Taxes when retired.

[RossWilliams]

"Wouldn’t a married couple filing jointly need income above $104K to break out of the 12% bracket and in to the 22% bracket?"

That is the correct tax bracket but that isn't the effective tax rate. If you take into account the income's impact on how much of your social security is taxed, the 12% tax bracket becomes a 18-22% tax bracket until 85% of your social security is taxable.



If your plan is to live on social security with limited retirement savings then a traditional IRA is likely a good choice. You are going to be one of those "lucky" people in the 0% tax bracket. Most people who are saving for retirement are trying to avoid that. If you are planning to live mostly on your retirement savings, a Roth is usually going to be the better choice.



If you throw other retirement into the picture, the advantages of a Roth become even more obvious. The economics change with 401(k) plans both because the contribution limits are different and there can be an employer match. Some offer a Roth option, but the employer match will still be taxable. If you have a pension, it is likely going to be taxable as well.


As the numbers people have thrown out make clear, if you have very limited savings and limited other income in retirement, then an IRA will serve you well. You aren't going to pay taxes on any of it. But the more you have saved in tax-deferred accounts, the more other income you have, the more likely it is you will be paying higher taxes in retirement and every dollar you have in an IRA will not only push that marginal rate higher when you withdraw it but will add to your taxes on social security. And, as someone pointed out, the cost of your health care if you retire early. Or your medicare if you are really lucky.

[jacwjames]

"If a person could save up enough money to allow him to live for 2-3 years, he could do the following:
1. Stop working at age XX, but don't start taking Social Security yet
2. For 3 years, live off the savings
3. For each of the 3 years, convert 1/3 of regular IRA money to a Roth IRA."


I am actually contemplating this.



Right now it does appear that taxes will be an issue when I start drawing SS and pension. This is one way to get a handle on it. Convert an IRA to Roth, making sure to stay in the 12% tax bracket.

[Cat320]

Originally Posted by Finance

..Investments will generally outperform the 8% SS increase. Spend the SS, preserve your capital...

The annual SS increase, at least for the last few years, has been a net loss. They give you and increase, then turn around and make the Medical Withholding higher than the amount of the increase.

[BubbaChris]

Originally Posted by wnytaxman

The biggest plus and minus on the use of a Roth comes down to tax rates and the effect of compounding. Let’s say that I determine that I can put away $10,000 per year for ten years. I can do a deductible retirement contribution or I can do a Roth after tax contribution. If I am in a combined federal and state tax bracket of 25% then my choices are to either deposit the full $10.000 pre-tax or $7,500 post tax. Assuming a 6% compounding factor the difference between the accumulated amounts in the deductible account and the Roth is about $40,000 over 10 years. If I am in a lower tax bracket at the end of the ten years then I’m way ahead with the deductible IRA. If I’m in the same or higher bracket then I’m better off with the Roth.

Nothing is easy when it comes down to what is the best route to go. Add to the uncertainty with the potential for major tax changes and it gets pretty dicey trying to make the right decision. What’s right today could be really wrong tomorrow or vice versa. Run the numbers and go with your gut is about the best advice anyone can use.

Thanks for the clear explanation in the first paragraph of why a traditional IRA may be the best option for people early in their careers.

Now late in my career I consider ROTH versus Traditional mostly based on if the Traditional can knock me back into a lower tax bracket. Otherwise my default is ROTH to keep the dividends and capital gains out of taxable status

Best regards,
Chris

[Jlo11111]

Originally Posted by jacwjames

"If a person could save up enough money to allow him to live for 2-3 years, he could do the following:
1. Stop working at age XX, but don't start taking Social Security yet
2. For 3 years, live off the savings
3. For each of the 3 years, convert 1/3 of regular IRA money to a Roth IRA."

I am actually contemplating this.

Right now it does appear that taxes will be an issue when I start drawing SS and pension. This is one way to get a handle on it. Convert an IRA to Roth, making sure to stay in the 12% tax bracket.

We're doing exactly this, but it's a challenge keeping our income low enough to stay in the 12% bracket, while still living well. You can pretty much count on tax rates going up in the future so do it while you can.

[awol50]

Just a thought on the elimination of the stretch IRA on inherited retirement money.
It's not necessarily as detremental as it seems.
For example if a working couple, both working and have access to workplace 401k or 403b plans, they can each contribute around $20k each. $6k each more if old enough. Add in the HSA deduction if you qualify.
Unless you are already maxing out all your tax deferral accounts before you inherit, you can max out these accounts and offset some or all of the new inherited IRA required distributions.
Also, you don't have to take the new inherited IRA distributions out equally each year, but just have to take it all out by the 10 years so if you are nearing retirement that can be a strategy too.
They also upped the age to 72 to begin your own retirement distributions. So plan, plan, plan. It ain't as bad as it seems. And feel blessed if you can leave a bundle to those you love or are a recipient of the same.

[GL243]

Originally Posted by Cat320

Quote:
Originally Posted by Finance View Post
..Investments will generally outperform the 8% SS increase. Spend the SS, preserve your capital...

The annual SS increase, at least for the last few years, has been a net loss. They give you and increase, then turn around and make the Medical Withholding higher than the amount of the increase.

Just to clarify, the "8% SS increase" referred to is not the annual cost of living increase that SS gives, which is based on the inflation rate, but the increase in your SS benefit that you get for each year you delay starting to take your SS. It's a sure thing compared to relying on a presumption that your other investments will "outperform the 8% SS increase", which is a crapshoot, especially when you consider the stock market is at or near an all high.

