Taxes in Retirement

[wyecrabber1]

Reading the thread, Retirement budget what to watch out for...

Taxes are a concern. DW and I have tracked expenses and have a good handle on what our retirement spending is going to be. Firecalc shows 0 failures and other predicators say the same thing.

Taxes are budgeted at 20% for Federal and State. Our plans are to relocate to Florida shortly, so the State tax bill goes away. Together our SS benefit is $50,000 and our pensions will be another $50,000 -- which cover expenses, health and taxes. Adjusting the SS benefit for the 0.85 taxable income and taking the standard deduction of $12,700 -- our taxable income is $80,000. RMD start kicking in in 4 years and will add $30K. So taxes are going to take a bigger bite. Plans are to pay the tax bill and transfer the balance to a Roth -- we may even spend some and spoil ourselves.

Do we have other options?

Thanks!!!

 

[sengsational]

Have you taken the time to enter your scenario into i-orp? The tax calculations there are kind of opaque, but the results of that optimization can give you an idea of one way the future might play-out.

 

[Z3Dreamer]

Some have said that Florida has high property taxes. Maybe not depending on where you currently live.

One of the other planning things is to look at tax bracket once you RMD vs today. $80,000 vs $130,000 is still in the 25% bracket for MFJ. This is the marginal bracket. Your average income for $80k is more like 15%. When you go to $130k it is close to your 20%. But since RMDs will not kick you into a higher bracket, none of the income shifting things will do you any good.

One of the other strategies is for those who itemize. You plan to claim the standard but I will go into this strategy. If you are close to itemize, you can gain an advantage by bunching in one year. Make your contributions on 1/1 and 12/31 of the same year. Nothing the next. We do this with property taxes and state income taxes, also.

You mention Roth but not Roth conversions before RMDs. I will assume you look at this every year right before year end to see if it makes sense. Some believe in converting to the top of the current bracket. That way you never pay taxes on future gains. Others say, don't pay taxes until you have to, if there is no incentive tax rates.

 

[bingybear]

TLI (too little info)
What kind of health insurance do you have? Are you eligible for an HSA?
How far are you from RMD (years)?
I agree... play with i-orp

 

[Z3Dreamer]

TLI (too little info)
What kind of health insurance do you have? Are you eligible for an HSA?
How far are you from RMD (years)?
I agree... play with i-orp

"RMD start kicking in in 4 years"
So, 70.5 minus 4 = 66 or so = Medicare = No HSA

Could be retired government (no Medicare) so OP could be eligible for HSA but I have never seen an HSA eligible public retiree health plan.

 

[user5027]

. RMD start kicking in in 4 years and will add $30K. So taxes are going to take a bigger bite. Plans are to pay the tax bill and transfer the balance to a Roth

That scenario would be a Roth contribution. You need earned income and have not identified any, to do that.

You can convert IRA funds to a Roth after taking the RMD. But that would incur additional taxes as the converted amount would be counted as ordinary income.

 

[kgtest]

That scenario would be a Roth contribution. You need earned income and have not identified any, to do that.

You can convert IRA funds to a Roth after taking the RMD. But that would incur additional taxes as the converted amount would be counted as ordinary income.

Precisely my father's issue. He doesn't need any of his investment income due to cash flow on income properties, 3 Pensions and SSA. Since I look at the main advantage of growing tax free as a good opportunity to transfer wealth to heirs, my advice would be of your RMD's to give deserving bloodline decedents/heirs the max you can before effecting any estate tax.

This is only if you don't need the money. if you need your retirement investments mileage may vary.

 

[jkern]

You forgot to deduct your two personal exemptions totaling about $8k. That will leave you with about $72k taxable income.

 

[Sunset]

Precisely my father's issue. He doesn't need any of his investment income due to cash flow on income properties, 3 Pensions and SSA. Since I look at the main advantage of growing tax free as a good opportunity to transfer wealth to heirs, my advice would be of your RMD's to give deserving bloodline decedents/heirs the max you can before effecting any estate tax.

This is only if you don't need the money. if you need your retirement investments mileage may vary.

To bad for all the adopted children in the world

 

[Sunset]

OP - you don't have to wait until RMD time to take out retirement savings.
So you may find that you can pull a little out now, and not pay much extra taxes at all vs waiting and pulling it out and paying 25% marginal tax rate.

Especially if you are not currently collecting pensions.

 

[LOL!]

20% for taxes? What do you mean by taxes? Have you even filled out a tax return in a while?

We just submitted our 2016 Federal tax return and even though my wife works full-time and made more money that she ever has in her life, we paid less than $4,000 in Federal income tax on income north of $140,000.

If you are going to pay 20% on taxes on $80K or even $130K, then you are doing something terribly wrong. If you are paying more than 3%, you are probably doing something wrong, too.

 

[bingybear]

while its nice to have 100K income stream, that puts you near the top of the 15% bracket. If you haven't started pension /SS and have some extra after tax $ to live on, then you could do some roth conversion.
If the pensions/SS are running and you have some after tax $, try investing these in either tax free muni's or in equities that kick out qualified dividends or create LTCG so you get taxed at a lower rate.

