Anticipating a tax increase

[megacorp-firee]

yes it may be less if you have a roth but not as less as having had taken that deduction in your earning years.


i dont think im to far off with 95%. i dont know anyone myself included that would be in a higher bracket not working. there is obviously some but i think its quite few in comparison to the masses. 1 million would give you about 40,000 a year plus ss. even if it was all taxable after deductions and the 3% a year increase in bracketing you still would be low. the first 35,000 is only 1500 in taxes

You could be right, however, there are those of us out there that have
a) a pension (which is taxable)
b) other income producing investments (which some are taxable)
c) and will have @ 70 1/2 rmd's from our 'large' 401ks, which hopefully will be even larger when we reach 70 1/2.

Adding a+b+c gives you a number that may be taxed at a VERY high rate.
i.e. 28 to 32% bracket @ todays tax rates.

It's not the 1st 35K (or even the 2nd) that I am worried about.

IMO, 95% is a very large number and may be an overstatement. This may lull some into a sense of 'ok-ness', when they should really do the math.

 

[mathjak107]

yes you must work the numbers.... ive ran them for myself a few different ways and although yes i will have those massive rmd's and my wifes pension and figuring in about a 3% increase in the tax brackets each year i couldnt get any higher than we are drawing 2 pay checks now .no matter how we tried the biggest advantge was the deduction now. since we hope to retire early our plan is to spend down the tax defered stuff first reducing that down. our income is in the mid six figure range now.those tax brackets increasing every year allowing more income at a lower rate is what made it so hard to justify a roth

 

[Jarhead*]

Don't the income ranges for the tax brackets also ratchet up every year? That will go a long way toward neutralizing the impact of rising tax rates on tax sheltering.

Example: Married, jointly, 28% bracket for 2007 applies to income of $128,500 - $195,850. In 2004 the 28% bracket was $117,250 to $178,060.

So your household income of $120K in 2004 had you at 28%. The same income in 2007 would put you in the 25% bracket.

So without even including the tax deferral on earnings, I figure I'll be best off just continuing to shelter what I can. No one knows for sure, but between the lower income in retirement and the upward creep of the tax bracket boundaries, this still seems the best tactic for me.

Rich: I think you've got it big guy.

While you're on "active duty", (even at 90%), sheltering with both hands and a shovel is a pretty darn good approach.

The way the feds have stretched out the RMD requirements in the last few years, (mostly lost on this board, as it would be for me if I was under 45 years old.).

Previously the RMD was a 16 year approach. Using a $1,000,000 Ira, the minimum started at $62000 out the gate and rising pretty sharply for the next 15 years.

Currently they use 27.4, and the first year requirement is $36,496, and an obviously more gentle rise going forward.

For me personally, I would welcome the situation that my investments have done well enough that taxes become a legitimate complaint.

Anyway, Rich, keep poring it on, and we'll save a spot for you on the fly-stream, and the golf course.

 

[FIRE'd@51]

One thing to keep in mind is, that if/when one spouse dies, the bracket thresholds for the remaining spouse are all cut in half, since he/she must file as a single.

 

[mathjak107]

my credit card bills would more than offset that ha ha ha

 

[Notmuchlonger]

Wouldn't you take into consideration the state tax aspect also? If you live in a high tax state but plan to move out of it in retirement would not a tax deferred plan be better?

 

[markf57]

While w*rking, I was in the 28% marginal tax bracket. After retirement, I will be in the 15% bracket. I am also fortunate enough to have a pension (which is what pushes me towards the upper end of the 15% bracket).
If one has $1M in their 401k/IRA, and do nothing (i.e. no roth conversion), they could find themselves in the 28% bracket at age 70 1/2 rmd time.
If I systematically convert over to say a 12% effective tax rate (25% marginal), until 70 1/2, then my overall tax burden will be less (going forward) and my Roth account will be the bulk of my sheltered funds, growing and coming out tax free.

So you may want to be a little careful waving everyone off of doing Roth conversions.

In addition to getting forced into the 28% bracket (or whatever it will be then), the 401k/IRA is a ticking tax time bomb. Scott Burns refers to it as the Torpedo Tax. While the tax rate tranches are indexed, the taxable amounts for SS benefits are not. I can envision most using a tax deferred plan being bumped into the highest bracket at RMD time and everyone having 85% of their SS benefits taxed.

My plan is to convert my 401k/IRA over to a Roth over time. I just wish that it was easier to convert in the next year in order to keep myself in the same tax rate tranche in the previous year. Why can't the conversion rules be the same as the contribution rules?

 

[mathjak107]

Wouldn't you take into consideration the state tax aspect also? If you live in a high tax state but plan to move out of it in retirement would not a tax deferred plan be better?

absolutley, in our case we live in nyc, we have a state tax thats brutal plus a city tax of over 5%. thats why for us a roth is never a good deal. we own a home we will retire to in pennsylvania. while not a low tax state by any means its a world apart from ny