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Old 08-26-2018, 11:54 AM   #61
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And that may be the correct plan for your situation.

For someone earning the maximum SS benefit of $2788/mo, and a $30K/yr pension, things may look different:
What are those 2 50% rate spikes caused by and how wide income-wise are they (what $ amount is involved in each of those spikes)
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Old 08-26-2018, 03:55 PM   #62
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I categorize all pension-like income as Defined Benefit. SS fits that definition in my retirement plan.


I do not really care what it is called as long as it arrives in my account on time.
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Old 08-26-2018, 04:02 PM   #63
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I do not really care what it is called as long as it arrives in my account on time.
+1000
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Old 08-26-2018, 04:07 PM   #64
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If doing extra conversions at 22% avoids paying 40%, then the extra conversions will have been helpful.
So if I have to convert 500k or more at the 22% tax rate over time to(110k in taxes paid up front ) to eliminate $1386 per. What if someone needs to convert more? It would take 79+ years make up for the 110k in taxes
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Old 08-26-2018, 04:38 PM   #65
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So if I have to convert 500k or more at the 22% tax rate over time to(110k in taxes paid up front ) to eliminate $1386 per. What if someone needs to convert more? It would take 79+ years make up for the 110k in taxes
Are you really looking for a quick answer? Do you even know if you're affected by that? If you are, it depends on how much SS you're getting, how much other income, divs, LTCGs, etc.

Don't get hung up on the taxes paid up front if the tax rate turns out to be the same or less. If you don't pay them now, your IRA keeps growing and you pay taxes on a larger amount later, vs. paying the tax now and letting it grow tax free. That's mostly a wash, with a slight gain to paying now if you use outside funds to pay the taxes.

In any case, it's not going to take 79 years to make up the taxes. You're going to be paying some taxes on MRDs, right? Probably quite a bit. That's what you compare against. You have to do a lot more thinking about all the factors and parts than what you are doing.
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Old 08-26-2018, 07:11 PM   #66
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Are you really looking for a quick answer? Do you even know if you're affected by that? If you are, it depends on how much SS you're getting, how much other income, divs, LTCGs, etc.

Don't get hung up on the taxes paid up front if the tax rate turns out to be the same or less. If you don't pay them now, your IRA keeps growing and you pay taxes on a larger amount later, vs. paying the tax now and letting it grow tax free. That's mostly a wash, with a slight gain to paying now if you use outside funds to pay the taxes.

In any case, it's not going to take 79 years to make up the taxes. You're going to be paying some taxes on MRDs, right? Probably quite a bit. That's what you compare against. You have to do a lot more thinking about all the factors and parts than what you are doing.
I disagree with your last paragraph, but I see where you are coming from. I have a plan to do roth conversions... ok I've actually started and have decided I have to take it to higher tax brackets. But none of this was to avoid the tax hump. From my perspective the comparison should be from where I stop roth converting by plan and do conversions to miss the hump.

I just guessed numbers on this thread.

I don't want to post too much personal info, but was hoping there was some kind of guidelines.
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Old 08-26-2018, 07:38 PM   #67
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What are those 2 50% rate spikes caused by and how wide income-wise are they (what $ amount is involved in each of those spikes)
The spikes (actually more than 50% but that's the y=axis scale) are IRMAA (Medicare premium) tier changes.


See https://www.healthmarkets.com/resour...what-is-irmaa/ for the various tier costs. Not huge (that's why the cumulative number change is relatively small) but annoying at least if one goes just above one when it could have been prevented with foreknowledge.
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Old 08-26-2018, 07:43 PM   #68
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So if I have to convert 500k or more at the 22% tax rate over time to(110k in taxes paid up front ) to eliminate $1386 per. What if someone needs to convert more? It would take 79+ years make up for the 110k in taxes
And what if $1386 is not the correct number, but much higher?

Unless you plan to die with a large traditional balance and leave all that money to charity, the higher tax rate will have to be paid eventually if you take no action now.

Whether you can avoid the higher rates completely or not depends on your individual situation. If you have too much money, well, that's a problem...of sorts.
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Old 08-26-2018, 08:19 PM   #69
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I disagree with your last paragraph, but I see where you are coming from. I have a plan to do roth conversions... ok I've actually started and have decided I have to take it to higher tax brackets. But none of this was to avoid the tax hump. From my perspective the comparison should be from where I stop roth converting by plan and do conversions to miss the hump.

I just guessed numbers on this thread.

I don't want to post too much personal info, but was hoping there was some kind of guidelines.
Not sure which part of my last paragraph you disagree with, but the 79 year payoff is certainly wrong, and just by saying it not just once, but twice, if you've really thought about the cost of paying taxes now vs. later you aren't displaying it. You're comparing apples to nothing: paying taxes now on conversion vs. not at all with MRDs. Common sense should tell you that's not right. That's the last I'll say on that.

For guidelines, there's no simple way. There are too many factors for a simple rule of thumb. I did my best to show it in post #60. You have to make estimates and do calculations with that spreadsheet, then do more calculations to figure out how that influences more conversions now vs MRDs later. I haven't bothered with the last part because I've determined that I should not have an SS hump.

