Effective Tax Rates in Retirement

[Golden sunsets]

It probably applies to only a few here, but I just learned this the other day and thought it was a nice little trick. If you're subject to the tax torpedo (taking RMDs that push up your tax bracket), you can avoid the problem of making estimated tax payments or withholding from SS by simply waiting until December to take your RMD and having a chunk of tax withheld from it. The IRS considers that money to have been withheld throughout the year. Of course, if you need all that RMD money to live on, it may not be possible, but if not, this is a good thing to know.

Good to know this. Thanks for sharing this tip. Our tax torpedo starts next year for DH and 2 years later for me plus I'll claim SS under my own record that year and I've been wondering when to plan the RMD vis a vis estimating taxes. This approach makes a lot of sense.

 

[NW-Bound]

The annualized inflation of the period 1945-2015 is 3.8%. If looking forward, the real return is low as Bogle and other pundits have said, say 4%, then it makes a big differerence whether the inflation part is taxed or not, because inflation can be just as high as the real return.

Consider two retirees, one whose asset is all after-tax savings, while the other one has it all in a 401k. Both live off the 7.8% return thrown off by their savings.

The one with the after-tax saving gets most if not all of his income exempted, or taxed at 15% marginal rate for the portion in the 6-figure.

For the one drawing 401k, if his income range is average, will pay at least 15% or 25% marginal tax rate as ordinary income. If inflation spikes, he will be hurting big time.

 

[Danmar]

Also Canadian. 2015 looks like 21% while 2014 was 12%. Really depends on your mix of income. Pensions and interest taxed at full rates while divs and cap gains taxed at lower rates. Tax rates certainly going up for high earners in Canada.