I think I torpedoed myself ...

[pb4uski]

A related RMD question which I have asked in a different thread but no response.
Now that they are changing the RMD schedule of first withdrawal from 70 y.o. to eventually 75 y.o., will the required distribution percentage be the same for year 80 for the person starting at 75 as for the person starting at age 70?

I think it would because the "percentage" is based on the prior end of year balance divided by the RMD factor (remaining life expectancy) and to my knowledge the RMD factors will not be changing because the first RMD year is changing.

Now the amount will be larger because the numerator will be larger since RMDs start later. Make sense?

 

[braumeister]

to my knowledge the RMD factors will not be changing because the first RMD year is changing.

And the RMD divisors were updated in 2022 for current life expectancies, so they should be stable for some time.

 

[SnowballCamper]

As I said, I have steady income (rentals, SS) and indeterminate investment income. If I average just 5% on investments it would be roughly a 35% addition to my steady income, which by itself covers my expenses. So I'm not desperate to boost my SS check, but it would be nice. Trying to build the estate for my sons.

Backing out my SS election until age 70 results in a 30% boost in SS, which works out to about a 12% raise in my total steady income. That seems worth some hassle? Dunno, I'm not sure yet how much hassle it is. If it's just filing a form and paying back the SS payments, that's not a big headache. Biggest concern is how much it will draw down my taxable account.

I think you need to compare your marginal tax rate now (with SS coming as you have now) with what your marginal rate would be if you delay SS to age 70). Without doing this math, it's a pure guessing game, and you'll get every answer in the universe...

 

[pb4uski]

My understanding is that yes, RMDs can be involved in this tax torpedo thing. But I'm not hearing anybody explain it the way I've seen it described by financial planners. See e.g. the video below -- he walks through examples that show how a $1000 RMD (or other income) could be taxed at a 49.95% marginal rate. ...

The video has too many moving parts. Also, any really high incremental tax scenarios are ytypically very narrow.

I suggest this. Go to https://www.irscalculators.com/tax-calculator and select 2024 or 2023 and Single over 65 for filing status. Put in your SS and estimated rental net income from Schedule E under unearned income and note what the tax is.

Then add $1,000 to your unearned income ($1,000 tIRA withdrawals) and calculate the increase in tax. Divide the increase in tax by $1,000 and you have your incremental effective tax rate on the first $1,000 of tIRA withdrawals. You can keep experimenting with larger amounts.

Then experiment with different scenarios like no SS.

From what you have described thus far it seems possible that you may be able to calibrate tIRA withdrawals between now and when RMDs start to pay no tax, but it is hard to know because you haven't provided what your net rental profit and SS are.

I think it is generally a good idea to defer SS as long as possible. check with your CPA, but if you do cancel SS retroactive to January 2023 and repay the benefits that you receive I think you will get a deduction and you can then do tIRA withdrawals equal to the deduction at no tax cost... it will all depend on whether the deduction is in 2023 or 2024. It gets complicated, hence the need to consult with your tax preparer.

 

[audreyh1]

And the RMD divisors were updated in 2022 for current life expectancies, so they should be stable for some time.

Ironically this table had been finalized just before 2020 and reduced percentages due to increased life expectancy over the previous decade. Just in time for the pandemic and other factors to wipe out those same increases.

Right, these tables are rarely updated.

 

[Dtail]

I think it would because the "percentage" is based on the prior end of year balance divided by the RMD factor (remaining life expectancy) and to my knowledge the RMD factors will not be changing because the first RMD year is changing.

Now the amount will be larger because the numerator will be larger since RMDs start later. Make sense?

Absolutely.

 

[Chuckanut]

An older friend described the tax torpedo this way:

It’s like growing older. It’s painful at times and not always fun, but it beats the heck out of the alternative.

The alternative for most seniors is a very limited income during retirement.

“Damn the torpedos! Full speed ahead” - David Farragut

It should be noted that Farragut’s bold action turned what could have a serious naval defeat into a very solid victory for both the Union Navy and Army. Limit the potential damage of the tax torpedos and get on with your retirement plans whatever they are.

 

[TheWizard]

An older friend described the tax torpedo this way:

It’s like growing older. It’s painful at times and not always fun, but it beats the heck out of the alternative.

The alternative for most seniors is a very limited income during retirement. Having done all I can to limit the potential damage, I’d rather face the torpedo...

The tax torpedo thing refers mostly to a sudden jump in taxes due to poor planning most times.
As a retiree filing single, I'd be fine with a taxable income of $400k per year, increasing at around 4% annually.
That's not likely to happen in my case, but I'm just saying...

