Tax Related questions

[ashok_sharma]

Hi, I have been enjoying reading articles about other fellow retirees here. Now I have started thinking about my own. I am 67 and in reasonably good health and my wife is 60.5 years. I am still working in my current job and intend to continue may be another 5 years. My question is related to taxes. Following is my tax situation that I am going to be looking at age 70 when RMD hits as well I will have to start withdrawing from my Social Security:


My SS benefits would be about $3,500 and I am not sure if my wife can be entitled to half of my benefits at age 62? Her own benefits are less but would be more when she reaches her full age of retirement at 67. I have 401 K and IRA that comes a combined total of about $600K. At age 70 ( year 2022) I will need to do RMD (required Minimum Draw) that comes to about $22K per year or about $1,830 pm. If and when my wife entitles for 1/2 of my benefits she should be getting around $1,750.

So at age 72 when I am fully retired I should be looking at about $85K per year ( $42K my SS+ $21K my wife's SS+ $22K (RMD) ). What type of taxes I am looking at or is there any way to reduce those taxes.

 

[MissMolly]

Although I can't speak to the tax question since I am no expert with that, I can tell you that your wife will not be entitled to 50% of your SS amount until she is full retirement age. She would receive a reduced amount at 62. If she files for spousal at 62, she will never be able to file for her own later on. She will be locked into whatever amount she is receiving at age 62 (unless you die before her. Then she will be entitled to survivor).

 

[gerntz]

Just because you reach age 70 doesn't mean you have to file for SS benefits.

 

[N02L84ER]

1. To qualify for a SS benefit equal to 50% of your Full Retirement Age (not age 70) SS benefits, the spouse must not file before her Full Retirement Age.
2. If the spouse outlives you, her SS benefit will bump up to equal the amount you are collecting when you die.
3. If your spouse is 60.5 years old, her FRA is 66 and 10 months, not 67.
4. At age 72, the RMD percent is 3.91% instead of the age 70 percent of 3.65% so the RMD will be closer to 23500.
5. The amount of SS benefits subject to tax based on $63K of SS and $23.5K of RMD is MIN(85%*63K,50%*(63K/2+23.5K-32K)+35%*(63K/2+23.5K-44K)) = MIN(53550,11500+3850) = 15350
6. With $85K+ of income per year, you will have an AGI of $15,350 + $23,500 = $38,850. After subtracting the standard deduction including the over age 65 deduction for yourself, your taxable income will be less than $15K and will be taxed at 10%.
7. To reduce the taxes, you could contribute some of the RMD to charity instead of receiving it.


Hope this helps.

 

[MissMolly]

Just because you reach age 70 doesn't mean you have to file for SS benefits.

Why wouldn't you? They don't grow beyond age 70. Why leave money on the table like that?

 

[MissMolly]

1. To qualify for a SS benefit equal to 50% of your Full Retirement Age (not age 70) SS benefits, the spouse must not file before her Full Retirement Age.
2. If the spouse outlives you, her SS benefit will bump up to equal the amount you are collecting when you die.
3. If your spouse is 60.5 years old, her FRA is 66 and 10 months, not 67.
4. At age 72, the RMD percent is 3.91% instead of the age 70 percent of 3.65% so the RMD will be closer to 23500.
5. The amount of SS benefits subject to tax based on $63K of SS and $23.5K of RMD is MIN(85%*63K,50%*(63K/2+23.5K-32K)+35%*(63K/2+23.5K-44K)) = MIN(53550,11500+3850) = 15350
6. With $85K+ of income per year, you will have an AGI of $15,350 + $23,500 = $38,850. After subtracting the standard deduction including the over age 65 deduction for yourself, your taxable income will be less than $15K and will be taxed at 10%.
7. To reduce the taxes, you could contribute some of the RMD to charity instead of receiving it.


Hope this helps.

#2 is only true if the surviving spouse is full retirement age. If younger, then it is a reduced amount. A survivor can file for benefits as early as age 60 - but still at a reduced amount.

 

[ashok_sharma]

1. To qualify for a SS benefit equal to 50% of your Full Retirement Age (not age 70) SS benefits, the spouse must not file before her Full Retirement Age.
2. If the spouse outlives you, her SS benefit will bump up to equal the amount you are collecting when you die.
3. If your spouse is 60.5 years old, her FRA is 66 and 10 months, not 67.
4. At age 72, the RMD percent is 3.91% instead of the age 70 percent of 3.65% so the RMD will be closer to 23500.
5. The amount of SS benefits subject to tax based on $63K of SS and $23.5K of RMD is MIN(85%*63K,50%*(63K/2+23.5K-32K)+35%*(63K/2+23.5K-44K)) = MIN(53550,11500+3850) = 15350
6. With $85K+ of income per year, you will have an AGI of $15,350 + $23,500 = $38,850. After subtracting the standard deduction including the over age 65 deduction for yourself, your taxable income will be less than $15K and will be taxed at 10%.
7. To reduce the taxes, you could contribute some of the RMD to charity instead of receiving it.


Hope this helps.

Wow. Really appreciate this feedback. I have a quetion about #4. I thought RMD is not an option but must be start drawing at age 70? Isx that true?.


