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Navigating Tax Brackets and Travelling
Old 02-13-2018, 08:04 PM   #1
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Navigating Tax Brackets and Travelling

Been thinking about this lately, and interested in inputs/comments. And quite possible that I am missing something fundamental/obvious.... don't be shy!!

I FIRE'ed Jan 2016 and DW will work until 2020, maybe a bit beyond depending on job opps. We are not pulling from our portfolio at all now, in fact, still contributing a bit. My 401k is 45% of the portfolio, hers is about 20%, and I have an IRA that is also about 20%. Rest is pretty much post tax, cash or cash like accounts. DW will be 59.5 Jan 1 2019. I am 2.5 years younger.

Our present annual expenses are about $90k, and we are modelling that that stays the same, although we know it won't, we will downsize at some point, but for the sake of this exercise....

The the question is about tax strategy. The new brackets (I could be off by a bit, but this is from memory, filing jointly) $18k-$77k 12%, and $77k-$163k (24% Federal).

Given that, it seems to me that it sure would be beneficial to stay in the 12% bracket after DW retires and we are funded (entirely, if not mostly) by 401K/IRA draws which I understand are taxed as ordinary income. And it seems that if expenses need $90k a year from the portfolio, and we have a mortgage and some other deductions, staying on the south side of $77k taxable might be do-able.

Living expenses are one thing, but early in retirement, while we still can, we want to travel, a good bit. And "travel" is not in that $90k budget. I'd like to have $15-$20k annually to travel with, at least for 10-15 years. The portfolio looks to be able to support this, BUT if I over draw to cover travel... I could easily get bumped from the 12% bracket, to the 24% one.... 10% more Federal! That is at least $7700 less a year!

Which brings me to my question: Would it makes sense for DW to pull from her 401k starting next year, pay the taxes on that, and sock it away somewhere ("post tax") for travel later? She is already in the 24% bracket with her salary anyway, and yes, we'd get nailed 24% on the 401k draws too, but, isn't that better than getting bumped to 24% after we are both retired on all that we draw??

Or is the first $77k taxed at 12%, and only above that at 24%??

Thanks for any insights, thoughts...
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Old 02-13-2018, 08:26 PM   #2
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Originally Posted by doneat54 View Post

Or is the first $77k taxed at 12%, and only above that at 24%??
Yes to your question except the next bracket above 12% is 22%. For a married couple filing jointly the first ~$19K is taxed at 10% then above that to $77K it's 12%. And don't forget that the standard deduction is now $24K for a married couple so any AGI under $101K should keep you in the 12% bracket.
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Old 02-13-2018, 09:15 PM   #3
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You should model this in a tax program for yourself, so that you see that only the part above a bracket is taxed at that rate.
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Old 02-13-2018, 10:35 PM   #4
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If you took $101,400 out of your tIRAs or 401ks, then assuming no other income, your taxable income would be $77,400 the top of the 12% tax bracket for 2018 after $24k of standard deductions and your tax would be $8,907... so you would have $92,493 available to spend.

Any withdrawals above that would be at 22%. So if you wanted $10k to travel you would need to withdraw $12,821... pay $2,821 in tax and have $10,000 for travel.

Don't forget to add state taxes if your state has them.
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Old 02-13-2018, 10:47 PM   #5
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OP - take a look at TaxCaster. Iíve been using the taxcaster app in determining max Roth conversions. It should be able to answer your questions - and the current app figures tax for tax year 2018.
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Old 02-14-2018, 12:17 AM   #6
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I’m a little confused why you need to pul money out of your 401K and pay taxes just to sock it away for later? You can always move it to something safe inside your 401K and then pull it out when you are ready to spend it.
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Old 02-14-2018, 02:58 PM   #7
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No, you shouldn't do as you suggest - see the examples provided by others. Further, you shouldn't let the tax tail wag the dog, so to speak.
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Old 02-14-2018, 04:00 PM   #8
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I always vote for delay paying taxes. The game of pay now save later never pencils out well...factor in you get to invest that extra monies till latter.
I'm sure others will disagree as many have converted iras into roths...just not for me.
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Old 02-15-2018, 03:05 PM   #9
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Thanks all, makes sense now....
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