Trade off between SS starting age and withdrawal rate

[Hermit]

Nonsense. If RMDs/tax torpedo is an issue, then it is better to defer SS and use any headroom to reduce tIRAs through withdrawals or Roth conversions before starting SS.

Are you sure this is correct in all situations? If you have significant income and have only enough headroom for SS at 62, I would think it would be worth running the numbers to determine taxes throughout your lifetime to see which direction may work better. You are talking about limiting your yearly income by quite a bit after 70 when you take SS at 62.

 

[pb4uski]

I think if you look at the actual SS cash flow, there is no "investment".

I paid taxes to the gov't. The gov't used my tax money to pay benefits to my parents, grandparents, and possibly other people in their generation. My taxes were spent and gone in the year I paid them. The gov't didn't keep any of my money.

That was an okay deal to me. It means my MIL did not live with us.

Now, the gov't will tax my children and possibly grandchildren to pay benefits to me and people in my generation. That's okay, too.

I don't think your impression is totally right... the SS trust fund tracks taxes paid in less benefits paid out and invests its cash flow in general fund treasuries... it currently has a $2.9 trillion balance because over the years it has collected so much more than it has paid out. The last year that benefits paid exceeded taxes collected was back in 1981.

https://www.ssa.gov/oact/STATS/table4a3.html

 

[pb4uski]

Are you sure this is correct in all situations? If you have significant income and have only enough headroom for SS at 62, I would think it would be worth running the numbers to determine taxes throughout your lifetime to see which direction may work better. You are talking about limiting your yearly income by quite a bit after 70 when you take SS at 62.

What do you mean by "have significant income and have only enough headroom for SS at 62"?

When I refer to headroom, I am referring to the top of the person's current tax bracket and their taxable income from non-discretionary income.

So in my case I have dividends and interest from taxable account funds, LTCG from rebalancing and a small pension, offset by the standard deduction before any discretionary Roth conversions or tIRA withdrawals.

What do you mean by "limiting your yearly income quite a bit after 70 when you take SS at 62"?

When I am 70 my taxable accounts will be mostly gone so my income will be my pension, SS and RMDs... not much to manage at that point.

 

[Hermit]

What do you mean by "have significant income and have only enough headroom for SS at 62"?

When I refer to headroom, I am referring to the top of the person's current tax bracket and their taxable income from non-discretionary income.

So in my case I have dividends and interest from taxable account funds, LTCG from rebalancing and a small pension, offset by the standard deduction before any discretionary Roth conversions or tIRA withdrawals.

What do you mean by "limiting your yearly income quite a bit after 70 when you take SS at 62"?

When I am 70 my taxable accounts will be mostly gone so my income will be my pension, SS and RMDs... not much to manage at that point.

Everyone is different. I have a pension that puts me in the 22% tax bracket for the rest of my life. Head room to me is the difference between my income and the top of the 22% bracket. I have no taxable account to draw on to pay taxes. If I can stay under the top of the 22% tax bracket and draw my SS at 62, that money could go into a taxable account to help me with those taxes for Roth conversions or anything else I needed a large amount of cash for. When I turn 70.5 and start RMDs, my income will include my pension, RMDs and that now much smaller SS income. That could keep me out of one of the higher tax brackets while still providing some discretionary spending prior to RMDs.

BTW, I am taking SS on my account when I turn 70. The above scenario might have worked for me if I wasn't already taking SS on my late wife's account which will disappear when I start on my account. I also plan to take RMDs as QCD distributions to charity so I personally don't plan on a tax torpedo situation.

 

[pb4uski]

Sounds like you will be in what is now the 22% or 24% no matter what, so the impact of Roth conversions for you is not necessarily current tax savings but more tax savings on growth of the Roth. Another factor to consider is the tax impact on your heirs since they might have a lower tax bracket than you do.

 

[joeea]

Another point is I will be lucky to get another 10 - 12 years in, so I wanted to max my SS in that time. If I take SS at 65, the difference between SS at FRA is only $145pm. It will take 15 years to break even if I wait, but which time I may/will be 6' under pushing up the daisies.

Knowing exactly when you will die does make the math easier.

 

[UnrealizedPotential]

At age 50, a year and a half from now I can collect my pension at a much reduced rate. If I took it at 50 I would receive about $625 a month. If I wait until age 58 I could receive my full pension on what I've earned. At this point I think it makes little sense to take it at 50. Each year I wait after 50 the amount goes up until I reach full benefits. It would maybe be twice the amount I would get at 50.

