Another rant about taxes

[COcheesehead]

Yeah, you can pay full freight. That should make you happy.

Ah, or paying your fair share as opposed to the subsidy welfare.

 

[Sunset]

After almost 10 years of doing Roth conversions to the top of the 15% bracket for the very reason you stated, I've come to the conclusion that I'm not making much of an impact. My t-IRAs totaled ~$1M when I FIREd, so doing a $30-$50K conversion (in the good years) hasn't even kept my balance the same. My t-IRAs have gained more than I've been able to convert. I'm still glad I've done it, but I'm not avoiding any torpedoes. I guess I could have gone deeper into the 25% bracket, but then it becomes a financial wash for me. It might have benefited my heirs someday, but I'm not too worried about that.

You can always pray for a 1929 type event and convert everything when it's worth 5% , then let rise back up.. . . .

 

[harley]

Excellent plan! I'll save tons on taxes, and since it's all about me we won't worry about any collateral damage.

 

[Winemaker]

Under this post's logic, all those who are getting ACA subsidies will get a tax hike!

The ACA is a tax, that is the reason why the Supreme Court ruled the ACA constitutional, as convoluted as it is.

 

[donheff]

It will be interesting to see how this year's tax cuts pan out. That will be worth a thread or two around here. People who are getting whacked by some of these marginal cliffs probably hope for some relief but if past is prologue people in higher brackets like me will get proportionally more relief and the top 1% will get the lion's share.

 

[donheff]

The ACA is a tax, that is the reason why the Supreme Court ruled the ACA constitutional, as convoluted as it is.

The SC ruled that the penalties are a tax, not supplements.

 

[RunningBum]

I think the OP is smart to run the scenarios and see what happens, but I don't get the rant part. Just don't convert the extra $5K. Or don't take SS early. Comparing 42% to 15% isn't the same thing since 42% is the total cost of taxes on the delta, and 15% is just a bracket for one of the taxes involved. What was the previous $5K in distributions taxed at?

 

[MichaelB]

As we've posted in other threads, let's please limit the discussion of possible legislative changes and wait until they actually happen, or at least until we have concrete measures under consideration.

 

[misanman]

Here is the rant part: Federal and state taxes increased by $1,346. Subsidy decreased by $746. So, that is an effective tax rate of 27% combined Fed and state and a 15% "tax" in the form of decreased ACA subsidies. 42% combined even though my top tax bracket is 15%.

In case you did not know this, increased income causes more SS to be taxed creating a super-marginal tax rate. Will have to find that sweet spot - draw SS later, convert less, find more above the line deductions. But 42%!!!

Yes, the dreaded retirement "tax torpedo" hits. The taxation of SS is based on the calculation of "provisional income" (see IRS Publication 915). Since only 50% of SS benefits count toward provisional income, one approach to reduce the taxation of SS benefits is to take steps to skew income toward SS and away from other taxable income sources such at tIRA distributions.

My calculations show my expected marginal rate for 2017 to be 36% but if my income goes up by 5-6K then the marginal rate will be 50% (includes phase in of state income tax). Definitely worth paying attention to this.

 

[Z3Dreamer]

I think the OP is smart to run the scenarios and see what happens, but I don't get the rant part. Just don't convert the extra $5K. Or don't take SS early. Comparing 42% to 15% isn't the same thing since 42% is the total cost of taxes on the delta, and 15% is just a bracket for one of the taxes involved. What was the previous $5K in distributions taxed at?

The $5k is just sitting in my IRA, waiting to be taxed. When is the question. Take it out now and hopefully avoid the dreaded RMD. Take it out later and keep the subsidy. I could delay SS and avoid tax (some call it subsidy) at 42% but I have to give up 100% of the SS cash in exchange for more SS cash later. These are all variables and that's why I "run the numbers".

I knew it was coming, so it is no surprise, but 42% is too high. I will have to reshuffle the deck.

Yes, it is a wonderful problem to have. Some wonder if their next paycheck will cover their bills. I can sip my coffee and rant about marginal tax rates. I am thankful.

 

[bingybear]

After almost 10 years of doing Roth conversions to the top of the 15% bracket for the very reason you stated, I've come to the conclusion that I'm not making much of an impact. My t-IRAs totaled ~$1M when I FIREd, so doing a $30-$50K conversion (in the good years) hasn't even kept my balance the same. My t-IRAs have gained more than I've been able to convert. I'm still glad I've done it, but I'm not avoiding any torpedoes. I guess I could have gone deeper into the 25% bracket, but then it becomes a financial wash for me. It might have benefited my heirs someday, but I'm not too worried about that.

I've just been starting the conversions. I do have a question about yours... what were your tIRAs invested in? Most of our tIRAs are in fixed income. Most of our Equities are either in roths or after tax accounts. In after tax accounts ETFs or individual stocks are used to lessen the tax bite. Mostly Q-divys with a small amount of CG unless we sell.

So I'm expecting out tIRA may not grow at such a great rate. Plus you may have been doing this during the 2009 to now recovery in the market. Who knows what is next.

 

[sengsational]

Been there, done that, got the tee shirt: http://www.early-retirement.org/forums/f38/the-29-bracket-in-roth-conversions-78112.html

The solution is to make line 56 as close to zero as possible.

 

[sengsational]

I knew it was coming, so it is no surprise, but 42% is too high. I will have to reshuffle the deck.

I agree that your 42% is "real". In other words, because it mixes subsidies and taxes does not make it less real.

There is a corpus of laws that you live under which have the ability to take money from you and give money to you. The fact that some of the laws taketh, and some giveth, is semantics. They have defined rules that tell you how you can interact with the treasury of the land. You are doing the right thing...optimize your situation to the best of your ability.

 

[Texas Proud]

The $5k is just sitting in my IRA, waiting to be taxed. When is the question. Take it out now and hopefully avoid the dreaded RMD. Take it out later and keep the subsidy. I could delay SS and avoid tax (some call it subsidy) at 42% but I have to give up 100% of the SS cash in exchange for more SS cash later. These are all variables and that's why I "run the numbers".

I knew it was coming, so it is no surprise, but 42% is too high. I will have to reshuffle the deck.

Yes, it is a wonderful problem to have. Some wonder if their next paycheck will cover their bills. I can sip my coffee and rant about marginal tax rates. I am thankful.

Well, you can take it out and pay 42% now or wait and see what happens to the tax code and probably the worst is take it out later and pay 42%....


Me, I would rather get the subsidy now... I think that it is going to go away as we know it... maybe next year, maybe the year after... I doubt this year...

 

[harley]

I've just been starting the conversions. I do have a question about yours... what were your tIRAs invested in? Most of our tIRAs are in fixed income. Most of our Equities are either in roths or after tax accounts. In after tax accounts ETFs or individual stocks are used to lessen the tax bite. Mostly Q-divys with a small amount of CG unless we sell.

So I'm expecting out tIRA may not grow at such a great rate. Plus you may have been doing this during the 2009 to now recovery in the market. Who knows what is next.

My t-IRA was close to 100% equities. I had a lot of cash in after tax to live off due to a timely house sale just before prices plummeted. I retired in 2006, so my Roth conversions were before, during, and after the recession. But with 8 out of my 10 years of retirement being in bull markets the IRA increases have dwarfed the amounts I've converted.

If your t-IRAs are mostly fixed income you might actually be able to make a dent in your balance.

 

[Spanky]

Look on the bright side. You may not have to deal with the ACA subsidy issue after 2017.

Are you stating the fact or projecting that ACA will be appealed or replaced?