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Withdrawals and Taxes
Old 02-24-2014, 01:35 PM   #1
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Withdrawals and Taxes

Hi...Just wanted to validate with the experts here that I am thinking about something correctly.

I'm not retired yet, looking at OMY or 2, and I am trying to determine withdrawal needs during retirement. My specific question is around taxes.

If my DW and I have budgeted $60,000 of spending needs, how much will need to be pulled out of our portfolio to attain that? Note: we will not have SS and pension in the earlier years of our retirement.

If I assume a 30% tax bracket, is the amount $60,000/(1-30%) = ~$86,000? Should I use marginal or effective tax rates -- I'm thinking effective?

I know that the rates will depend on my withdrawal mix of qualified vs.non-qualified accounts, but I am I thinking about this correctly?

Thanks,
Troop
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Old 02-24-2014, 01:42 PM   #2
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The approach is sound but the tax rate looks very high to me. You could use a copy of turbotax to estimate your taxes, but even if you live in a high tax state I'm guessing for a net of $60k your rate will be 15% or less.

Marginal tax rates are important when doing "what if" planning, but for this calculation the average rate is what matters.
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Old 02-24-2014, 01:48 PM   #3
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Originally Posted by Trooper View Post
Hi...Just wanted to validate with the experts here that I am thinking about something correctly.

I'm not retired yet, looking at OMY or 2, and I am trying to determine withdrawal needs during retirement. My specific question is around taxes.

If my DW and I have budgeted $60,000 of spending needs, how much will need to be pulled out of our portfolio to attain that? Note: we will not have SS and pension in the earlier years of our retirement.

If I assume a 30% tax bracket, is the amount $60,000/(1-30%) = ~$86,000? Should I use marginal or effective tax rates -- I'm thinking effective?

I know that the rates will depend on my withdrawal mix of qualified vs.non-qualified accounts, but I am I thinking about this correctly?

Thanks,
Troop
As far as it goes, your calculation is correct, using an average or effective tax rate. Not a full 30% tax bracket rate.

Use an online tax calculator or your tax software for a more specific calculation.
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Old 02-24-2014, 01:48 PM   #4
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This help?

1040 Tax Calculator
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Old 02-24-2014, 01:50 PM   #5
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If you withdraw $60K from a taxable account, you only pay taxes on the capital gains, not the entire $60K. Taxes will depend on how well your investments have been doing prior to selling, but even if they doubled in value, you would only pay taxes on $30K.
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Old 02-24-2014, 01:59 PM   #6
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I generally plan to stay within the married joint income of < $90K . This keeps a couple in the 15% marginal tax rate even taking just exemptions and the std deduction. Overall the tax rate is about 10%.
Our planned ER budget is less than this, so we'll be able to take .withdrawals without tapping the Roth's
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Old 02-24-2014, 02:10 PM   #7
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If you withdraw $60K from a taxable account, you only pay taxes on the capital gains, not the entire $60K. Taxes will depend on how well your investments have been doing prior to selling, but even if they doubled in value, you would only pay taxes on $30K.
Yeah, this. I don't know what qualified and non-qualified accounts that you mentioned are.

Mostly your taxes will depend on how much you are pulling from taxable accounts (and the basis of the investments in that account), tax deferred (401K and tIRA) and tax free (Roth IRA) accounts.

You're also going to get a certain amount tax free due to deductions and exemptions, and a certain amount in lower tax brackets. Unless all of your withdrawals are from tax deferred, you're probably in the 15% federal bracket. Long term capital gains from taxable accounts will be 0% to the extent they don't overflow the 15% bucket, and 15% after that. If you still have room in the 15% bucket, consider converting some tIRA money to a Roth. Just make sure you understand how LTCGs also fill up that bucket.

Didn't check your profile to see if you listed your state to see what state taxes will be.
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Old 02-24-2014, 03:25 PM   #8
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Perfect, Midpack - thanks! The 30% I used in the OP was just 'for example', but as you can see I am still in the paradigm of the workingman's tax rates
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Old 02-24-2014, 03:53 PM   #9
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I don't know what qualified and non-qualified accounts that you mentioned are.
Thanks RunningBum. I use qualified and non-qualified to mean the same as tax-deferred and taxable.

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Didn't check your profile to see if you listed your state to see what state taxes will be.
I'm in Arizona, so about another 2% for state taxes.
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Old 02-24-2014, 05:23 PM   #10
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Even folks with lots and lots of income probably pay an effective income tax rate of under 10%. Retirees probably should be able to work it so that they don't pay any income taxes at all until their annual spending goes above $100,000.

