Marginal Tax Rates Repost

[Fedup]

Quote:

Originally Posted by RunningBum I think you exactly want to make decisions based on marginal tax rates. The question isn't whether you convert 0 or $75K, it usually is more that it make sense to convert some, but is there a point at which an extra $1 or $1000 gets taxed too high that it isn't worth it. If that extra $1000 is still taxed at 15%, it's probably good, but if it's 25% or 30% or maybe even higher, you might stop. $1000 isn't a big deal in itself and won't tip the overall tax rate that much, but what if you are thinking about converting another $100K? It seems to me that you might as well know what each additional $1 or $1000 will be taxed at so you can optimize it. And the reason to stop is that in 5 years you might have it all converted. In that case, you might rather have had some left to convert at 15% and not converted some of it 5 years ago at 30%. Everyone's case is different because if you have a lot to convert, 25 or 30% may not be a deal breaker if it means avoiding high MRDs later in retirement, pushing you into higher tax brackets and hump situations like the OP shows.

That's the point. It's not like our tax situation is going to be better in years later. I mean what choice do we have if we don't convert? Marginal tax rate means nothing.
For me, that means I have to create multiple scenarios from many different age points and simulate using TT.
I've done some cases, but it doesn't look like I will be able to exhaust the taxable account easily.

[Sandy & Shirley]

Quote:

Originally Posted by Fedup OP, I noticed this marginal tax rate when I put in different Roth amount for conversion. Like withdraw $60k with $2500 tax or $75k with $5000 tax(not exact amount) , but then what do you do? Do you not converting at $75k? Because it's still under 15% bracket. Unless you are willing to make a decision differently by looking at this marginal tax rate, it's still not useful to me.

My ex said that I was certifiable, but I am not certified in any financial areas. My knowledge comes from personal research on what I could have done better and what I can now do better for Shirley as she plans to retire in a year or two.

As for Roth conversions, the real profit in doing a conversion is the difference between your marginal tax rate at the time you do the conversion vs your marginal tax rate at the time you use the money.

If you do a conversion today at the 10% or 15% level, convert everything to Roth, then your only other income source during retirement is your Social Security, your marginal rate during retirement will be 0%, so converting at 10% was a loss.

If you convert today at 25% and use the money in retirement when you have a lot of other income and your marginal rate is 46.25% or 55.5%, then your conversion will be very profitable.

You also have to take state tax considerations into account. Converting today in a high state tax state like California, then retiring to a no state tax state could result in a huge loss, or not, it all depends on your personal situation, your personal Social Security levels.

[kaneohe]

Quote:

Originally Posted by pb4uski I can see the 46.25%... essentially 185% of 25% marginal tax bracket. I'm not seeing anything like that in my situation either.

Is it possible that when you have SS income and QDIV/LTCG in the "base" income, adding more income not only makes more SS taxable (the 1.85X factor) but also pushes 0% taxable income into the 15% range adding to the
46.25% rate.

[Fedup]

Quote:

Originally Posted by Sandy & Shirley My ex said that I was certifiable, but I am not certified in any financial areas. My knowledge comes from personal research on what I could have done better and what I can now do better for Shirley as she plans to retire in a year or two. As for Roth conversions, the real profit in doing a conversion is the difference between your marginal tax rate at the time you do the conversion vs your marginal tax rate at the time you use the money. If you do a conversion today at the 10% or 15% level, convert everything to Roth, then your only other income source during retirement is your Social Security, your marginal rate during retirement will be 0%, so converting at 10% was a loss. If you convert today at 25% and use the money in retirement when you have a lot of other income and your marginal rate is 46.25% or 55.5%, then your conversion will be very profitable. You also have to take state tax considerations into account. Converting today in a high state tax state like California, then retiring to a no state tax state could result in a huge loss, or not, it all depends on your personal situation, your personal Social Security levels.

Thank you for your explanation. I don't plan to move out of California, but it's a pain to have to pay more state tax than necessary for these conversion. I need to keep an eye out for both.

