Social Security tax Torpedo

[qwerty3656]

Are you planning around it, or have you just accepted it as inevitable? I don't see much discussion around it. I would personally love a good model to forecast marginal tax rates taking into account things like the tax torpedo, IRRMA, ACA insurance, RMDs, etc.

 

[TheWizard]

I totally avoided any big increase in AGI and taxes at age 70 (start of SS) or age 72 (start of RMDs) by projecting my AGI in a spreadsheet starting at age 63 when I retired.
I had higher AGI in my sixties than I might have had otherwise, due to Roth conversions, but transitioned into my 70s with nary a bump, just a gradually increasing AGI of 3-5% per year.

I do pay midrange IRMAA since age 65 and always will under current law, but that comes with the territory when you're a higher income retiree...

 

[Car-Guy]

I paid mid to upper IRMAA limits for a few years (mid/late 60's) but I've made some adjustments and don't expect to pay it again (if they don't change the rules), although it's still going to be close.

 

[Midpack]

I’ve done large Roth conversions but between passive income (dividends, interest, STCG) and RMDs I can’t avoid the “tax torpedo,” so I don’t worry about it anymore. A good problem I guess. My tax situation will improve and stabilize in a few years, best I can do.

 

[Exchme]

Our plan is to wait until 70 to claim my SS benefits both to maximize the actuarial value and to leave more years for Roth Conversions. The idea is to get Roth Conversions out of the way before then.

Whether that works or not depends on future longevity, markets, inflation (income range is not indexed) and legislation (an obvious way to get money from more well off folks is to change the taxes on SS). So it may not be effective, but it's the best we can do.

 

[Which Roger]

DW and I plan to avoid the tax torpedo by ramping up our donations - using QCDs and the like - when that time arrives.

 

[COcheesehead]

I use the table view in Fidelity’s Retirement planner to give me visibility into a reasonable guess at what our income will be going forward in retirement. So we can see what the SS RMD torpedo really looks like. It’s not that scary, the thought of it is worse than the reality of it and it really doesn’t present a bigger tax bill until into our mid 80’s and even then there are options to deal with it.
I am aware of it, but it’s not high on the worry list.

 

[aaronc879]

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.

 

[Dash man]

Our income gets us through the tax torpedo, so no reason to sweat it. IRMAA is something we hope to reduce significantly by 2026 since we’re nearly done with large Roth conversions. Will take a close look in December to see what we need to do if anything for the remainder of this year and next year.

 

[dmpi]

I've run my spreadsheet, mitigated as much as I can. We converted close to 1M into a Roth 401K. There is really not much more we can do. We'll get hit by the IRMAA and NIIT torpedo when we startup social security in about 3-4 years.

 

[RunningBum]

Perhaps a short explanation of the SS tax hump is in order.

The hump exists when a tax filer has low enough income that their SS benefit is not taxed at the full 85%. Incremental income, such as an RMD, is taxed at a very high level because not only is 100% the RMD taxed at regular income rates, but it pushes up to 85% of your SS income to be taxed at regular rates, and the 185% increase in taxable income also pushes that amount of QDivs/LTCGs into being taxed at their rate. This marginal rate could be as high at 49.95% until you've pushed all of SS benefit into being fully taxed. At that point, additional income is taxed at it's own rate, and it may push more QDivs into being taxed until all of them are fully taxed. Beyond that, you're only dealing with your marginal rate on additional income, until you start hitting IRMAA and NIIT.

The SS tax torpedo is also known as the SS tax hump, because it only lasts for a certain amount of incremental income, than it falls back down. IRMAA and NIIT are not humps; once you hit them there is no hump that brings them back down.

Barring extremely high tax deductions, no one facing IRMAA and especially not NIIT is facing the SS tax hump. Your income is too high, making all of your SS fully taxable.

 

[RunningBum]

For my own case, I'd be pretty close to the end of the SS tax hump if I was collecting SS now. Since SS benefits are inflation indexed, and the SS taxation formula is not, I suspect I'll be over the hump by the time I do start SS. Short of spending or giving away of lot of my taxable assets (which generate taxable dividends and possible CGs), the only lever I have to control over is my tax-deferred IRA. I'm already planning to fully convert what I don't want to set aside for QCDs to avoid RMDs, so if I'm still in the hump I won't have any incremental income from RMDs being taxed at that high rate.

 

[Gumby]

Are you planning around it, or have you just accepted it as inevitable? I don't see much discussion around it. I would personally love a good model to forecast marginal tax rates taking into account things like the tax torpedo, IRRMA, ACA insurance, RMDs, etc.

If you look for posts by member Sandy & Shirley, the social security tax hump is discussed at length by them.

As for me personally, our two pensions already put us past the point where 85% of my social security is taxed, so I don't worry about it. And we're already beyond the start of the 15% tax on capital gains, so I don't worry about that either.