 

[teej1985]

I'll just leave this here...

https://thefinancebuff.com/high-mar...#htoc-tax-torpedo-on-social-security-benefits

 

[TheWizard]

I'll just leave this here...

https://thefinancebuff.com/high-mar...#htoc-tax-torpedo-on-social-security-benefits

I read the link.
What is says has been true for the past decade+ and will be true for the indefinite future since the income levels for SS taxation are not adjusted for inflation.

But, without throwing stones at lower income retirees, wouldn't you prefer to have 85% of your SS income be taxable for all future years?

 

[oldtimer]

See the SS tax torpedo on the heat maps on https://www.bogleheads.org/wiki/Taxation_of_Social_Security_benefits
Delaying SS allows (far left edge of heat maps) one to have more room for Roth conversions at lower marginal rates to help lower future RMDs. Though delaying does increase SS income later and expands the SS tax torpedo (farther to the right on the heat maps).

 

[pb4uski]

For many of us the SS tax torpedo is a myth. If you have pension income and taxable account income then SS will be taxed at 85% no matter what. No torpedo unless you were naive and thought that you SS would not be taxed.

I think the RMD tax torpedo is a bigger surprise to early retirees than that 85% of their SS will be taxed.

 

[GaryInCO]

Thanks @oldtimer, that's a very useful reference! It explains things very clearly. From a quick scan I see several interesting things: 1) The heat map shows that at my SS income level, the "red zone" (40.7% spike) only applies to non-SS incomes in the $38k-$43k range. So the chances of getting hit with it are slim. Furthermore, even if you get hit, 2) the cumulative-rate chart (first chart on that wiki page) shows that the spike is no big deal. The marginal rate sounds terrible, but in reality it just speeds the shift in your total tax rate from 12% to 14%. So why get an ulcer over it??

(I wonder why they set it up so weird. Why do low-SS-income people pay a low marginal rate, and high-SS-income people pay a high marginal rate, if their non-SS income is around $40k !?)

For "Other Income," I assume that's basically your Adjusted Gross Income, so e.g. I'd deduct my mortgage interest, any rental or business expenses, etc.

 

[RunningBum]

For many of us the SS tax torpedo is a myth. If you have pension income and taxable account income then SS will be taxed at 85% no matter what. No torpedo unless you were naive and thought that you SS would not be taxed.

That's simply not true. Everyone should run their own numbers rather than believe this. I have a small pension and plenty of taxable income and I've projected that I might not have quite 85% of my SS taxed. Since I plan to delay SS to 70 by that time it probably will be over, but

Go to https://www.irscalculators.com/tax-calculator
For a single person, put in $40,000 unearned income and $35,000 for SS and you'll see that only $24,475 is taxed. 70% of SS. These are not my exact numbers but not that far off.

 

[Calico]

That's simply not true. Everyone should run their own numbers rather than believe this. I have a small pension and plenty of taxable income and I've projected that I might not have quite 85% of my SS taxed. Since I plan to delay SS to 70 by that time it probably will be over, but

Go to https://www.irscalculators.com/tax-calculator
For a single person, put in $40,000 unearned income and $35,000 for SS and you'll see that only $24,475 is taxed. 70% of SS. These are not my exact numbers but not that far off.

Thanks for posting the link to that calculator.

Currently I am only receiving pension income, but in two years (at age 70) I will take social security, and the calculator is a helpful tool.

 

[TheWizard]

That's simply not true. Everyone should run their own numbers rather than believe this. I have a small pension and plenty of taxable income and I've projected that I might not have quite 85% of my SS taxed. Since I plan to delay SS to 70 by that time it probably will be over, but

Go to https://www.irscalculators.com/tax-calculator
For a single person, put in $40,000 unearned income and $35,000 for SS and you'll see that only $24,475 is taxed. 70% of SS. These are not my exact numbers but not that far off.

I put in $100k of unearned income and $50k of SS income, filing single, and 85% of my SS income is taxable.
Nothing unexpected about that...

 

[TheWizard]

Since the formula for taxation of SS income is not inflation adjusted, it's reasonable to expect that increasing numbers of retirees will have 85% of their SS income subject to taxation as the decades roll on...

 

[RunningBum]

I put in $100k of unearned income and $50k of SS income, filing single, and 85% of my SS income is taxable.
Nothing unexpected about that...

Not sure of your point here. I never claimed that everyone has less than 85% of their SS taxable, just that some certainly do.

