Marginal Tax Rates Repost

[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:

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.

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]

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]

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.

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-deducti...ncome-limits-maximum-credit-amounts-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]

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-deducti...ncome-limits-maximum-credit-amounts-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]

 

[MichaelB]

It would be a good idea to avoid getting into talking points and political rhetoric regarding the tax bill. There’s a lively and very informative discussion underway here http://www.early-retirement.org/for...al-tax-bill-details-89791-13.html#post1984529

 

[spncity]

Wow. Thank you for this thread - and I have a lot of studying to do.