However if my retirement plan goes bad, then I will take a hard look at taking my pension early, but I don't want to. I will get SS but I have no idea when I will start taking it. But right now things are going well. So for me I look at my pension as sort of a safety valve if I need it early, only in the worst case.

 

[pb4uski]

One thing you might want to check into is the rate of increase for each year. My pension went up generously from 55 (earliest I could take it) until 60 and the annual increases from 60 to 65 were lower... so I took it at 60 once the annual increases moderated.

 

[omni550]

Sounds like you will be in what is now the 22% or 24% no matter what, so the impact of Roth conversions for you is not necessarily current tax savings but more tax savings on growth of the Roth. Another factor to consider is the tax impact on your heirs since they might have a lower tax bracket than you do.

I'm in the same boat, also. Don't have any heirs to worry about.

Am trying to figure out how to calculate the the value of tax savings on growth of Roth. And whether it makes sense to pay the taxes for Roth conversions now. And, if so, how much to convert.

omni

 

[Red Badger]

Data for survival rates take in genetics, a fatal accident either your fault or some else can't be calculated.

Have to disagree here. I can calculate it based on the weather forecast. It rained here the last few days here. When the dog and I tracked mud into the house yesterday, my DW 'splained to me that a further offence on my part would result in an "accident" where my dismembered corpse would fertilize her garden beds for year to come.

The fur kid? He got off Scott free.

 

[rayvt]

Am trying to figure out how to calculate the the value of tax savings on growth of Roth.

There is no tax savings on growth of Roth. Multiplication is commutative.

You either leave it in the IRA, it grows X% and then you pay tax on that X% growth.
--or-- you convert IRA to Roth, pay tax now, and the now-reduced Roth grows X%.

Either way, it nets out to the same amount. The only tax advantage is by paying the income tax at whichever time you are in the lower tax bracket.

Plenty of people did conversions in the last few years and paid 15% tax, but if they had waited until this year they'd only be paying 12% tax.

 

[pb4uski]

^^^ correct. A simple example.... one has $10,000 in a tIRA and is in the 22% tax rate and expects to be in that tax rate indefinitely.

If you leave the money in the tIRA for 10 years at 7% it grows to $19,672. You take it out, pay the 22% in tax and have $15,344 to spend.

Alternatively, you convert and pay the tax from the proceeds of the tIRA and have $7,800 in the Roth. After 10 years at 7% the $7,800 has grown to $15,344.

Where there is a bit of an advantage is if you have $2,200 in taxable and $10,000 in a tIRA.

If you convert, your $2,200 goes poof (pays the taxes) and your $10,000 grows to $19,671.

If you don't convert, your taxable account grows to $3,744 after paying tax on the annual returns and the $10,000 grows to $19,671. When you withdraw and pay the taxes you have a net of $19,087.

So the advantage of the Roth is not having to pay tax on the growth in the taxable account, which totals $584.

 

[googily]

^^^ correct. A simple example.... one has $10,000 in a tIRA and is in the 22% tax rate and expects to be in that tax rate indefinitely.

If you leave the money in the tIRA for 10 years at 7% it grows to $19,672. You take it out, pay the 22% in tax and have $15,344 to spend.

Alternatively, you convert and pay the tax from the proceeds of the tIRA and have $7,800 in the Roth. After 10 years at 7% the $7,800 has grown to $15,344.

Where there is a bit of an advantage is if you have $2,200 in taxable and $10,000 in a tIRA.

If you convert, your $2,200 goes poof (pays the taxes) and your $10,000 grows to $19,671.

If you don't convert, your taxable account grows to $3,744 after paying tax on the annual returns and the $10,000 grows to $19,671. When you withdraw and pay the taxes you have a net of $19,087.

So the advantage of the Roth is not having to pay tax on the growth in the taxable account, which totals $584.

Thank you for this. A wonderfully clear explanation.

 

[garyt]

No, I'm serious. People use this reasoning all the time. Is this really what's on people's minds on their deathbed?

Yea, that one gets me too. If I die, who cares? I'm dead.

