Trade off between SS starting age and withdrawal rate

[Lawrencewendall]

Be careful. The AARP article concerns the question of earned income relative to reducing benefits, not the taxation of those benefits.

Using the referenced Motley Fool calculator, both pension payments and IRA withdrawals will increase the amount of SS subject to taxation.

ok. I was lazy and grabbed the first article I saw. Here is from the SSA:

"Social Security does not count pension payments, annuities, or the interest or dividends from your savings and investments as earnings. "

https://faq.ssa.gov/ics/support/KBAnswer.asp?questionID=3742&hitOffset=32

https://www.ssa.gov/planners/retire/annuities.html

 

[CardsFan]

ok. I was lazy and grabbed the first article I saw. Here is from the SSA:

"Social Security does not count pension payments, annuities, or the interest or dividends from your savings and investments as earnings. "

https://faq.ssa.gov/ics/support/KBAnswer.asp?questionID=3742&hitOffset=32

https://www.ssa.gov/planners/retire/annuities.html

I still think you are incorrect. These two items from SSA refer to Benefits, not taxation, and they do not agree with the Motley Fool calculator.

When I get the chance I will try pb4uski's suggestion and run some "what ifs" in TT.

 

[Lawrencewendall]

I still think you are incorrect. These two items from SSA refer to Benefits, not taxation, and they do not agree with the Motley Fool calculator.

When I get the chance I will try pb4uski's suggestion and run some "what ifs" in TT.

From the second link:

"You may have to pay income tax on pensions, annuities, interest, or dividends, but you do not pay Social Security taxes."

It doesn't get any clearer than that IMO.

 

[CardsFan]

That is correct. You do not pay SS TAX on those earnings (FICA). You need to go to the tax codes, not SSA, to determine the portion of SS that is taxed!

 

[pb4uski]

I think you guys are confusing two different concepts. One is if you have a certain amount of income then your SS benefit may be reduced. The other, and the one at hand, is that if you have certain sources of income then it impacts how much of the SS benefits that you receive are subject to income tax.

 

[joeea]

This example assumes the taxes are paid from IRA money.

If one is able to pay the taxes from non-IRA money you now have more money in the tax sheltered account (the Roth).

I realize the money to pay your taxes isn't magic - it came from taxable accounts.

Example: $100,000 in IRA. To convert this you have to pay $16,500 in taxes (assuming roughly 12% federal plus 4.5% state tax (Ohio in my case). You end up with $100,000 inside the ROTH (not $83,500). You have $16,500 tax advantaged money compounding tax free.

Am I wrong?

Of course you are correct. You can pay the taxes from additional already-taxed money and thus end up with more ROTH funds.

But similarly, if you start with more money in the tIRA, you'll end up with more money after taxes.

As you indicated, it isn't magic. The tax man taketh from somewhere.

 

[CardsFan]

I think you guys are confusing two different concepts. One is if you have a certain amount of income then your SS benefit may be reduced. The other, and the one at hand, is that if you have certain sources of income then it impacts how much of the SS benefits that you receive are subject to income tax.

Bingo! One is what you pay in SS taxes (FICA) on income, the other is what you pay in federal taxes on SS.

But I think your earlier post is the best recommendation. Run it through TT and see what IT says.

Good to know. I have a pension, albeit a small one, but now can take that income out of my spreadsheet for analyzing how much SS is taxable.

This was the post that prompted my original comment on the topic.

 

[pb4uski]

Close but no cigar... it was more if your SS benefit will be reduced because of other earned income.... not relating to the payment of SS taxes...

https://www.ssa.gov/pubs/EN-05-10069.pdf

 

[CardsFan]

Close but no cigar... it was more if your SS benefit will be reduced because of other earned income.... not relating to the payment of SS taxes...

https://www.ssa.gov/pubs/EN-05-10069.pdf

OK. It depends which post is being considered.

You are correct the the post by garyt asked about reduced BENEFITS. Then the Motley Fool calculator was posted, which does NOT address this issue. Then Dtail asked if his pension income would affect the taxes on his SS income, which was the question I was addressing.

So, I agree that we both gave reasonable answers, to different questions.

No harm, no foul. Carry on.

 

[rayvt]

This example assumes the taxes are paid from IRA money.

If one is able to pay the taxes from non-IRA money you now have more money in the tax sheltered account (the Roth).

I realize the money to pay your taxes isn't magic - it came from taxable accounts.

Example: $100,000 in IRA. To convert this you have to pay $16,500 in taxes (assuming roughly 12% federal plus 4.5% state tax (Ohio in my case). You end up with $100,000 inside the ROTH (not $83,500). You have $16,500 tax advantaged money compounding tax free.

Am I wrong?

In terms of tax benefit doesn't matter where the money to pay the tax came from, either the IRA or outside money.

