Anyone else plan to take SS early, to stay in a lower tax bracket?

[almost there]

https://www.morningstar.com/articles/1077620/how-retirees-can-avoid-the-tax-torpedo

More on the "Tax Torpedo"

 

[New Thinking]

Even with the last 8 years of Roth conversions, one more this year and one final in 2023. I will never be able to get my taxable income under $44k a year. In my case SS at 62 for both is $2900 / mo. So I will be paying 12% tax on $2465 rather than $1450.
I love the idea though. Just cant get down that low. With rental income and a small lifetime fixed annuity ($4700 / month today)
Unless I am missing something?

Let me answer it this way. The chart is a bit misleading as it is not necessarily 85% of SS benefit taxed at filer's marginal tax rate in the lower right hand box. It's UP TO 85%. In reality, the Combined Income formula says it is the lowest of:


1. 85% of the benefits; or
2. 50% of the benefits plus 85% of any excess over the second threshold; or
3. 50% of the excess over the first threshold, plus 35% of the excess over the second threshold.

So, under #3 if married, you could have $64,000 of SS income going into the formula at a 50% rate (if you delayed) before any SS gets taxed. Your SS would be roughly the $64,000 if you delayed from 62 to 70 but would vary based on COLAs. Many would have much lower other taxable income at age 70 because they spent it down to "bridge" to delayed SS and did Roth conversions along the way. So, one doesn't have as many IRA dollars to push that large SS benefit over the thresholds. Your situation may be different.

 

[New Thinking]

Cuts

Agree, the SS cuts will be forward looking. Like being able to get full SS at 65 and now 67 yrs. That went into effect in 1983.
One question, if you are over 62 and under 70. But not taking SS, are you considered a retiree?

I look for both. Higher tax's in the future. And a reduction in SS.
Guess I don't have as much faith in the Govt. as some.

Yes, I think it's safe to assume that someone eligible to take SS and has chosen not to, is as safe as someone who has started benefits.

Yes, the changes in 1983 gave people a long time to adjust and prepare and I would agree that most adjustments will follow suit. (What might be more immediate is a change to SS taxes or how the COLA is calculated)

We'll have to see what happens in the equity market if returns end up lower in the near term, as coupled with relatively low real interest rates in recent years, SS becomes that much more important to retirees and thus harder to cut.

The way I have thought about it is we've had roughly 15% of our paychecks go into the program all our working lives. Kinda hard seeing a cut made when we are retired.

 

[almost there]

Agree.
While potentially / mathematically unsound...
Part of me, would rather tap the 15% that was removed from our checks
than take distributions from the IRA. lol lol
At lease the IRA can be inherited, if I get creamed on my motorcycle today.
That 15% goes up in smoke.

Side note, my retirement is based on a 3% return. So, I am more conservative than most.
When it comes to investing.

 

[ShokWaveRider]

Side note, my retirement is based on a 3% return. So, I am more conservative than most.
When it comes to investing.

Similar to you ours is based on 4% return. So far so good.

 

[wmc1000]

I recommend everyone run their numbers with and without SS in your tax program or a tax estimator like https://www.irscalculators.com/tax-calculator.

Thanks for the link. I plugged in all my numbers and it confirmed what I had previously calculated manually. Our Fed tax will be about $400 and state runs about $1,000.

 

[NoEZmoney]

Are You Considering Roth Conversions?

My brother was a teacher and had sizeable tax deferred accounts and took SS before FRA and didn't convert, now he's wishing he had waited on SS and made ROTH conversions at a lower (no-income) tax rate. Now he's got RMD's that are adding to his annual tax bill at a higher rate than had he waited and converted.

FWIW -- your mileage may vary.

PS... we're 65 and retiring but waiting 'til 70 and converting to ROTH's for the next 4 years which will be our only reported taxable income -- (cash buckets and small withdrawals for living 'til 70.)

 

[almost there]

Yea, not everyone looks ahead. Did he retire early?
Roth conversions have been around since 1998.
I started converting 8 yrs ago. Should have done more.
Will do it 2 more years this year and 2023.
Then the home made paycheck begins with SS and small annual IRA
distributions. From 2024 to 2044.
After that it will be all Roth and savings. Trad IRA will be gone.


I am betting the Tax rate to be higher going forward.
So for me, I try and make as little as possible.
Now, and in the future.