 

[scrabbler1]

Z3Dreamer, put me down for bunching itemized deductions to save some money. Barring any moderate or large unforeseen health expenses the rest of the year, I will be able to save a few hundred dollars in taxes by postponing my 4th quarter estimated state income taxes from late December to early January (2018). I can claim the standard deduction for 2017 while boosting my 2018 state income tax deduction because it will have the 2017 payment in January and the 2018 payment in December. (I pay most of my state income taxes through the 4th quarter payment.)


Another quirk in the tax code which enables me to save a few more dollars this way is not having to declare as income any state property tax rebate for a prior year I took the SD instead of itemizing. That income (unfairly IMHO) counts toward my MAGI in the ACA premium subsidy so the subsidy rises by bunching, too.

 

[RunningBum]

20% for taxes? What do you mean by taxes? Have you even filled out a tax return in a while?

We just submitted our 2016 Federal tax return and even though my wife works full-time and made more money that she ever has in her life, we paid less than $4,000 in Federal income tax on income north of $140,000.

If you are going to pay 20% on taxes on $80K or even $130K, then you are doing something terribly wrong. If you are paying more than 3%, you are probably doing something wrong, too.

Maybe, probably not.

You probably have a lot of divs and LTCGs, much or all of which probably isn't taxed. The OP is talking about pension + SS income. I did a real quick taxcaster run and it showed $7949.

OP is also talking about fed+state. OP is in Maryland and most of that pension income will be taxed at 4.75%.

It won't add up to 20% but it'll probably be double digits.

 

[pb4uski]

Reading the thread, Retirement budget what to watch out for...

Taxes are a concern. DW and I have tracked expenses and have a good handle on what our retirement spending is going to be. Firecalc shows 0 failures and other predicators say the same thing.

Taxes are budgeted at 20% for Federal and State. Our plans are to relocate to Florida shortly, so the State tax bill goes away. Together our SS benefit is $50,000 and our pensions will be another $50,000 -- which cover expenses, health and taxes. Adjusting the SS benefit for the 0.85 taxable income and taking the standard deduction of $12,700 -- our taxable income is $80,000. RMD start kicking in in 4 years and will add $30K. So taxes are going to take a bigger bite. Plans are to pay the tax bill and transfer the balance to a Roth -- we may even spend some and spoil ourselves.

Do we have other options?

Thanks!!!

20% is too much... based in the info you provided it will more likely be ~8% (of your $100k of income) before RMDs rather than 20%.

You can't transfer your RMD to a Roth... you can convert some from your tIRA to Roth (in addition to your RMD) but that will increase you taxable income and taxes.

But think of it this way, the 15% or 25% tax that you pay on your RMDs is likely a lot less than the taxes that you avoided when you deferred that income so you are still coming out ahead.

 

[wyecrabber1]

f/u to comments

Thanks for the comments. Some more details;

I work for the VA and submitted my retirement forms last month. Only worked at the VA for 7 years, so I have a small pension [others from previous employers], but I can take my health care at cost. I'm 63, but my DW is 67 and has been retired for 2+ years. House is paid for, so we do not have a great deal of itemized expenses -- therefore standard deduction. Combined our SS and pensions are $100K. DW starts RMD in 4 years. I start mine in about 7 years.

I've got a fairly detailed spreadsheet projecting expenses and taxes, I want to make sure my logic is okay when RMDs kick in. I fully expect to be in Jacksonville/St. Augustine area before then. Florida does not tax SS and pension income, not sure about RMD distributions.

These are the tax details as I understand them. Pension $50,000 per year. SS $50,000 per year -- federal taxed at 0.85, $42,500. Md does not tax SS, but taxes pension income and RMD distributions [State 4.75%, County 2.8; 6.5%]. Based on SS $42,500 + Pension $50,000 and RMDs $40,000;
I figure total income $132,500, adjust for exemptions and standard deduction this is reduced to ~$112,000. Federal tax is $19,500, for a tax rate of $14.7%. Maryland's state and county rate is 6.5, but SS is not taxed. Maryland tax is $6,100. for a tax rate of 4.6%, Combined federal and Md tax is $25,600, tax rate of 19.3%

Trust me, I would love to have a single digit tax rate.

 

[MichaelB]

not sure about RMD distributions.

Also not taxed as an individual in Florida.

If you used tax SW to prepare your '16 return, why not just run your planned retirement numbers through it and see how much the tax is? You'll most likely be pleased with the result.

 

[LOL!]

Maybe, probably not.

You probably have a lot of divs and LTCGs, much or all of which probably isn't taxed. The OP is talking about pension + SS income. I did a real quick taxcaster run and it showed $7949.

Actually, I did not have any LTCG and -$3,000 entry for that because of tax-loss harvesting. We did have return-of-capital which was not taxed.

Since my wife works, Line 7 (W-2 wages) were larger than the amounts discussed in this thread for pensions.

Furthermore, we did a bit of Roth conversions, too, which are treated as ordinary income.

Yes, we had qualified dividend income, but a good chunk of our dividends were non-qualified, so taxed at ordinary income tax rates.