I would seriously take a shot at that spreadsheet I mentioned or just do the form with pencil and paper. All you have to provide is your SS benefit income and estimate of all other income. If you have a decent sized pension or large taxable account throwing dividends, you may very well find with a rough estimate that you aren't affected by this and you can stay with your plan. Otherwise you've got more work to do. I definitely wouldn't blindly try to avoid the SS hump at all costs. You may very well be right that the hump savings isn't enough to overcome the higher conversion tax rate now. I don't really understand that annuity option S&S mentioned. Seems like annuity income would also be taxable and wouldn't be that different than MRDs. But again, it's not an issue I need to solve so I haven't looked into how it would work.
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Old 08-26-2018, 09:33 PM   #70
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For guidelines, there's no simple way. There are too many factors for a simple rule of thumb. I did my best to show it in post #60. You have to make estimates and do calculations with that spreadsheet....
Yup.

If an example is desired, Calculations!X32:AE51 in the spreadsheet referenced in the Bogleheads' wiki (https://forum.mrmoneymustache.com/fo...sheet-updates/) is one place to go.
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Old 08-27-2018, 06:27 AM   #71
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The spikes (actually more than 50% but that's the y=axis scale) are IRMAA (Medicare premium) tier changes.

.................................................. .......
Thanks,kinda makes sense now..........I was going to say delta function but the plot spike maxed at 50%. Might be useful to have the spike go higher if possible and notate IRMAA at those income levels.
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Old 08-27-2018, 07:30 AM   #72
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I suggest making a simple spreadsheet from IRS pub 915. It's only 19 lines long and not complex.

If line 6, 8, or 12 is 0, your SS benefit is not taxable and you can increase income (from MRDs or whatever) until it gets above 0 with no bump in the marginal tax rate.

If line 15 is smaller than line 14, you're being taxed on 50% of some of your SS. Every $100 of income you add will push an extra $50 of SS benefits into being taxed until line 15 = line 14. So your marginal tax rate in that range goes up 50%, probably from 12% to 18%.

After line 14=line 15, if line 19 is less than line 18, you're being taxed on 85% of some of your SS. Every $100 of income you add push an extra $85 of income into being taxed until lines 18 and 19 are equal. So your marginal tax rate goes up 85%, from 12% to $22.2% or 22% to 40.7%.

Once line 18 = line 19, your SS benefits are taxed to the max, so the marginal rate drops back down.

Making the spreadsheet lets you play with numbers to see how different MRD levels affect your marginal rate, and also what happens if you take your SS benefits at any point between 62 and 70. You can also keep adding income to see how long you stay in the hump.

I see a lot of people say "I'm in the 12% bracket now and will be in retirement even with MRDs, so why should I bother converting now?" The answer might be that your marginal rate for some of the MRDs might be a lot more than 12%.

The marginal rate in any case can be further compounded if you are pushing LTCGs and QDivs into being taxed.
Thanks RunningBum, that is a good form to look at. Since I am a computer geek, the math is simple on that form, so I might try to create the spreadsheet and publish the formulas for everyone to copy.

Line 11 of Publication 915 is very interesting, “Enter $12,000 if married filing jointly; $9,000 if single…”!

A very interesting way of stating the second half of the Social Security “Marriage Penalty”!

The “Basis” for the taxability of your benefits is the same if you are married or single, half of your SSB (lines 1 and 2) plus your other taxable income (lines 3 thru 8).

The first half of the marriage penalty is shown on line 9, enter $32,000 if you are married filing jointly or $25,000 if you are single.

Line 11 is another way of saying that 85% taxability starts at $44,000 for a married couple and $34,000 if you are single.

Since the married couple gets more of their benefits tax free from line 9 ($32,000) than the single individual does ($25,000), why is this a Marriage “Penalty”? The $32,000 requires that you are filing “jointly”, two people. If two individuals are domestic partners, like we are, the combined taxation of our combined benefits starts at $50,000, $25,000 each.

Here is the some data on the penalty for a married couple vs a domestic couple with each couple getting a combined SSB of $50,000, $25,000 per individual:


FromToSizeMarriedTaxableSingleTaxable
$32,000$44,000$12,00050%$6,0000%$0
$44,000$50,000$6,00085%$5,1000%$0
$50,000$68,000$18,00085%$15,30050%$9,000
    $26,400 $9,000
$68,000$86,941$18,94185%$16,100  
$68,000$107,412$39,412  85%$33,500
    $42,500 $42,500
The penalty is not the total amount of taxable SSB on the last line, the penalty is that a married couple’s benefits become taxable at lower income levels. They are being taxed on $11,100 of their SSB at the $50,000 basis level while the domestic couple’s benefits are still tax free. Over the next $18,000 they are being taxed 85% instead of 50% which increases their penalty up to $17,400.

The penalty finally ends at $107,412 when the domestic couple reaches their full 85% taxable SSB level.

Not to throw salt on it, but the domestic couple does have half of a way around this. You take a large amount out of your IRA on the odd years and I’ll do the same on the even years. My SSB is tax free this year yours is tax free next year!


PS: I never though this thread would go this far when all I was asking for the proper accounting term for the deferred or delayed taxation of our Social Security Benefits!
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Old 08-27-2018, 06:42 PM   #73
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Thanks,kinda makes sense now..........I was going to say delta function but the plot spike maxed at 50%. Might be useful to have the spike go higher if possible and notate IRMAA at those income levels.
Not a bad idea, but then I'm just using it as a "for example" in this situation. Anyone can download the spreadsheet and adjust the chart as desired.

The developer has a thread at Case Study Spreadsheet updates "for updates, questions, comments, suggestions, etc. about the spreadsheet tool itself."
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