Social Security tax Torpedo

[TheWizard]

I tried to figure out this model, but I failed. I don't understand how to set up social security and I don't see how to get/see detailed taxable income and cashflow.

Just put together a spreadsheet projecting your monthly Adjusted Gross Income year by year, to age 75 or so.
Tweak it annually, as more info becomes available.

It's not rocket surgery...

 

[pb4uski]

Yes, I have my own homegrown spredsheet with the following columns:

Year, Age, Taxable Interest, Qualified Dividends, Pension, tIRA withdrawals, SS – her, SS – him, Adjusted Gross Income. Standard Deduction, Subtotal (taxable income before Roth conversions using 85% of SS), Roth conversions, RMD factor, RMD, Taxable Income.

I then split the Taxable Income between Ordinary Income and Preferenced Income and calculate the tax.

In order to do estimates of interest and dividends I project my taxable account balances as beginning balance plus investment income less gap (spending less pension, 100% of SS, tIRA wthdrawals, etc) = ending balance.

It's a little complicated only because I have embedded that tax calculations for the top 3 tax brackets in the spreadsheet.

 

[statsman]

If I had enough money to be heavily impacted by taxes then I wouldn't worry about taxes because I would have plenty of money to pay them.

^^^ This ^^^

 

[Midpack]

If I had enough money to be heavily impacted by taxes then I wouldn't worry about taxes because I would have plenty of money to pay them.

^^^ This ^^^

You want to optimize no matter what, pay the lowest taxes you legally can. You “have plenty of money” if you do “worry about taxes.”

 

[statsman]

You want to optimize no matter what, pay the lowest taxes you legally can. You “have plenty of money” if you do “worry about taxes.”

I wasn't agreeing to paying more taxes than I need to. But I am not going to altered our income and investment plan a lot in order to save a bit of income taxes. I realize for some people, the lowest tax bill is their goal. I can't live and invest that way.

 

[CardsFan]

You want to optimize no matter what, pay the lowest taxes you legally can. You “have plenty of money” if you do “worry about taxes.”

While I basically agree with this, sometimes we at E-R.org tend to obsess over optimizing (taxes, Roth conversions, when to take SS, etc.) when it is impossible to do accurately without knowing when you (and your spouse, if you have one) will hit your expiration date.

The best we can do is plan and make reasonable attempts to mitigate risks, maximize gains, and minimize taxes.

JMHO.

 

[dmpi]

While I basically agree with this, sometimes we at E-R.org tend to obsess over optimizing (taxes, Roth conversions, when to take SS, etc.) when it is impossible to do accurately without knowing when you (and your spouse, if you have one) will hit your expiration date.

The best we can do is plan and make reasonable attempts to mitigate risks, maximize gains, and minimize taxes.

JMHO.

These are difficult problems. There's a level of satisfaction knowing that you've discovered and implemented the optimal solution for your own personal situation.

 

[TheWizard]

Yes, I have my own homegrown spredsheet with the following columns:

Year, Age, Taxable Interest, Qualified Dividends, Pension, tIRA withdrawals, SS – her, SS – him, Adjusted Gross Income. Standard Deduction, Subtotal (taxable income before Roth conversions using 85% of SS), Roth conversions, RMD factor, RMD, Taxable Income.

I then split the Taxable Income between Ordinary Income and Preferenced Income and calculate the tax.

In order to do estimates of interest and dividends I project my taxable account balances as beginning balance plus investment income less gap (spending less pension, 100% of SS, tIRA wthdrawals, etc) = ending balance.

It's a little complicated only because I have embedded that tax calculations for the top 3 tax brackets in the spreadsheet.

Sounds good.

For the OP's benefit, you can simplify your sheet by just projecting your AGI year by year and then doing certain computations manually each December to compute how much total Roth conversion to do for the year, which is one of the few things in your AGI that you have control over.

That's what I did last December when I totalled up my likely AGI for the year.
I wanted to avoid: a) getting into the next higher IRMAA tier two years later, and b) getting into the 32% tax bracket for 2022.
Also, I had $3000 of TLH which wasn't accounted for in my spreadsheet.

The big advantage of my spreadsheet was 5-10 years ago in my 60s when it was telling me what I would be facing in my 70s.
Now that I'm there, in RMDland, I could discontinue the spreadsheet; my early December sit-down is now the important thing for annual tax planning...

 

[SevenUp]

All those are covered by the case study spreadsheet. E.g., see Roth Conversion with Social Security and Medicare IRMAA, and Taxation of Social Security benefits.

Is that close to what you had in mind?

I tried to figure out this model, but I failed. I don't understand how to set up social security and I don't see how to get/see detailed taxable income and cashflow.

Not sure what "set up social security" means. If you put your gross SS benefits in row 38, the spreadsheet calculates how much is taxable based on your other income amounts.

If you haven't already, take a look at the step-by-step screen shots shown in the "Roth Conversion" article linked above. Can you reproduce that example?

 

[qwerty3656]

Not sure what "set up social security" means. If you put your gross SS benefits in row 38, the spreadsheet calculates how much is taxable based on your other income amounts.

If you haven't already, take a look at the step-by-step screen shots shown in the "Roth Conversion" article linked above. Can you reproduce that example?

Row 38 - I interpret that as "current" social security. If I'm 60 and not going to take SS til 70, does it still go there?