[pb4uski]

Quote:

Originally Posted by Sandy & Shirley Go online to TurboTax TaxCaster https://turbotax.intuit.com/tax-tool...ors/taxcaster/ And make the following entries: Single Head of Household No Age on 12/31/16 68 Taxable Wages $28,000 Fed Withholdings $0 State Withholdings $0 [Have Investments] Check [Other taxable income] Check and continue Short Term Gains $0 Long Term Gains $6,000 Interest $0 Dividends $0 Unemployment $0 IRA/Pension $0 Social Security $30,000 Misc Income $0 Alimony $0 Health Insurance Yes Result $4,798 [Eidt] Wages & Withholdings Change wages from $28,000 to $29,000 Result $5,353 That is an increase of $555 in Federal taxes owed because of $1,000 of additional income

I stand corrected. I was aware of the 30% marginal tax rate for a while once one broached the top of the 15% tax bracket as I am in that area now... I would have thought that at that level that SS was already at 85% but it isn't in some circumstances... the 55.5% is 1.85*30%.

[samclem]

Quote:

Originally Posted by pb4uski I stand corrected.

I hope nobody rudely tells you to "learn to read."

[pb4uski]

Quote:

Originally Posted by samclem I hope nobody rudely tells you to "learn to read."

Whatever... I didn't attempt to bring up a bunch of irrelevant, extraneous things like SS tax, medicare tax, state income taxes, etc in a feeble attempt to try to make a political point.... I stayed on point and referred to federal income taxes which is what the OP has written about the whole time.

[Souschef]

What really gets me upset is the fact I have to pay taxes on my SS, even thought the money has already been taxed! Truth be told, my RMD's are the real driver.
I do understand the concept of marginal tax rate, my AGI was 130K, and my total tax rate was 12.4%.

[samclem]

Quote:

Originally Posted by Souschef What really gets me upset is the fact I have to pay taxes on my SS, even thought the money has already been taxed!

I'll just be happy to see any of that FICA money coming home to papa. It's "found money," so having it taxed hurts a little less.

[Texas Proud]

Quote:

Originally Posted by Fedup That's the point. It's not like our tax situation is going to be better in years later. I mean what choice do we have if we don't convert? Marginal tax rate means nothing. For me, that means I have to create multiple scenarios from many different age points and simulate using TT. I've done some cases, but it doesn't look like I will be able to exhaust the taxable account easily.

That is a problem that I have... I have more than 50% gain in all my funds... so if I sell I have LTCG... now, I do not have to worry about paying income tax on it, but I lose ACA credits at a decent clip...

But, any type of income will affect the credit, so I have to see what is the best... at least I only have to take my gain as income as opposed to an IRA where it is all 'income' against the credit...

[Fedup]

I don't have to worry about ACA credit. At most I have to worry about Medicare part B payment. Too high then my husband might have to pay more.

[samclem]

A couple of observations:

Quote:

Originally Posted by Fedup That's the point. It's not like our tax situation is going to be better in years later.

I don't know what your situation is but I try to keep in mind that our tax situation in later years could be "better"--due to some very unfortunate turns of events (terrible long-term investment returns or unavoidable spending that leaves our accounts a lot lower than they are today, etc). If that happens and we find ourselves with very low withdrawals, very low income, and a zero or very low tax rate, I'm going to be very unhappy if I voluntarily paid higher tax rates earlier when we could really use that money to meet expenses. Paying more taxes when we are a decade or two closer to the finish line (and uncertainty is lower) is better than paying them earlier when the road ahead (and uncertainties) are greater.

Quote:

Originally Posted by Fedup I mean what choice do we have if we don't convert? Marginal tax rate means nothing. For me, that means I have to create multiple scenarios from many different age points and simulate using TT. I've done some cases, but it doesn't look like I will be able to exhaust the taxable account easily.