But, yes, if you convert from an IRA and pay the tax with outside money, you have effectively contributed extra money to the Roth. The way it was explained to me was that this make a Roth "bigger" than an IRA -- because you can slide extra money in.

 

[rayvt]

I just spent a little more time with the Motley Fool calculator, and got a wake-up call about converting to Roth after starting SS at FRA.

With SS and other income (Int/Div/Cap gains) I will be limited to about $15,000 in conversions (staying in the 12% bracket). But the conversions will increase the taxes on SS by $1,500! Effectively a 10% additional tax on those conversions.

Welcome to the complexity of tax interactions!

I created a spreadsheet once, to examine how this works. It's so complex that the only way to do it is with a tax program--I used TurboTax--and bump up the various sources of income to see how the tax changes.

It's another donut hole.

When I did it back in 2014, at the same SS benefit, my marginal rate started at 15%, then jumped up to 27.8% (when the SS began to be taxed) and then dropped back to 15% (when the max 85% of SS was taxed), and stayed at 15% until I hit the 25% bracket.

 

[Dtail]

Welcome to the complexity of tax interactions!

I created a spreadsheet once, to examine how this works. It's so complex that the only way to do it is with a tax program--I used TurboTax--and bump up the various sources of income to see how the tax changes.

It's another donut hole.

When I did it back in 2014, at the same SS benefit, my marginal rate started at 15%, then jumped up to 27.8% (when the SS began to be taxed) and then dropped back to 15% (when the max 85% of SS was taxed), and stayed at 15% until I hit the 25% bracket.

I believe this is the "hump" reference which "Sandy and Shirley" have posted a few times here, where one's marginal rate can be as high as 40-50% for a portion of their income.

 

[Hermit]

^^^ correct. A simple example.... one has $10,000 in a tIRA and is in the 22% tax rate and expects to be in that tax rate indefinitely.

If you leave the money in the tIRA for 10 years at 7% it grows to $19,672. You take it out, pay the 22% in tax and have $15,344 to spend.

Alternatively, you convert and pay the tax from the proceeds of the tIRA and have $7,800 in the Roth. After 10 years at 7% the $7,800 has grown to $15,344.

Where there is a bit of an advantage is if you have $2,200 in taxable and $10,000 in a tIRA.

If you convert, your $2,200 goes poof (pays the taxes) and your $10,000 grows to $19,671.

If you don't convert, your taxable account grows to $3,744 after paying tax on the annual returns and the $10,000 grows to $19,671. When you withdraw and pay the taxes you have a net of $19,087.

So the advantage of the Roth is not having to pay tax on the growth in the taxable account, which totals $584.

If the ten years puts you over 70.5, and RMD drives you above 85k, you will pay an additional $1600 Medicare primium where that would not be a problem if you convert to Roth. Those Medicare premiums go above $4k per year depending on income.

 

[pb4uski]

Another good reason to convert.

 

[Independent]

I don't think your impression is totally right... the SS trust fund tracks taxes paid in less benefits paid out and invests its cash flow in general fund treasuries... it currently has a $2.9 trillion balance because over the years it has collected so much more than it has paid out. The last year that benefits paid exceeded taxes collected was back in 1981.

https://www.ssa.gov/oact/STATS/table4a3.html

You are correct, my statement was not "totally" correct. I think it was "almost totally" correct, as a response to the poster who considered his payroll taxes an investment.

I think we need to look at the second table to separate payroll taxes from total revenue.

SS was run almost entirely as a paygo program through 1983. At that time, the accumulated trust fund was only 15% of a single year's benefits.

Then, the 83 amendments intentionally increased taxes so they would be more than benefits for a number of years into the future. As it turned out, payroll taxes outran benefits in each year for the next 25 years. The excess wasn't all that great. On average, benefits were 89% of payroll taxes in those years. So we might say that my statement was 89% accurate for a person whose working career covered exactlyly those years.

For the remaining 9 years in your link, payroll taxes were less than benefits, by an average of 13%. A simple average says that payroll taxes outran benefits by about 5% for the entire 34 year period.

But, instead of a simple sum, we could accumulate the taxes and benefits with interest. If I do that, using rates inferred from the tables, I get a positive balance at the end of the 34 period that is about 7% of the accumulated payroll tax.

Lots of numbers, but I think "SS is mostly a paygo program, even after the 83 amendments" is reasonably accurate.

------------------
Note that the table includes "taxation of benefits". I treated that as a reduction in benefits in the calculation above, since I was trying to compare everything to payroll taxes paid. If I had included it as revenue, all the percentages above would have been slightly smaller.

Also, one reason the tax/benefit ratio changed in the last 9 years was the temporary cut in payroll taxes in 2011 and 2012.