 

[5Miler]

The question of RMDs and Roth conversions has had me bamboozled for a long time. It wasn't really on my mind during the first 10 years of my retirement as I was drawing about $30K per year from my rollover IRA for living expenses. It didn't click with me until I went on SS at 68 that I should have been watching the RMD situation a little closer.

This is my third year of Roth conversions now but I have only been doing a little each year, right around $30K. This year I plan to do $34K which with my SS at $44K, my micro pension and a tad of div/cap gains will bump be hard against the top of the 12% bracket as I file single. I don't see much advantage to converting more into the 22% bracket. I expect to be near the top of the 12% tax bracket for many years after RMDs begin.

When working, my 401K contributions dropped me from the 25% bracket into the 15% bracket so quite the savings on that. Plus I would have paid the top state tax rate of 5.75%. In retirement I don't pay GA state taxes on retirement or pension income under my $65K exclusion. No tax on SS either so no GA state tax for many years now.

It looks like I'm right in the middle of tax torpedo territory as the way 2023 income looks, 53% of my SS income will be taxable. The final $20K of my Roth conversion should show about a 20% tax rate with the torpedo so jumping into the 22% bracket for additional Roth conversions with no real future advantage seems pointless.

 

[SevenUp]

Row 38 - I interpret that as "current" social security. If I'm 60 and not going to take SS til 70, does it still go there?

The marginal rate chart that tool generates is two-dimensional: marginal rate vs. "something". By default, "something" = traditional withdrawals (converted to Roth or not), but other options (e.g., capital gains, 401k contributions, etc.) are also available.

The assumption is that all income and taxes are occurring in the same year. One exception: IRMAA costs that may occur two years in the future are treated as incurred in "this" year.

AFAIK there is no tool that will display a three-dimensional chart, with one dimension being time (i.e., for a span of years) and the other two being the ones described above.

To your specific question, you can
a) look at your current (age 60) marginal rates for Roth conversions with no SS. Then
b) estimate your age 70 incomes, including SS, and look at expected marginal rates (using this year's tax law) for age 70. Then
c) add RMDs for age 75 and repeat step b).

When you see how b) and c) look, that can inform your choice for what to do "this year". Does that work for you?

 

[oldtimer]

When I was doing Roth conversions I watched for the IRMAA threshold but don't do those anymore so it more or less is what it is for us. Really have no control here.

After 70.5 you do have the QCD control lever to adjust IRMAA AGI.

 

[PERSonalTime]

I will start Medicare in January, but part of my retiree health care deal is that they supposedly will reimburse me for Part B premiums and, if applicable, any IRMAA surcharges (haven't done it yet, so we'll see how that goes). Any income we get now is at 22% marginal, so my main concerns for IRA/401k conversions/distributions are the 24% bracket and NIIT.







Here is the shortcut for determining that https://www.early-retirement.org/fo...-income-levels-2021-a-106300.html#post2506932

+1 The same applies to us as well.

 

[mcbraemer]

If I had enough money to be heavily impacted by taxes then I wouldn't worry about taxes because I would have plenty of money to pay them.

For what it's worth, this is how I've always operated... don't like paying taxes much at all. However, better to have to pay taxes following a prosperous year than to avoid a tax bill on the way to the poorhouse.

 

[fishfactory]

Midpack, have you considered filling the 24% bracket with conversions before the income tax rates go up in 2026 ? It is a very large bracket and only 2% points above the 22% bracket you are currently filling. It may be worth it even with the extra Medicare premiums.

 

[dmpi]

What I didn't plan for was my fixed income (bonds & CD) to yield better than 5%. I'm not complaining but this boosted our total income 30% putting us in the cross hairs of the torpedo. I don't know if I should worry too much. One scenario is yields eventually going back down to the 2% level. Or they might stay at these levels for years. Who knows.

 

[meleana]

Don’t know how it will pan out but we are doing some small Roth conversions staying within our 12% tax bracket. I don’t think we’ll be able to avoid it but next year my husband turns 70 and starts SS. I’m 67 so have a few years yet.

Whatever will be will be.

 

[zippy2020]

Spouse has a good (and very rare) pension, so we always knew 85% of our SocSec would be taxed. I took mine at 67. He'll take his at age 70, but he gets socked with the WEP so he'll lose 60% of his SocSec benefit right off the top.

So he's only going to receive a few hundred $$$ monthly. Altho I'd better check with our tax advisor to be sure the income taxes come after the WEP, and not before!

 

[Car-Guy]

So does any know if the money we paid into the Social Security system for the all the years we worked, paid in as pretax or post-tax? I really don't know!

 

[TheWizard]

So does any know if the money we paid into the Social Security system for the all the years we worked, paid in as pretax or post-tax? I really don't know!

There are no pre-tax SS payments...

 

[jollystomper]

It is inevitable for us. I'm not complaining as it will be due to a very good pension and getting the maximum SS payout. We are already getting the torpedo with DW's SS but it does not hurt that bad . I will do Roth conversions before my RMDs are due but it will not be enough.

 

[TheWizard]

There's no torpedo involved.
I have close to $200,000 AGI in retirement, filing single, without any torpedo involved.
And I'm only in the 24% Federal income tax bracket, not 32% or higher.
Cheers...

 

[pb4uski]

So does any know if the money we paid into the Social Security system for the all the years we worked, paid in as pretax or post-tax? I really don't know!

All post tax. That's why for most people about 85% is taxable and 15% is not taxable... the 15% isn't taxable because it is a return of your contributions albeit in an extremely crude and broadbrush way.

 

[Car-Guy]

^^^^Thanks