donheff said:
This would only apply if you didn't have other income (RMDs, taxable pension, etc) that took you up to the point where every dollar of SS is taxed. With income at that level the tax implications are not in favor of waiting.
That's not true.
<Reposted for your enjoyment>
Just to spell out clearly the retire at 70 game plan just look at what happens to a dollar of taxes when you are above the threshold.
On that dollar of extra income you pay.
1) Income taxes on that dollar
2) Plus up to 85 percent (either 50 or 85 percent) of the income from a dollar of SS income which has just become taxable.
So, for example, if you are in a federal bracket of 25 percent you get taxed for that extra dollar at 25 % regular income taxes plus 85 percent of the (over the threshold SS income) for a net tax rate on that extra income of 25 + 0.85 * 25% = 46.25 percent marginal tax rate. That rate isn't even applied to people with million or even billion dollar income.
Now Throw in your state tax and it's even a worse deal for those with "extra" income.
So the retire at 70 game plan just says delay SS and spend down some of that IRA/401k/after tax stash so that when you get SS at 70 less of your income is taxed at that 46 percent (or higher considering state taxes) marginal rate.
Quote from: FIRE'd@51 on September 17, 2006, 03:11:39 PM
I don't follow this example. For a married couple, the 25% bracket starts at a taxable income of $61,301. Assuming this couple took the standard deduction ($10,300) and 2 personal exemptions ($6,600), they would have to have a gross income of at least $78,201 (more if they itemized on Scedule A) to be in the 25% bracket, well above the SS taxability thresholds. At this level, a dollar of SS income (of which 85 cents is taxed) would have an effective marginal tax rate of 0.85*25% = 21.25%, not 46.25%
Usually, these "higher than you might think" marginal rates are the result of triggering something that causes a change in tax rate on a type of income or the disallowance of a deduction (e.g the AMT) or the phase out of a deduction or exemption. Now, if that $78,200 included qualifying dividends and LT capital gains (taxed at 5% in 2007 and 0% in 2008-2010), and extra income (SS or otherwise) were to fill up the 15% bracket bucket, thereby pushing some of the dividend/LT gain income into the 25% bracket where it would be taxed at 15%, you would see the effect you are talking about. However, that would "only" raise the effective marginal rate on that SS dollar to 21.25% in 2007 and to 25.5% in 2008-2010.
Just a few points
1) The $61301 threshold for the 25 percent tax bracket includes one half of your SS income. So if you are one of the heavy hitters and get upwards of $2k a month from SS then the effective 25% threshold starts at under $50k/year income.
2) So any non exempt, non-SS income you have above $50k gets taxed at the marginal federal rate of 46.25%. Plus whatever your state wants to tax you.
3) Now the above discussion is just for the 85% tax rate on SS income. The 50% tax rate on SS income starts at just $32k. If you are a higher level SS receipient then the effective 50% tax rate starts at under $20k of non SS income.
4) The marginal federal tax rate for the $32k to $44k income including half of your SS check is 15% + 0.5*15% is 22.5%
The marginal federal tax rate for the $44k to $61.301k income including half of your SS check is 15% + 0.85*15% is 27.75%
The marginal federal tax rate for the income over $61.301k including half of your SS check is 25% + 0.85*25% is 46.25% <Note corrected for typo>
Plus whatever your state wants to tax you for SS income.
I believe that if you have income separate from SS above any of these thresholds that you just may want to think about when you start taking SS income.