiree than I ever did while I was working. If want to lower my AGI to take advantage of special tax breaks of using saving bonds to pay for educational expense, I just hold off realizing capital gains that year.

So while your examples are possible I just don't think they are very likely, if you do even a 1/2 way decent job of asset location with your portfolio. You just wouldn't owe $36,000 in taxes on a million dollar portfolio and thus be left with only $4,000 to spend from your 4% SWR. It just ain't going to happen. Even those 16% 30-year bonds from the 70s have matured LOL.

Now as to your other point that preparing your portfolio for retirement can involve a great deal of taxes. I completely agree, in fact during my transition years I paid hundreds of thousand in taxes, due exercising stock options, selling my portfolio of high-tech stocks and buying bonds, and truly hellish experience with the byzantine world of AMT. I would certainly recommend that you base you SWR on your assets after you pay your taxes.

 

[jdw_fire]

So while your examples are possible I just don't think they are very likely, if you do even a 1/2 way decent job of asset location with your portfolio. You just wouldn't owe $36,000 in taxes on a million dollar portfolio and thus be left with only $4,000 to spend from your 4% SWR. It just ain't going to happen. Even those 16% 30-year bonds from the 70s have matured LOL.

i grant you that if you think all retirees have portfolios like is most often talked about on this forum you would be correct, but i can think of 2 other asset allocations that would lead to the problem i brought up.

1) a retiree with a large amount of rental property that is both F&C and completely depreciated. if operated correctly this will throw alot of rental income which is taxed at earned income rates. now granted there will be write offs but since there is no more depreciation you had to actually pay out that money (assuming you arent cheating on your taxes) and it was a real expense of making that rental income. this will leave alot of free income that you will have to pay taxes on and if you bought the property at a great cap rate that income would present the problem i discussed earlier.

2) a retiree who gets most of his income from the interest paid to him from hard money loans. these loans can be very high interest rate loans and the expenses are minimal. so this too leaves alot of income that is taxed at earned income rates.

now not everyone would invest like this (either of the 2 examples) but the people who have, if they are successful at it, can retire early doing it. and what i was talking about could be very applicable to them

 

[LOL!]

1) You wouldn't be retired: you would be working as a landlord.

2) You wouldn't be retired: you would be working as a cash-advance-store manager.

Perhaps that leads to a another definition of retired: Your income is taxed at a lower rate than it was while you were working.

 

[jdw_fire]

1) You wouldn't be retired: you would be working as a landlord.

2) You wouldn't be retired: you would be working as a cash-advance-store manager.

Perhaps that leads to a another definition of retired: Your income is taxed at a lower rate than it was while you were working.

[MODERATOR EDIT]

1) you could have hired a manager to do the work. if there are no loans against the property and the cap rates are high there would be plenty of income to do such and still throw the retiree a good income. there is at least one poster on this forum who is looking to retire off of income from his rental property and has written about his training a manager.

2) no you wouldnt be a manager, managers arent loaning their own money. if you want to be a hard money lender there are companies that look for investors to supply said money for the loans. the investors can get a very high yield and the work involved can be minimal. there have been discussion on this forum about doing this too.

and with your new definition people with large pensions or annuities or WDs from 401ks and who are highly invested in income producing investments would no longer be called retired? wow, to you they dont just have to have stopped working but instead they have to have the same investment profile as you to be considerd "retired". why dont you challenge whether the people who retire with a large portfolio of stocks and bonds using an AA model that may include slice and dice are really retired? couldnt some one say that they arent retired, they are working as a fund manager? [MODERATOR EDIT]

 

[LOL!]

Well, I enjoyed my little jokes even if some others did not.

[MODERATOR EDIT]
Really?
[MODERATOR EDIT]