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Old 04-26-2018, 08:27 AM   #41
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Sandy, maybe I missed something, but where is the marginal tax rate 50% for someone making 70k?
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Old 04-26-2018, 10:10 AM   #42
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I'm not seeing it either but I may just be clueless.

https://www.mortgagecalculator.org/c...calculator.php
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Old 04-26-2018, 11:10 AM   #43
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I am personally going to pay mine off, although it is much smaller than yours. There are arguments on both sides, but how about the satisfaction of knowing, you are no longer in debt?
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Old 04-26-2018, 11:17 AM   #44
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Sandy, maybe I missed something, but where is the marginal tax rate 50% for someone making 70k?
The 1983 amendment to the social security act changed the “tax free” nature of your Social Security benefits to “tax deferred”. The “basis” for this taxation is one half of your benefits plus your other taxable income. This is represented on the graph by the dotted green line. This taxation starts for an individual at $25,000 and $32,000 for a married couple.

Half of $36,000 is $18,000 plus $7,000 equals $25,000. So the dotted green line starts at $36,000 plus $7,000: $43,000 on the graph. It starts at 5%, representing the 50% taxability level of your benefits. The 1993 Budget Bill added a second 85% taxability level starting at $34,000 for a single person and $44,000 for a married couple.



Note how the solid blue line starts at 15%. If you earn / withdraw an additional $100 when your tax bracket, the dotted red line, is 10%, that $100 makes $50 of your deferred social security benefit taxable so you are paying 10% of $150, not just the $100 that your income increased and $15 is 15% of the $100 that you withdrew. The next marginal tax level is 18.5% when the taxability level is 85% and your tax bracket is 10%. The next marginal tax level is $22.20 which is 12% of $100 plus $85.

Let’s ignore the 49.95% level and jump to the 40.7% level. 22% of $185 is $40.70.

Now to the more complex 49.95% marginal bracket. The 22% bracket starts at $38,700. For some reason the new tax bill starts the taxability of your deferred LTCGs at $38,600. This is why there is a small dip in the marginal tax line over that $100 income level.

Assume that your taxable income is at $35,600. Plus your $3,000 of LTCGs is a total of $38,600, nothing over that so none of your gains are taxable. Now, you withdraw an additional $100 from your IRA which makes an additional $85 of your Social Security benefits taxable. So your taxable income increases by $185. $185 at the 12% tax bracket is $22.20. But, this also pushes $185 of your tax deferred LTCGs over the $38,600 limit where they are now taxed at the special 15% bracket. 15% of $185 is $27.75.

Bottom line: When the taxation of your additional income is added to the deferred taxation of your Social Security Benefits plus the deferred taxation of your LTCGs, $22.20 plus $27.75 results in paying an additional $49.95 because you withdrew $100 and that is a 49.95% marginal tax bracket.

So, to correct your statement, the IRS is not taking 50% of your money, they are only taking 49.95%.
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Old 04-26-2018, 12:01 PM   #45
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Aah, got it now. Although I don't fully follow your logic (why are you adding $7K?) I see your point that when making these decisions you have to consider all of the additional taxes that will be triggered by that extra income that you choose to take.
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Old 04-26-2018, 12:53 PM   #46
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Aah, got it now. Although I don't fully follow your logic (why are you adding $7K?) I see your point that when making these decisions you have to consider all of the additional taxes that will be triggered by that extra income that you choose to take.
The taxability of a single person’s Social Security Benefits start when the “basis” is over $25,000. The “basis” calculation is one half of your Social Security Benefit plus your other taxable income. Since half of your $36,000 Social Security Benefit is $18,000, you need an additional $7,000 of other taxable income to reach that $25,000 level.

So the point where your basis reached the taxability point is $18,000 plus $7,000 and the reality for your actual income is $36,000 plus $7,000. You are using half for the basis and all of it for your actual gross income.
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Old 04-26-2018, 01:04 PM   #47
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Here is another graph that I posted on a different thread that might be helpful:


It shows how larger benefit levels result in higher gross income levels before you start paying taxes, you are getting more “tax deferred” income, which result in more tax savings.

The other side of this is that the more taxes you save, the more the IRS wants back, which results in larger “Tax Humps”.

You don’t need all the fancy graphs to do your planning, they are just the old cliché picture that in this case is worth thousands of dollars. What you need to know is that these humps start at either the $38,700 22% taxable income level or the $38,600 taxable LTCGs level.
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Old 04-26-2018, 01:59 PM   #48
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I am building a new "retirement" house and we plan to pay cash for it. The funds will come from the sale of our current home and short term investments we now hold. The way I look at it is I will need about 14% less money each year by not having a mortgage based on our planned retirement budget. That allows me to dial down my market risk and still have all the money I need to pay the bills and have fun.
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Old 04-26-2018, 02:23 PM   #49
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I am building a new "retirement" house and we plan to pay cash for it. The funds will come from the sale of our current home and short term investments we now hold. The way I look at it is I will need about 14% less money each year by not having a mortgage based on our planned retirement budget. That allows me to dial down my market risk and still have all the money I need to pay the bills and have fun.
Not sure what “all the money I need” means, but like I said, try to do your taxes as if you are retired now and see how close you will be to the 22% Federal Bracket. If you are close to it, doing Roth Conversions now at 22% is far better than taking the money out later and paying 49.95% and 40.7%.

