Another Math Logic Problem

[marko]

So, most of you know that I have a severe blind spot when it comes to numbers. That's why my company assigned two accountants to me to keep me in line.

Here's my math logic dilemma of the day:

Trying to figure out how much I need to withdraw from the IRA for 2024:

Scenario 1: I take my planned after tax spending MINUS after tax SS and that should be my after tax cash requirement, which if I ADD my tax rate, should equal the taxable amount I should withdraw.

Scenario 2: I take my planned after tax spending and ADD my tax rate to get my pre tax spending. Then subtract my PRE TAX SS I should get the taxable amount I should withdraw.

Except the numbers between the two scenarios don't line up. Obviously, I'm adding in my tax rate either before or after the time I should be.

Like the man with two watches, I'm not sure which is correct. Thanks to Excel, the math itself is solid (I think)

As always, any help for this idiot is most appreciated. (amazed I got this far in life being such a dope)

Note that for my pre/post SS tax calculation I just did a straight percentage; same as my tax rate vs the more complicated true SS tax.

 

[wmc1000]

Have you taken into consideration what the taxable portion of your SS is which is based on your income level, Ie up to 85% taxable, which affects the amount you need to withdraw?

 

[marko]

Have you taken into consideration what the taxable portion of your SS is which is based on your income level, Ie up to 85% taxable, which affects the amount you need to withdraw?

As noted, I just did a flat rate, same as my regular tax. No SS tax gyrations.

The differences are way more than any tax irregularity.

 

[Dash man]

Remember the funds you withdraw for taxes are also taxed.

 

[marko]

Remember the funds you withdraw for taxes are also taxed.

Yeah. I tried to keep it as straightforward as possible but just including everything as "2024 Spending"

 

[pb4uski]

To get your withdrawal, divide by 1-t.

IOW, if you want $100 to spend and you are in the 12% tax bracket then withdraw $114 ($100/(1-12%)).

12% tax on $114 is $14, leaving $100 to spend.

Or even better, put your SS and use trial and error for withdrawals to get your target amount to spend using https://www.irscalculators.com/tax-calculator

As an example, if you are married filing jointly and both over 65 (filing status box at the top of the page) and had $35k in SS and $74k in tax-deferred withdrawals (in the Unearned Income box) then you would end up with $100,674 for spending. Play with different tax-deferred withdrawal amounts until you get to your after-tax spending.

While the tool is for 2023, it would likely be close enough for 2024.

 

[marko]

To get your withdrawal, divide by 1-t.

IOW, if you want $100 to spend and you are in the 12% tax bracket then withdraw $114 ($100/(1-12%)).

12% tax on $114 is $14, leaving $100 to spend.

Yes, that is the formula I'm using in Excel. What I'm trying to get my arms around is why the two scenarios have a different result.

I'm assuming that I'm adding the tax at the wrong point in the equation, either adding/subtracting first or including the tax before/after the time I should be.

In the first, I"m subtracting my SS before calculating my pre-tax amount. In the second, I'm adding the tax first then subtracting SS.

 

[cathy63]

For this estimate, it sounds like you're treating your SS as if it were 100% taxable income and your IRA withdrawal is also 100% taxable income; and you're also using a flat percentage as a tax rate.

In that case, the amount of money you need to gather before taxes is:

$X = Spending / (1 - tax rate)

E.g. if you want to spend $100K and your flat tax rate on all income is 15%, then the amount you need is:

$X = $100K / (1 - .15) = $117.65K

The amount you need to withdraw from the IRA is $X - SS (pre-tax). In my made-up example, if you get $30K in SS, the amount to take out of your IRA is $117.65 - $30K = $87.65K.

Obviously this assumes that the amount you need to live on is greater than your RMD. If not, you would just withdraw the RMD amount and stash the extra in a taxable account.

 

[latexman]

Or even better, put your SS and use trial and error for withdrawals to get your target amount to spend using https://www.irscalculators.com/tax-calculator

Thanks! I like how it consolidates all the filing status choices, integrates Fed and State calculations together, and has results on a single page. Bookmarked!

 

[latexman]

Except the numbers between the two scenarios don't line up. Obviously, I'm adding in my tax rate either before or after the time I should be.

Is there anything else baked into your numbers? SWAG, like Medicare payments coming out of SS?

 

[marko]

For this estimate, it sounds like you're treating your SS as if it were 100% taxable income and your IRA withdrawal is also 100% taxable income; and you're also using a flat percentage as a tax rate.