We did not have SS income.

We did bunch deductions this year on Schedule A and did not itemize. We do not have a mortgage, so no interest deduction for that.

Something not discussed in this thread are tax credits. We got the foreign tax credit for foreign taxes paid on our foreign stock mutual funds.

 

[Blue Collar Guy]

, Combined federal and Md tax is $25,600, tax rate of 19.3%

Trust me, I would love to have a single digit tax rate.

I was crying when I saw the title of this post "f/u to comments", hahah, I thought you were unhappy with some of the answers.

When I sit down with pencil and paper, I take 30 % off from the top for taxes. I know its over kill. So when I pay the tax man I'm under what I thought i was going to pay. It allowed me to overestimate my expenses so when I pulled the trigger on retirement I had a cushion. I think 20 % is good, if it allows you to retire with enough know that you have extra.

When you find a nice place in Florida, post the location, Im running there too. I might get a place in a community property state too(10k trailer), my widow will get a full step up value on all the assets. Im getting smarter all the time.

 

[pb4uski]

Pension.........................$50,000
SS ($50,000 * 85%).........42,500
Income pre RMDs.............92,500
Std deduction.................(12,700)
Adj for DW over 65...........(1,250)
2 Exemptions @$4,050 ea.(8,100)

Taxable income...............$70,450
Tax................................ $9,635 (9.6% of $100,000 income) for next 3 years

Once RMDs begin (~3 years for DW and ~7 years for you):
RMDs.............................$40,000
Adj std dedn for you...........(1,250)
Taxable income...............$109,200
Tax.................................$18,778 (13.4% of $140,000 income)

plus state income taxes while you are still in MD. You are best off not doing any tIRA withdrawals until you move from MD so you don't have to pay the 8.5%.

YMMV.

 

[wyecrabber1]

I was crying when I saw the title of this post "f/u to comments", hahah, I thought you were unhappy with some of the answers.

Trust me, I'm not crying. I am so thankful for the knowledge and the willingness of the folks here to share.

Thanks to everyone.

 

[RunningBum]

Something not discussed in this thread are tax credits. We got the foreign tax credit for foreign taxes paid on our foreign stock mutual funds.

Hard to get foreign tax credits on pension, SS and RMDs. I re-ran the OPs numbers with the RMDs (which I hadn't included before) and got the same ball park numbers.

OP, I'd look at trying to top off the 15% bracket with Roth conversions before RMDs happen. As has already been said, you cannot contribute to the Roth without earned income, which you haven't shown you have any of.

 

[CardsFan]

20% for taxes? What do you mean by taxes? Have you even filled out a tax return in a while?

We just submitted our 2016 Federal tax return and even though my wife works full-time and made more money that she ever has in her life, we paid less than $4,000 in Federal income tax on income north of $140,000.

If you are going to pay 20% on taxes on $80K or even $130K, then you are doing something terribly wrong. If you are paying more than 3%, you are probably doing something wrong, too.

Please enlighten us as to how you can pay so little on $140,000, with over $50,000 of your income as W-2 wages, and a significant portion from unqualified dividends (from your other posts). If there is a trick I can use, I am open to ideas. But please give us the complete picture for one year, not just snip-its of info that do not give the whole picture.

But if part of your plan is High contributions to 401K, Ira and/or HSA, OP can't do that. Ditto if there are a lot of long term cap gains that can be at 0 to 10%

Also, IMHO federal tax credits are the same as paying federal taxes, you just paid to a different entity, you didn't get to keep the money.

For the OP, I think Pb4uski's numbers show the OP is probably pretty close to 20% (Fed+state) when RMD's kick in.

 

[pb4uski]

.... For the OP, I think Pb4uski's numbers show the OP is probably pretty close to 20% (Fed+state) when RMD's kick in.

But, OP has stated that they plan to move to a no tax state before RMDs begin, so the 8.5% of state tax will not apply.... their tax rate will for federal only and likely less than 15%... a far cry from 20%.

 

[LOL!]

@CardsFan, yes, I cheated. Please accept my apologies for that.

1. Yes, we had a lot of Qualified Dividend Income. Just because we had a significant chunk of non-qualified dividend income does not mean we didn't have a bigger chunk of QDI.

2. Yes, my spouse is working. Lots of income doesn't appear on Line 7 Form 1040 such as employer health insurance, FSA, 401(k) contributions.

3. I have a little self-employed income. I was able to exclude ALL of it from state and federal income taxes, but not SS taxes.

4. We get the American Opportunity Tax Credit of $2500 which the OP will not get.

5. We gave lots of money to charity this year when we bunched deductions, so our Schedule A is outsized to normal years. We use a Donor Advised Fund.

6. On the Foreign Tax Credit, if you have your foreign funds in your IRA or 401(k), then you pay those foreign taxes, too, but you don't get a tax credit for them.

7. Even if one's net capital gains are less than zero, one still has the money to spend from selling shares. Return of capital is tax-free.

8. I was considering only Federal income taxes and not state taxes.

9. You noticed the AOTC, so that means we have a child in college which gives us another exemption.

I guess the OP is screwed on taxes.