 

[NoEZmoney]

Yep, he took SS at 63 and couldn't accept the ROTH conversion tax cost and didn't really do the math should his tax-deferred accounts deliver higher-than-expected returns (which they did) so when he turned 70, he had some good gains and writes a nice check to Uncle Sam. I tell him to look at it this way:
"It's better to have an income-tax problem than an income problem." He's loaded but still hates to write the check. LoL!

 

[almost there]

Agree, thats the worst.
Writing Prop. Tax & Income tax checks at the end of the year.
Its a lot less painful if its in a monthly mortgage, or out of a paycheck.
Got rid of the mortgage 20 yrs ago. And the J O B almost 10 yrs ago.
But the one big lump is a killer.

 

[skyking1]

Yep, he took SS at 63 and couldn't accept the ROTH conversion tax cost and didn't really do the math should his tax-deferred accounts deliver higher-than-expected returns (which they did) so when he turned 70, he had some good gains and writes a nice check to Uncle Sam. I tell him to look at it this way:
"It's better to have an income-tax problem than an income problem." He's loaded but still hates to write the check. LoL!

I keep reading these stories and am happy to be in the choir now.

 

[almost there]

Agree 100% if you retire around 62, with a large IRA or 401K to hold off on SS and do conversions.

 

[Exchme]

Thanks for the overview. Don't know if "ridiculously more" is apt (e.g., it appears the Case Study tool has all the tax calculations mentioned - albeit for only one year at a time), but it may depend on the specifics of someone's situation.

I suppose it wouldn't hurt to give the Bronze version a try, unless this is a case of "oh, the free version won't provide enough feedback - one really has to buy the Gold version to understand...."?

The program did all the calculations for each historical year when you hit the case study button and displays the range of returns (deciles) on the graph. But yes, it only displays the detailed, account by account results for the starting year you select. Since there are maybe 100-150 data fields x 30+ years, I wouldn't really know what to do with all that detail for more than one year at a time?

As for what Bronze does, I can't help at all; I've never looked at it. I needed a tool, saw good reviews for Gold, figured $99 (1st year price, renewal is $49) for something to help me plan retirement was pretty cheap, so I bought a copy and have been happy with it.

 

[skyking1]

Agree 100% if you retire around 62, with a large IRA or 401K to hold off on SS and do conversions.

DW does not have a large one, and we can convert to the top of the 12% tax bracket and eat virtually all of it up into a Roth. She would have no RMD's or taxes from investments, from that point forward when we take SS.
This seems to be the surviving spouse best case scenario.

 

[SevenUp]

Is P.G. similar to a combination of the Retiree Portfolio Model and Case Study Spreadsheet tools?

In other words, how do the above tools compare with each other?

No comparison, Pralana is ridiculously more full featured than those.
<snip>

Thanks for the overview. Don't know if "ridiculously more" is apt (e.g., it appears the Case Study tool has all the tax calculations mentioned - albeit for only one year at a time), but it may depend on the specifics of someone's situation.

I suppose it wouldn't hurt to give the Bronze version a try, unless this is a case of "oh, the free version won't provide enough feedback - one really has to buy the Gold version to understand...."?

The program did all the calculations for each historical year when you hit the case study button and displays the range of returns (deciles) on the graph. But yes, it only displays the detailed, account by account results for the starting year you select. Since there are maybe 100-150 data fields x 30+ years, I wouldn't really know what to do with all that detail for more than one year at a time?

As for what Bronze does, I can't help at all; I've never looked at it. I needed a tool, saw good reviews for Gold, figured $99 (1st year price, renewal is $49) for something to help me plan retirement was pretty cheap, so I bought a copy and have been happy with it.

Two different meanings for "case study."

I was referring to the case study spreadsheet that seems a reasonably comprehensive tax estimation tool for a given year, and the marginal tax rate chart it generates has been helpful for our Roth conversion strategy.

The RPM spreadsheet was lacking in some capital gain tax functionality but recent updates mention improvement in that area - haven't investigated those.

 

[werdone]

We are doing something along the lines you are. Wife started her SS at 62 and we are converting IRA to Roth (hers first to avoid RMD) to the top of the 12%. We are lucky in that our expenses are only $5 ~ $10K more than her SS. It works out that taking my SS at FRA is the best option for us. We will reduce our conversions down when my RMDs kick in (assuming RMD stay at age 72). When conversions are finished, our actual tax burden reduces to $0 (after standard deduction). Or so goes the plan...