If a person plans to withdraw $250K every year, then this "hump" is inconsequential. As pointed out in the OP, this "hump" is only significant (and can probably only be effectively dealt with) if your planned taxable income is close to the same level as the "hump." In that case, I do think it is worthwhile to use Roth withdrawals just to cover the hump (even before taxable accounts have been used up), and/or to do the "bunching" withdrawals every other year or so to lower the total taxes paid over time.

[Fedup]

Thank you for the suggestion. I might try bunching withdrawals simulation on my TT to see the effect.

[marko]

Quote:

Originally Posted by samclem If a person plans to withdraw $250K every year, then this "hump" is inconsequential. As pointed out in the OP, this "hump" is only significant (and can probably only be effectively dealt with) if your planned taxable income is close to the same level as the "hump."

Ahhh! That's what I've been missing in the discussion.

With several hard to avoid income streams, the hump is so far in my rear view mirror I can't see it.

[misanman]

The hump also relates to the decision of when to start drawing SS. This is because only 50% of SS income is used as the input to the provisional income calculation. So there could be a significant tax benefit to deferring on SS and while spending down tIRA amounts.

[Fedup]

It's not just taking SS at 70, that's a given for my situation. There is a lot of income to appear in the horizon that I need to do several years of modeling using Turbotax. The total tax in those years combined is what I'm aiming to be lower. Then there is potential new tax law change(no political comment please) that I also try to model.

[Sandy & Shirley]

Op again, glad to see that this thread is gathering a lot of interest, hopefully many will read it and start their retirement planning early.

If you are way “over the hump” it makes no difference, but if you are going to be close to the hump, on either side, then early planning for retirement can be very helpful. A “very close friend” who happens to be a widow, is in this situation, has been doing Roth Conversions for the last 4 years at her 25% tax level. She will retire on survivor benefits at age 62, but will not start her annuity at that time. With just her age 62 Social Security plus her late husband’s small pension she will be in the 0% tax bracket. We can use her ages 62 to 70 to do as many Roth Conversions as she can at the 0%, 10%, 15% and 18.5% marginal brackets while her annuity payment grows by 9% per year. Then at age 69 or 70 she can start her annuity at a level that will place her just below the 46.25% bracket when she starts her own max SS at age 70. By that point all of her retirement savings will have been converted from TIRA to Roth so she will never go into The Hump.

There will be no MRD’s to be taxed at 46.25% since everything was converted at 18.5% and lower. She will have everything in Roth and can take it out tax free.

If you start in your mid 50’s, or earlier, to calculate what your personal retirement situation will be, you might be able to take steps to maximize your lifelong retirement income, but this takes early planning.

I’ve talked to my broker and it is amazing how many people, at any income and savings levels, call him at age 60 and say they want to retire in 2 years, or less, and ask what they can do. You need to start planning at least 5 to 10 years before retirement.

[SevenUp]

Quote:

Originally Posted by ERD50 It's a shame that the tax programs don't include some sort of graph like this. They could also tell you (for planning purposes, and/or Roth re-characterization reviews) what would be the effect of a $100 change in various forms of deductions and income.

Quote:

Originally Posted by samclem Charts like those in the OP would be helpful....

Charts such as the ones in Marginal tax rate - Bogleheads, e.g.,

can be generated for practically any common income or saving option using Tools and calculators - Personal_finance_toolbox

[43210]

You could forfeit up to $6,444 in EITC if you go over the Investment Income Limit by $0.01.
https://www.irs.gov/credits-deductio...unts-next-year

So that's a 64,440,000% (sixty four million four hundred and forty thousand percent) tax bracket!

There are plenty of examples like this. Watch out.

[samclem]

Quote:

Originally Posted by 43210 You could forfeit up to $6,444 in EITC if you go over the Investment Income Limit by $0.01. https://www.irs.gov/credits-deductio...unts-next-year So that's a 64,440,000% (sixty four million four hundred and forty thousand percent) tax bracket! There are plenty of examples like this. Watch out.

These hard cutoffs and cliffs are things that should be fixed in any real improvement to our tax code. [MOD EDIT]