Note the difference in the two lines above with $24,000 SS Benefits. You are taking $7,908 less out of your IRA and replacing it with $4,992 from tax free sources which reduces your taxes by $2,901.

Paying $2,901 on a $7,908 is an overall 37% marginal tax rate; some at 49.95%, some at 40.7%, and some at 22%.
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Old 04-26-2018, 02:49 PM   #50
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Not sure what “all the money I need” means, but like I said, try to do your taxes as if you are retired now and see how close you will be to the 22% Federal Bracket. If you are close to it, doing Roth Conversions now at 22% is far better than taking the money out later and paying 49.95% and 40.7%.

Note the difference in the two lines above with $24,000 SS Benefits. You are taking $7,908 less out of your IRA and replacing it with $4,992 from tax free sources which reduces your taxes by $2,901.

Paying $2,901 on a $7,908 is an overall 37% marginal tax rate; some at 49.95%, some at 40.7%, and some at 22%.
I can't do conversions now, I am in too high of a tax bracket. I hope to show as close to 0 income as I can in my first two years of retirement and plan to convert in those years. SS income is way down the road for us.
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Old 04-26-2018, 03:05 PM   #51
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The other thing to remember about Roth Conversions is to try to do them before the year you turn 63.

The year you turn 65 and apply for Medicare, they will look back two tax years, the year you turn 63, to determine your MAGI, Modified Adjusted Gross Income, and they will then use this number to determine your Medicare premium. Each year after that they will continue to look back two tax years to determine your premium for the next year.
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Old 04-26-2018, 03:06 PM   #52
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Thank you all for your thoughts and suggestions. Very helpful indeed. I talked it over with DW. We agreed to stop plowing money into the market for a while and instead apply all excess cash flows to extinguish our mortgage.
The beauty of that decision is you can be flexible. Spend one months excess on things you need/want outside your budget. Or put some in market when you see a buying opportunity. And all the excess dollars go to pay down the principal so that you are "years" ahead on the amortization schedule. Every regular payment applies more to the principal then if you had not doubled up.
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Old 04-26-2018, 03:16 PM   #53
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The other thing to remember about Roth Conversions is to try to do them before the year you turn 63.

The year you turn 65 and apply for Medicare, they will look back two tax years, the year you turn 63, to determine your MAGI, Modified Adjusted Gross Income, and they will then use this number to determine your Medicare premium. Each year after that they will continue to look back two tax years to determine your premium for the next year.
That's great advice. I am going to try and pull off my conversions when I am 59/60.
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Old 04-26-2018, 03:27 PM   #54
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The other thing to remember about Roth Conversions is to try to do them before the year you turn 63.

The year you turn 65 and apply for Medicare, they will look back two tax years, the year you turn 63, to determine your MAGI, Modified Adjusted Gross Income, and they will then use this number to determine your Medicare premium. Each year after that they will continue to look back two tax years to determine your premium for the next year.
Base premium is for AGI of $170k or less for MFJ. Assuming standard deduction of $24k, that would put you in the 22% tax bracket. So if like many here, you convert to the top of the 12% tax bracket, then you don't need to worry about this.

If you convert to the top of the 22% tax bracket, then you'll have to pay an additional $53.50/mo for Medicare Part B and $13/mo for Medicare Part D... so worst case a total of $798/year.... still your future tax savings on those additional Roth conversions might easily exceed $798 so while it is a factor to consider, additional Roth conversions may still be worthwhile. YMMV.
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Old 04-28-2018, 04:55 AM   #55
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One of the biggest problems when posting on any site that deals with income levels is that those levels change drastically depending on where you live. Here is an image of the first and last 3 lines of a chart created by Business Insider based on the median income numbers from the US Census Bureau's 2013 American Community Survey.



The full chart is viewable here:
https://amp.businessinsider.com/imag...-1136-2338.jpg

Median Household Income varies from $37,963 to $72,483 depending on what state you live in and this changes the range of “middle class” income. The $37,963 state has a “middle class” defined as earning from $25,309 to $75,926, while the $72,483 state has a “middle class” defined as earning from $48,322 to $144,966.

We are from Maryland, so we consider an average income to be $40,000 to $60,000 for an individual and $100,000 for a couple.
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