So if you are paying any income taxes, you should be asking yourself, "How come I am paying income taxes and nobody else is?"
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Old 02-24-2014, 05:31 PM   #11
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Received an unexpected bonus during 2013 which put our income just under $200,000 married filing joint. Our average rate ( FIT/Income) was 11.4%
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Old 02-24-2014, 06:30 PM   #12
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Retirees probably should be able to work it so that they don't pay any income taxes at all until their annual spending goes above $100,000.
While I like your statement, it makes me wonder why the question of "what will tax rates be like after retirement?" was relevant when planning for tIRAs vs Roth IRAs...
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Old 02-24-2014, 06:34 PM   #13
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One should be converting tIRAs to Roth IRAs perhaps even in the 0% tax bracket. So tIRAs were tax-free going in and may be tax-free coming out.
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Old 02-24-2014, 11:25 PM   #14
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Perfect, Midpack - thanks! The 30% I used in the OP was just 'for example', but as you can see I am still in the paradigm of the workingman's tax rates
Much lower tax rates was one of the big pleasant surprises of early retirement. In fact, if in ER you are mostly living off of taxable accounts, your tax rate might be nearer to 0% then 10%. As others have mentioned, you can get a good notion by taking a copy of this years tax return, zeroing out the earned income and making any other needed adjustments (add pensions or IRA withdrawals/conversions, change deductions as needed, etc).

In many cases, what you are withdrawing for living is "principal" and not subject to tax. Also, the tax rate for qualified dividends and long term capital gains is 0% if your taxable income stays in the 15% tax bracket.
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Old 02-25-2014, 01:10 PM   #15
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Much lower tax rates was one of the big pleasant surprises of early retirement.
I am beginning to see this as I research more thoroughly.

Seems like the key is managing withdrawals across your taxable and tax-deferred accounts. Right now I am at 61% deferred, 39% taxable. All of the deferred is in tIRA (no Roth). I am hesitant to do a conversion because of the tax impact - last year I got hit with AMT
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Old 02-25-2014, 01:49 PM   #16
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I am beginning to see this as I research more thoroughly.

Seems like the key is managing withdrawals across your taxable and tax-deferred accounts. Right now I am at 61% deferred, 39% taxable. All of the deferred is in tIRA (no Roth). I am hesitant to do a conversion because of the tax impact - last year I got hit with AMT
Probably not worth converting if you hit the AMT. But you can convert multiple small amounts and then recharacterize the conversions that would put you over a tax limit at tax time. So you can have a lot of control.

One thing I do is to is to do Roth conversions into accounts worth something like $16k, $8k, $4k, $2k, and $1k. Now you can use any combination of those to hit your desired tax target to within $1k. All your other conversions can be $32k or larger, or whatever makes sense to you.
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The Future of Tax Rates?
Old 02-26-2014, 04:21 PM   #17
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The Future of Tax Rates?

OK so now I get what tax rates I should use for retirement planning.

But what are you folks seeing about the future? I can't imagine that the Feds will allow a growing population of retirees to pay little or no taxes, while trying to balance the budget.

Thoughts?
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Old 02-26-2014, 09:13 PM   #18
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Even folks with lots and lots of income probably pay an effective income tax rate of under 10%. Retirees probably should be able to work it so that they don't pay any income taxes at all until their annual spending goes above $100,000.

So if you are paying any income taxes, you should be asking yourself, "How come I am paying income taxes and nobody else is?"
Would love to know how to get under 10% for taxes in retirement.

Is your 10% combined Fed and State?

In my situation, I'll be the first to retire and sure, since my overall income will be lower, my wife will still be working w/ a gross income of about $110K.

We then have after tax accounts that generate interest & dividends - taxed as ordinary income.

Any sales of after tax assets will be in the 15% for Fed and CA has no preferential brackets for LTCG - it is all taxed as ordinary income - add another ~9.3% for LT sales.

I'm adding up my wife's AGI (after contributions to her 403b/457), my planned pension, my systematic withdrawals from after tax and 401k.... it sure looks like we will be in the 25% for Fed and 9.3% for CA.
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Old 02-27-2014, 12:13 AM   #19
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Below is a link to a helpful calculator:

Roth IRA Conversion Calculator - Is A Roth IRA Right For You? | Calculators by CalcXML
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Old 02-27-2014, 06:13 AM   #20
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Would love to know how to get under 10% for taxes in retirement.
One easy thing you can do is move out of California.

Even while working and having $200,000 of income, one might be under 10% in federal income taxes. Here's a link that describes all the things one should be doing: Bogleheads € View topic - Taxes on a family with $200,000 gross income

You will see that many things are not taxed:
401(k) contributions
HSA contributions
health insurance premiums
exemptions/allowances/deductions
return of capital.

One should invest tax efficiently which means do NOT earn interest. Instead learn that qualified dividends are taxed as low as 0%.

Then when retired, there is this more complicated thread on getting your taxes to zero:
Bogleheads € View topic - How to pay ZERO taxes in retirement with 6-figure expenses
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