My Second question is that can my spouse start drawing 1/2 of my SS benefits when she reach age 62 or for that she have to wait for FRA of 66yrs 10 months? Becuase her own SS if she wait until FRA would be about $1,850. I thought since difference is not much if she qualify she can start drawing 1/2 of SS benefits at her age 62 even though I will be still working a few more years?


Appreciate the calculations for taxes that really helps!

 

[ashok_sharma]

i thought there is no benefit to delay withdrawing SS benefits after age 70 anyways, that is why.

 

[Souschef]

With regard to RMD. the first is required at 70 1/2. Depending on what month your birthday is, you may want to take it early so you do not hit with 2 in the same year.
In our case, my birthday is in May, so at 70 1/2 it would be November. I would not be 71 until the following May.
However, DW's birthday is in December, so she would be 70 1/2 in June, and 71 in December. That would mean 2 RMD's in the same year.
We took the first RMD early, in December of the year she turned 70.

 

[MissMolly]

RMDs are not required until the year you turn 70.5, so taking it in December (the same month she turned 70) did not count as an RMD. It was just a plain old withdrawal.

 

[pb4uski]

Check out opensocialsecurity.com to see the optimal claiming strategy for you and to look at the impact of alternative claiming strategies. Be sure to check the Advanced Options box at the top left.

IIRC in order for your wife to get spousal benefits you would need to be collecting. So if she filed at her FRA her benefit would be based on her work record.... once you file, her benefit would be increased for the difference between 1/2 of your PIA and 100% of her PIA.... effectively increasing her benefit to 1/2 of your PIA if she filed at her FRA.

There is no benefit to delaying SS beyond age 70.... however if your age 70+ earnings exceed the lowest of your highest 35 years of earnings your benefit would increase some.

 

[MissMolly]

Wow. Really appreciate this feedback. I have a quetion about #4. I thought RMD is not an option but must be start drawing at age 70? Isx that true?.


My Second question is that can my spouse start drawing 1/2 of my SS benefits when she reach age 62 or for that she have to wait for FRA of 66yrs 10 months? Becuase her own SS if she wait until FRA would be about $1,850. I thought since difference is not much if she qualify she can start drawing 1/2 of SS benefits at her age 62 even though I will be still working a few more years?


Appreciate the calculations for taxes that really helps!

Did you read post #2? She cannot draw 1/2 spousal at age 62. She must be full retirement age to draw 1/2 spousal. Any spousal claimed before full retirement age will be a reduced amount. She also cannot draw spousal unless you are collecting SS benefits.

 

[Senator]

A few thoughts...

You can quit work now, and delay taking SS and it will be nearly the same as working another few years.

According to the actuarial tables, at 67 you have another 14.68 years left. So you want to spend 34% of that time working? How many productive/enjoyable years to you really have?

Since you are worried about taxes, why not start spending it now, so your RMDs are less of an amount?

 

[N02L84ER]

Wow. Really appreciate this feedback. I have a quetion about #4. I thought RMD is not an option but must be start drawing at age 70? Isx that true?.

Yes, you must start RMDs after age 70.5. I used age 72 in #4 because the last line of your original post asked the tax question about age 72 and I just wanted to be sure you realized the RMD % increases each year.


My Second question is that can my spouse start drawing 1/2 of my SS benefits when she reach age 62 or for that she have to wait for FRA of 66yrs 10 months? Becuase her own SS if she wait until FRA would be about $1,850. I thought since difference is not much if she qualify she can start drawing 1/2 of SS benefits at her age 62 even though I will be still working a few more years?

No, the spouse MUST be Full Retirement Age to qualify for 1/2 of their spouse's FRA SS benefit and you must be collecting SS before your spouse can qualify for a spousal benefit. MissMolly also stated this. So, if your FRA benefit was $3,800 and her FRA benefit was $1,850, then the spousal benefit at FRA would be ($3,800/2 - $1,850 = $50) and the total she could collect would be her $1,850 + the spousal $50 = $1,900 which would be half your FRA of $3,800. Since your FRA benefit was only $3,500, then there is no spousal benefit, since $1,850 > $3,500/2 . If the spouse claims SS before FRA then her $1,850 benefit would be reduced AND had there been any spousal benefit, it would also be reduced. It gets messy to calculate so using a SS calculator like opensocialsecurity.com can really help you determine what effect early claiming will have.

Also, the law changed regarding claiming a restricted spousal benefit a number of years ago. Your wife is too young to be grandfathered into the old rules. When she files for SS, they will calculate her "best" benefit based on her earnings, her age at filing, and any spousal additions. It looks like it will be based solely on her earnings since her FRA benefit is greater than half your FRA benefit.

Appreciate the calculations for taxes that really helps!
You are welcome.

See comments within the quote.

 

[Spock]

Your spouse only gets 50% of your SS benefit if the spouse waits until they reach their full retirement age. Before FRA, the spousal benefit is reduced.
Play with this to see how much: https://www.ssa.gov/OACT/quickcalc/spouse.html

 

[Rianne]

Check out opensocialsecurity.com to see the optimal claiming strategy for you and to look at the impact of alternative claiming strategies. Be sure to check the Advanced Options box at the top left.

Thanks, I totally ignored that box in the past.