In that case, the amount of money you need to gather before taxes is:

$X = Spending / (1 - tax rate)

E.g. if you want to spend $100K and your flat tax rate on all income is 15%, then the amount you need is:

$X = $100K / (1 - .15) = $117.65K

The amount you need to withdraw from the IRA is $X - SS (pre-tax). In my made-up example, if you get $30K in SS, the amount to take out of your IRA is $117.65 - $30K = $87.65K.

Obviously this assumes that the amount you need to live on is greater than your RMD. If not, you would just withdraw the RMD amount and stash the extra in a taxable account.

Cathy63, once again you come through with something that even I can understand!

Thanks!!

 

[donheff]

Math is hard. I get wrapped around the axles on these questions too. I recently stumbled on the calculator site pb4uski mentioned when helping my sister-in-law out. It does seem like a nice, quick tool.

 

[marko]

Math is hard. I get wrapped around the axles on these questions too.

But my mother always told me that I have many other excellent qualities......

 

[marko]

Math is hard. I get wrapped around the axles on these questions too. I recently stumbled on the calculator site pb4uski mentioned when helping my sister-in-law out. It does seem like a nice, quick tool.

Yes, I like this one but prefer the Turbo Tax one here https://turbotax.intuit.com/tax-tools/calculators/taxcaster/ I like it better because I don't have to lump all/most of my retirement income into one box. As proven on this thread, adding up a bunch of numbers can be dangerous for me. TT let's you break them out into different boxes.

 

[dknighd]

Remember the funds you withdraw for taxes are also taxed.

Yep. And tax rates are not constant. For simplicity I assume 85% of SS is taxable (since it always seems to work out that way.) But even that 85% is taxed at a different rate depending on other income.
A simple $X = $Y / (1 - tax rate) does not work because tax rate is not constant.


I've decided to just consider taxes as an expense. If I withdraw $A, I can spend $B = $A - $taxes, on other things.


The difficult part for me is I'm also taxed on money I do not actually "withdraw". So there is no direct relationship between spending, withdrawals, and $taxes.

 

[dknighd]

@marko, you say


"Living well is the best revenge!
Retired @ 52 in 2005"


So, you been retired for about 18 years. And are about 70 years old. Congratulations!


How did you do your taxes for those years? Did you hire somebody, or use tax software, or pencil and paper? I can't remember when I used pencil and paper. I use tax software. Never felt the need to hire anybody.


The math is pretty simple. Addition, subtraction, sometimes multiply or divide. The difficult part is deciding what numbers to use.


I remember transitioning from paper and pencil, to trying to use excel, it was a fools errand. It took me a few years to discover that it was cheaper to buy tax software.



I've occasionally used last years tax software to estimate this years taxes. Not perfect, but often close enough. If you pay somebody, they can probably help.


I still use excel spreadsheets to replace pencil and paper for estimates. Only because then I also do not need a calculator. Excel can replace a calculator. But it can never replace the numbers you estimate on the back of your envelope. Over the years, I've actually created an excel spreadsheet that replaces the back of my envelope. Most years the back of the envelope is close enough.

 

[CRLLS]

I assume that you are talking about tax deferred monies and not yet subject to RMDs. I don't think it makes a heck of a difference which formula you use for your "plan." Figure out your annual needs and divide it by 12. Use that amount to setup an automatic monthly w/d. Adjust as required as the months go by.

I say that for several reasons. First, one cannot know all expenses to any degree of accuracy. unplanned expenses do arise. I guess that it why they call them unexpected expenses.

The second reason is it works in your favor. If you find that your monthly draw is too high, you can reduce it later in the year, thus reducing the taxes paid on unneeded w/d from tax deferred accounts.

Last is that growth is typically an upward trend. The longer (months) money is kept in a growing account, the more you would have left at the end of the year. Yes, there is a lot of variability in that. Often it will be the bad choice, but over time (years) I believe that it is the better.

With one year doing the above, you will have a better idea as to how to adjust your plan for the following year. This is what I did for a few years before SS, with a p/t gig that paid less than our expenses. I setup an auto w/d from my IRAs and by August/September I knew whether I should/could reduce or increase my auto w/d.

 

[marko]

@marko, you say


"Living well is the best revenge!
Retired @ 52 in 2005"


So, you been retired for about 18 years. And are about 70 years old. Congratulations!


How did you do your taxes for those years? Did you hire somebody, or use tax software, or pencil and paper? I can't remember when I used pencil and paper. I use tax software. Never felt the need to hire anybody.

We have the same accountant that we've been using for almost 40 years. Our taxes can be somewhat complex.

Note that this thread isn't so much about taxes but more about mathematical logic ( do I add my taxes before or after my calculation) and thanks to a few other inputs has been resolved on my part.