 

[almost there]

Sounds smart. Another interesting point. The standard deduction for a married couple in 2012 was $11,900. For 2022 $25,900. I will be 70 in 2032. Wonder what it will be then? I don't have a warm fuzzy about taxes going forward. Not so sure printing all that money last year was smart. Or keeping rates at zero. And am afraid we will all have to pay for it.

 

[werdone]

Sounds smart. Another interesting point. The standard deduction for a married couple in 2012 was $11,900. For 2022 $25,900. I will be 70 in 2032. Wonder what it will be then? I don't have a warm fuzzy about taxes going forward. Not so sure printing all that money last year was smart. Or keeping rates at zero. And am afraid we will all have to pay for it.

I tend to spin tires too much going thru "What ifs". Must have adjusted the spreadsheet 50 times. Now I just review twice a year and adjust as needed using the latest tax/SS/IRA rules. However I still find myself on the websites at 4AM with a cup of coffee... So far we really like the idea of being able to do what we want when we want with the nest egg by having it in a Roth. I am happy just getting a slightly below avg safer return and it is baked into the current spending plan. Low maint and less chance of me doing something really stupid.

 

[ShokWaveRider]

"It's better to have an income-tax problem than an income problem."

This is SO very true.

 

[Out-to-Lunch]

Sounds smart. Another interesting point. The standard deduction for a married couple in 2012 was $11,900. For 2022 $25,900. I will be 70 in 2032. Wonder what it will be then? I don't have a warm fuzzy about taxes going forward. Not so sure printing all that money last year was smart. Or keeping rates at zero. And am afraid we will all have to pay for it.

Don't forget that married couple also got personal exemptions totaling ~$8k.

 

[almost there]

Oh yea. Had to look it up. That went away with the Tax Cuts and Jobs Act.
When the standard deduction almost doubled.
It worked out for me, but understand some didn't do as well.

 

[Chuckanut]

I've already taken SS, but if the market continues down, it may make another Roth conversion more appealing. I'm not quite sure how to look at this form a tax point of view. My pension and now SS pretty much deny me the 0% bracket or even the one just above that. However, this year might be different given our falling market. Overall, I figure a Roth conversion with stocks down 20+ percent can't go too far wrong.

 

[New Thinking]

It may have been mentioned earlier but the tax benefits of delaying SS to age 70 often include significant savings at the state level as well. For example, I'll be in South Carolina and the ordinary income tax rate on income over (just) $15,400 (in 2022) is 7%. SS is tax-free in SC.

By delaying from 62 to 70, I'm roughly doubling (with projected COLAs) the amount of retirement income that we will receive state tax-free. OP indicated $2900 per month at 62. Double that at 70 and another $2900 per month gets tax-free treatment at state level (because it's in the form of Social Security). In SC, that's 7% X $34,800 = $2,436 per year in savings...And think of that savings as being COLA'd too, especially if higher inflation is here for a while.

 

[almost there]

I don't think it was mentioned as its tax free regardless of age taken. (in most states)
While imaginary, an opposing view from Calif. could look at it as missing out on a 9.3% tax break from 62 to 70.0
(9.3% / $61,215 to $312,686. $2,695.19 plus 9.3% of the amount over $61,214.)

If fed tax rates in 9 yrs are the same as today, the additional $$$ over 62 (in my case) would be taxed at a 10% higher rate. 85% of it anyway. As you're 7% is imaginary where the 10% on 85% of it is real. $2958.00 annually using you're example at 70.

I now see it as more of a glass half full / half empty type of discussion.
100% dependent on ones personal situation.

I am basically going to control my annual income with IRA distributions. After my final 2 Roth conversions 2022 and 2023.
Its roughly $2500 a month from 62 to 82 to keep me in the 12% bracket.
That was my goal. having the entire Old 401K / IRA taxed at 12%.
Its the little things.....

 

[Lisa99]

I recommend everyone run their numbers with and without SS in your tax program or a tax estimator like https://www.irscalculators.com/tax-calculator.

Thanks for this link, I've not seen it before. I've recently moved to Iowa and was able to run a couple of scenarios with and w/o SS.

If I take $25k in capital gains, for example, my Iowa tax is around $2k. If I take SS at 62, also $25k, my Iowa tax is $200 since the state doesn't tax SS.

With my portfolio down and the big difference in taxes due, easy for me to decide to take SS next year at 62.