[Dave11]

Originally Posted by RossWilliams

That is the correct tax bracket but that isn't the effective tax rate. If you take into account the income's impact on how much of your social security is taxed, the 12% tax bracket becomes a 18-22% tax bracket until 85% of your social security is taxable. ..........................................

Ross, I am confused by this statement from your recent post, specifically the 18-22% reference. To help understand it better I would like to use a hypothetical retired couple filing jointly in 2019.

Social Security income = $45,000
IRA (traditional) = $55,000
Total = $100,000

Standard deduction = $24,400
Age 65 + deduction = $1,300
Total deduction = $25,700

I chose $45,000 of Social Security income because it just exceeds the 85% threshold for Fed. tax.

So, this couple has gross income of $100,000 of which $74,300 is taxable income, this puts them near the top of the 12% bracket. If you calculate the tax on this it is $8,528 (using 10% of the first $19,400 and 12% of the next $54,900) which is about 8.5% of their gross income.

For simplicity the above example assumes the Social Security income is all taxable when in reality only 85% should be taxed. Making that adjustment would reduce the tax owed by about $800 so they would be looking at owing about $7,700 ish.

The result I calculate is far different than 18 to 22% you referenced so it has me wondering if I have misunderstood the treatment of social security income? I'd welcome your comments or any others to help clear this up. Thanks!

[travelorer99]

Originally Posted by jacwjames

"If a person could save up enough money to allow him to live for 2-3 years, he could do the following:
1. Stop working at age XX, but don't start taking Social Security yet
2. For 3 years, live off the savings
3. For each of the 3 years, convert 1/3 of regular IRA money to a Roth IRA."


I am actually contemplating this.



Right now it does appear that taxes will be an issue when I start drawing SS and pension. This is one way to get a handle on it. Convert an IRA to Roth, making sure to stay in the 12% tax bracket.

That's why I posted my doings, on an earlier post. It is outside the box of traditional retirement thinking, but if one can do it its great.
If all goes well in my world, I wont pay for taxes or healthcare, unless they take the AFC away, till im 65. Eat up cash and keep below single filing status and suck on ira keeping below filling status till age 65. Im 56 now.
When at 65 I will have no choice but to pay taxes on 2 pensions and ssn and any money I take out of my ira.

[powercat_ras]

Thanks to all for the great thoughts being contributed on this tread.

With the current tax laws where the federal income tax rate jumps from 12% to 22% at about $ 52,000 of taxable income (number is for single person using the standard deduction) I am going to plan around trying to keep taxable income right at that $ 52,000 mark by delaying taking social security, making taxable withdrawals to bring me up to that mark.

[awol50]

Originally Posted by GL243

Just to clarify, the "8% SS increase" referred to is not the annual cost of living increase that SS gives, which is based on the inflation rate, but the increase in your SS benefit that you get for each year you delay starting to take your SS. It's a sure thing compared to relying on a presumption that your other investments will "outperform the 8% SS increase", which is a crapshoot, especially when you consider the stock market is at or near an all high.

The stock market is always climbing a wall of worry, so I ignore market fluctuations for money with more than a 4-5 year time horizon on use.
That 8% more you are referring to is not really 8% more. You ignore that for each year you put off taking ss no matter at what age is a permanent guaranteed loss unless you live long enough after you do start taking ss, somewhere between 12-20 years depending on if you impute an interest rate on the calculation.
Spousal considerations and a few other things are worthy considerations though.

[GL243]

Originally Posted by awol50

The stock market is always climbing a wall of worry, so I ignore market fluctuations for money with more than a 4-5 year time horizon on use.
That 8% more you are referring to is not really 8% more. You ignore that for each year you put off taking ss no matter at what age is a permanent guaranteed loss unless you live long enough after you do start taking ss, somewhere between 12-20 years depending on if you impute an interest rate on the calculation.
Spousal considerations and a few other things are worthy considerations though.

Yes, getting your max SS benefits assumes you live at least as long as what the SS Administration presumes you will "on average" based on your actuarially estimated life span. So when you delay starting SS, they plan on giving you the same number of total dollars over fewer years, and it just happens to come out to about 8% more dollars per year for every year you delay. You indeed get fewer total dollars if you don't live that long, but you get more total dollars if you live longer than the actuarial average. So that's just the part of the gamble with this. I figure I won't miss all the remaining SS dollars I wasn't able to collect if I'm dead, but, as you allude to re spousal considerations, the much higher survival spousal benefit for my wife is the main reason our situation comes out better with me waiting til age 70.

[bigchick]

just a comment about the 18% tax bracket on social security income. if you are in the 12% bracket and you receive an additional $1,000 of income you might expect your taxable income to increase by $1,000. in reality it will probably result in an increase of taxable income of around $1,850. this is because this incremental income ($1,000) will also cause the taxable portion of your social security income to increase by the 85% factor ($1,000 x .85).

[jacwjames]

I finally got to the bank and checked on an HSA. Since changing ownership they now offer the HSA which is encouraging. However, the account pays no interest and there are minimum requirements to avoid any type of fee. They would provide a debit type card to use.

Are there other sources for the Health Savings Accounts that might provide some interest?

Still looking to this, won't take advantage of this until there is a tax benefit though and have to see if there are age limits etc.