Withdrawals and Taxes

[Trooper]

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

 

[MichaelB]

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.

 

[Animorph]

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.

 

[Midpack]

This help?

1040 Tax Calculator

 

[Ready]

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.

 

[foxfirev5]

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

 

[RunningBum]

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.

 

[Trooper]

This help?

1040 Tax Calculator

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

 

[Trooper]

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.

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.

 

[LOL!]

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?"

 

[RetireAge50]

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%

 

[Trooper]

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...

 

[LOL!]

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.

 

[pb4uski]

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.

 

[Trooper]

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

 

[Animorph]

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.

 

[Trooper]

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?

 

[BBQ-Nut]

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.

 

[34rlsa]

Below is a link to a helpful calculator:

Roth IRA Conversion Calculator - Is A Roth IRA Right For You? | Calculators by CalcXML

 

[LOL!]

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

 

[MileKing]

Planning to ER in about 5 years (I'll be 55 and wife 51) and wondering what early retirees are doing for health insurance prior to Medicare at 65 and how that impacts their withdrawals and taxes. Seems many here have some form of employer provided health insurance in retirement....won't be the case for us or, I suspect, many up and coming early retirees. Thus, reliance on the ACA or insurance purchased in the open market. With the way the ACA subsidies are working, there is no subsidy above about $62K MAGI for a couple. 0% taxes is a worthy goal, but Medicaid is not necessarily desireable. And I expect RMDs at 70 would easily put us into 25% Fed tax bracket, thus need to convert/withdraw IRA money earlier in an attempt to stay within 15% Fed tax bracket (currently extends to about $93K AGI for a couple). The lower cap for ACA subsidies is clearly a consideration. Would be interested in hearing how are others with no employer-provided health insurance in ER are working through this?

 

[explanade]

So what are the average tax rates some early retirees are seeing?

Any significant fluctuations from year to year?

 

[mpeirce]

Planning to ER in about 5 years (I'll be 55 and wife 51) and wondering what early retirees are doing for health insurance prior to Medicare at 65 and how that impacts their withdrawals and taxes. ... Would be interested in hearing how are others with no employer-provided health insurance in ER are working through this?

No employer provided anything here (health insurance or pension).

It's just another expense in our budget. I'm 52 (DW is 60, DS is 19) and have purchased high deductible health insurance on the individual market in Ohio. Our expenses have been roughly (premium + out of pocket):

2012: $4800
2013: $5400
2014: $5600 estimated (we keep our pre-ACA insurance through 11/2014)

After ACA we expect this to more than double depending on what changes are made to the law going forward.

We are in Roth conversion mode. So in November we sit down with our CPA and look at our actual income to decide how much conversion is optimal.

 

[H2ODude]

I'm really scratching my head on this year. I have been having an accountant do it for many years and sort of lost touch with the intricacies of how it all works. This was first tax year with no real earned income other than pension. Fed tax works out to about 9% on a little north of six figures of taxable.

One thing struck me when talked to accountant; there's a lot of gray in what gets filed based on accountant's experience and knowledge. What he figures is way beyond my experience as an engineer where while you may have to make assumptions, you generally look for the absolute correct answer. More or less. Let's just say he's worth way more than the $300 he charges. Printed out over 35 pages of stuff from his transmittal and for life of me can't understand where some of it comes from.

Now, about the 7% NC takes. Maybe I'll think about returning to FL!

 

[golfnut]

No employer provided anything here (health insurance or pension).

It's just another expense in our budget. I'm 52 (DW is 60, DS is 19) and have purchased high deductible health insurance on the individual market in Ohio. Our expenses have been roughly (premium + out of pocket):

2012: $4800
2013: $5400
2014: $5600 estimated (we keep our pre-ACA insurance through 11/2014)

After ACA we expect this to more than double depending on what changes are made to the law going forward.

We are in Roth conversion mode. So in November we sit down with our CPA and look at our actual income to decide how much conversion is optimal.

Those are some real low hc premiums. We (me 58, dw 55 and ds) pay 950 per month of which 150 if for dental. Our coverage is thru my former employers' retirement hc plan which is subsidized.