 

[SevenUp]

I would personally love a good model to forecast marginal tax rates taking into account things like the tax torpedo, IRRMA, ACA insurance, RMDs, etc.

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?

 

[audreyh1]

If you look for posts by member Sandy & Shirley, the social security tax hump is discussed at length by them.

As for me personally, our two pensions already put us past the point where 85% of my social security is taxed, so I don't worry about it. And we're already beyond the start of the 15% tax on capital gains, so I don't worry about that either.

Right, we’re always going to be subject to 85% of SS income taxable, so I don’t worry about it. What I pay attention to each year is the IRMAA thresholds.

 

[2017ish]

We don't worry about it much. Under the current government projected payment levels, if we each delay until 70, our social security alone would make it 85% taxable I think. (Looks like it starts at 88,000 of joint income?).

In any event, we've been very aggressively converting to Roths since 2017 in an effort to drain the TIRA monies. Nonetheless, they remain sources of large future tax liabilities. I'll take the tax liability and IRMAA surcharges over not having the assets.

 

[Gumby]

Right, we’re always going to be subject to 85% of SS income taxable, so I don’t worry about it. What I pay attention to each year is the IRMAA thresholds.

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.

We don't worry about it much. Under the current government projected payment levels, if we each delay until 70, our social security alone would make it 85% taxable I think. (Looks like it starts at 88,000 of joint income?).
.....

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

 

[Telly]

Right, we’re always going to be subject to 85% of SS income taxable, so I don’t worry about it. What I pay attention to each year is the IRMAA thresholds.

Yup, same here. The taxation of 85% of SS is a given. I figured most people here at er.org would be in that boat, too. If they're not, give them some time...

Earlier this year we decided to sell a managed taxable growth fund that we had since the 1990s. The CGs were killing us. So to do any Roth conversions this year at all, we are going to try to hit the upper end of Tier 1 of IRMAA, without falling off the edge of the world into the dragons of Tier 2. With the two year delay of IRMAA brackets, it's like sailing with a low-accuracy compass.

 

[Alan]

I’ve done large Roth conversions but between passive income (dividends, interest, STCG) and RMDs I can’t avoid the “tax torpedo,” so I don’t worry about it anymore. A good problem I guess. My tax situation will improve and stabilize in a few years, best I can do.

+1 except for us it is mostly private pensions that is our passive income we can’t do anything about tax-wise. We are both 100% Roth now so at least no taxes on RMD withdrawals.

 

[jebmke]

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.

 

[CardsFan]

Yup, same here. The taxation of 85% of SS is a given. I figured most people here at er.org would be in that boat, too. If they're not, give them some time...

Earlier this year we decided to sell a managed taxable growth fund that we had since the 1990s. The CGs were killing us. So to do any Roth conversions this year at all, we are going to try to hit the upper end of Tier 1 of IRMAA, without falling off the edge of the world into the dragons of Tier 2. With the two year delay of IRMAA brackets, it's like sailing with a low-accuracy compass.

We did the same this year (actually sold off all managed funds in after tax account), but decided we will take a tax breather instead of Roth converting. If we did conversions they would be at an incremental rate over 27%.

The elimination of cap gains will lower our income going forward.

 

[Midpack]

Right, we’re always going to be subject to 85% of SS income taxable, so I don’t worry about it. What I pay attention to each year is the IRMAA thresholds.

+1. With passive income from dividends, interest & STCG, Soc Sec, plus RMDs we’re over as well. I’ve done Roth conversions to the top of the 22% bracket, and any more would also put in IRMAA tier 2, so nothing more I choose to do. I wish I’d started conversions earlier, but I trusted a bunch of calculators that said it was a wash in our case - they were all dead wrong! Thank goodness I actually did the full math in detail before it was too late and I’ll get 6-8 years of big conversions done before all the above hits. I’ll have converted about 2/3rds of my TIRA>Roth.

 

[Chuckanut]

If we have a big market downtown, I may do one more Roth conversion on the theory that if I can convert and pay taxes on 80¢ today, I will get to keep an entire $1 later when the market goes back up, avoiding the tax on the 20¢ of gain. We’ll see if that option arises.

Then there is IRRMA and its cliffs.

 

[Midpack]

If we have a big market downtown, I may do one more Roth conversion on the theory that if I can convert and pay taxes on 80¢ today, I will get to keep an entire $1 later when the market goes back up, avoiding the tax on the 20¢ of gain. We’ll see if that option arises.

Then there is IRRMA and its cliffs. Retirement is not for sissies.

I swear our tax code, IRMAA, Soc Sec admin, healthcare options and the like are largely job creation programs...

None of them have to be as complicated as they are.

 

[qwerty3656]

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.