 

[garyt]

Bit of a thread jack, but didn't want to start another thread. I'm retiring this year or next. My wife,who is 3 years younger, will work another year or two. So if I take SS at 62 and my wife is working if we file jointly, will my SS be taxed? Should we file separately? Should I wait to collect?

 

[Lawrencewendall]

Bit of a thread jack, but didn't want to start another thread. I'm retiring this year or next. My wife,who is 3 years younger, will work another year or two. So if I take SS at 62 and my wife is working if we file jointly, will my SS be taxed? Should we file separately? Should I wait to collect?

To calculate how much of your SS is taxable
https://www.fool.com/retirement/2016/06/06/social-security-tax-calculator-are-your-retirement.aspx

 

[Dtail]

To calculate how much of your SS is taxable
https://www.fool.com/retirement/2016/06/06/social-security-tax-calculator-are-your-retirement.aspx

Note that the baseline is 25k for Single and 32k for Married, so one gets something of a marriage penalty related to the taxing of SS.

 

[Lawrencewendall]

Note that the baseline is 25k for Single and 32k for Married, so one gets something of a marriage penalty related to the taxing of SS.

But remember, not all income is taxable.

In general, the Social Security Administration defines “earned income” as “income from wages or net earnings from self-employment.” For example, earnings may include bonuses, commissions, and severance pay. Investment income, pensions, capital gains, and inheritances are not considered wages. Other types of payment made by an employer may be considered earnings under certain conditions.

https://www.aarp.org/work/social-security/info-02-2009/faq_social_security_earnings_limit.html

 

[Dtail]

But remember, not all income is taxable.

In general, the Social Security Administration defines “earned income” as “income from wages or net earnings from self-employment.” For example, earnings may include bonuses, commissions, and severance pay. Investment income, pensions, capital gains, and inheritances are not considered wages. Other types of payment made by an employer may be considered earnings under certain conditions.

https://www.aarp.org/work/social-security/info-02-2009/faq_social_security_earnings_limit.html

Good to know. I have a pension, albeit a small one, but now can take that income out of my spreadsheet for analyzing how much SS is taxable.

 

[CardsFan]

Good to know. I have a pension, albeit a small one, but now can take that income out of my spreadsheet for analyzing how much SS is taxable.

Be careful. The AARP article concerns the question of earned income relative to reducing benefits, not the taxation of those benefits.

Using the referenced Motley Fool calculator, both pension payments and IRA withdrawals will increase the amount of SS subject to taxation.

 

[pb4uski]

Your best bet is to use TT or the What-If worksheet in TT as it does the calculation.

 

[Dtail]

Be careful. The AARP article concerns the question of earned income relative to reducing benefits, not the taxation of those benefits.

Using the referenced Motley Fool calculator, both pension payments and IRA withdrawals will increase the amount of SS subject to taxation.

Ahhh
Okay back to the original spreadsheet and will use an SS tax calculator to confirm.

 

[mpeirce]

There is no tax savings on growth of Roth. Multiplication is commutative.

You either leave it in the IRA, it grows X% and then you pay tax on that X% growth.
--or-- you convert IRA to Roth, pay tax now, and the now-reduced Roth grows X%.

This example assumes the taxes are paid from IRA money.

If one is able to pay the taxes from non-IRA money you now have more money in the tax sheltered account (the Roth).

I realize the money to pay your taxes isn't magic - it came from taxable accounts.

Example: $100,000 in IRA. To convert this you have to pay $16,500 in taxes (assuming roughly 12% federal plus 4.5% state tax (Ohio in my case). You end up with $100,000 inside the ROTH (not $83,500). You have $16,500 tax advantaged money compounding tax free.

Am I wrong?

 

[CardsFan]

I just spent a little more time with the Motley Fool calculator, and got a wake-up call about converting to Roth after starting SS at FRA.

With SS and other income (Int/Div/Cap gains) I will be limited to about $15,000 in conversions (staying in the 12% bracket). But the conversions will increase the taxes on SS by $1,500! Effectively a 10% additional tax on those conversions.

So, if we take SS at FRA, looks like conversions do not make sense. We could defer SS longer, of course.

Time to re-think the plan. We have 3+ years before FRA, so no urgency yet.

 

[pb4uski]

.... Am I wrong?

In most cases you are right.... one exception might be where the funds used to pay the tax are also tax free in the taxable account... like domestic equities where qualified dividends and LTCG are 0% if your taxable income is low enough. Then it is a push.