Your next point is a good one though. With SS indexed to inflation but the income formula for SS taxation not indexed, more and more will be paying tax on the full 85%. But that just shows my point that not all do now. You can't have an increasing # of retirees paying full tax if all of them already do now.

 

[dknighd]

With SS indexed to inflation but the income formula for SS taxation not indexed, more and more will be paying tax on the full 85%. But that just shows my point that not all do now. You can't have an increasing # of retirees paying full tax if all of them already do now.

I agree. There are many many people who do not pay income tax on SS income. And, there are probably many people who will never pay any income taxes at all. The SS system was designed to be very progressive. Those who earn less, and contribute less, get more out of it. I'm fine with that. It is a safety net, or at least was designed that way.

This brings up an interesting question, at least for me. We currently pay income tax on 85% of my spouses SS income. When I claim SS in a few years, I expect 85% of it to be taxed. We'll be living on SS, plus purchased annuity, plus spouses small pension. And we'll be subject to RMD.
I do not see a way that less than 85% of our SS income will be taxed. Do you?


My best guess is that 100% of our SS income will be taxed one day. And our SS income will be reduced. Which would be unfortunate for us, since about 2/3 of our future planned income comes from SS.

 

[levindb]

"My best guess is that 100% of our SS income will be taxed one day. And our SS income will be reduced. Which would be unfortunate for us, since about 2/3 of our future planned income comes from SS."

If 100% of SSA benefit gets taxed in the future, that is only 15% more than it is right now. If your marginal tax bracket is about 22%, then you will only see a 3.3% reduction in SSA income. (+15% x 22% = +3.3%) If SSA benefit is $60K/year ($5000/mo), that would mean a loss of $2000/year, or about $165/month.

Would that change your lifestyle? While it would not make me happy, the alternative could be a 23% reduction in SSA benefits for everyone...and that would make me much more unhappy.

 

[target2019]

If 40% of people pay some tax on their SS income (Google Bard), that means a majority do not pay tax. That ratio is something to think about. Think of a person you know who has SS as primary income source, and compare lifestyle with your own.

 

[dknighd]

"My best guess is that 100% of our SS income will be taxed one day. And our SS income will be reduced. Which would be unfortunate for us, since about 2/3 of our future planned income comes from SS."

If 100% of SSA benefit gets taxed in the future, that is only 15% more than it is right now. If your marginal tax bracket is about 22%, then you will only see a 3.3% reduction in SSA income. If SSA benefit is $60K/year, that would mean a loss of $2K/year, or about $165/month.

Would that change your lifestyle? While it would not make me happy, the alternative could be a 23% reduction in SSA benefits for everyone...and that would make me much more unhappy.

I'm not sure who invented your math. If my SS benefits were reduced by 20-25% We would notice.




Edit: It is a revenue problem. SS needs more revenue if they are expected to deliver what has been promised.

 

[target2019]

"My best guess is that 100% of our SS income will be taxed one day. And our SS income will be reduced. Which would be unfortunate for us, since about 2/3 of our future planned income comes from SS."

If 100% of SSA benefit gets taxed in the future, that is only 15% more than it is right now. If your marginal tax bracket is about 22%, then you will only see a 3.3% reduction in SSA income. (+15% x 22% = +3.3%) If SSA benefit is $60K/year ($5000/mo), that would mean a loss of $2000/year, or about $165/month.

Would that change your lifestyle? While it would not make me happy, the alternative could be a 23% reduction in SSA benefits for everyone...and that would make me much more unhappy.

A 3.3% reduction, or $2,000 per year, will not affect us much. It might happen that COLA raises offest that, but maybe not. I guess that's future uncertainty we'll have to accept for now.

 

[dknighd]

A 3.3% reduction, or $2,000 per year, will not affect us much. It might happen that COLA raises offest that, but maybe not. I guess that's future uncertainty we'll have to accept for now.

A 3.3% reduction might be noise. But a 23% reduction is not noise.


Edit: Unless something is done our projected (joint) $70k per year SS benefit will be reduced by about 20%. I'll notice that.

 

[target2019]

A 3.3% reduction might be noise. But a 23% reduction is not noise.

[Going from 85% taxable to 100% taxable is a real thing now for some. - not true] In the future going from 85% to 100% taxed could apply to me. Then or now, 3.3% won't upset my apple cart.

23% is a number that some say will happen if the funding problem is not corrected in some way.

I'm personally not bothered by that at this time, since I won't be here.

For reading, Social Security funding crisis could be on the horizon if policymakers fail to take action to protect the program in the next decade, threatening a 23% cut to all 70 million recipients' annual benefits, a new report claims. https://money.com/social-security-benefits-cut-2033/