City-Data Forum Bankrate Article: "Scary retirement income reality" (separate, years, support)
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03-17-2015, 09:26 AM
 8,860 posts, read 5,143,460 times Reputation: 10144

Quote:
 Originally Posted by mathjak107 " Jeremy and Martha have an AGI of \$28,000 (and no tax-exempt or foreign income), and receive combined Social Security benefits of \$14,000. As a result, their provisional income is \$28,000 + \$7,000 (half of Social Security benefits) = \$35,000, which is \$3,000 above the \$32,000 threshold. This means that 50% x \$3,000 = \$1,500 of their Social Security benefits are subject to taxation, which ultimately increases their AGI to \$28,000 + \$1,500 = \$29,500." "Continuing the earlier example of Jeremy and Martha, if the couple decides to take another \$1,000 out of their IRA, this will increase their AGI by \$1,000 to \$29,000. As a result, it will also increase their provisional income by \$1,000, which leaves them \$4,000 above the threshold, resulting in \$2,000 of their Social Security benefits being taxable. In the end, this means Jeremy and Martha end out with a total AGI of \$31,000... their AGI increased by \$1,500 even though they only took out a \$1,000 IRA withdrawal due to the taxation of Social Security benefits! If the couple is subject to the 15% tax bracket, their additional tax liability on \$1,500 of income is \$225, which equates to a marginal tax rate of \$225 (additional taxes) / \$1,000 (additional income) = 22.5%. In other words, even though the couple is in the 15% tax bracket, their \$1,000 IRA withdrawal is subject to a 22.5% marginal tax rate due to the formulas triggering taxation of Social Security benefits!"
Except they aren't in the 15% bracket. These examples are totally ignoring the fact that AGI is before standard deduction and personal exemptions. AGI of 31k - 22.7 (MFJ, both over 65, 2 personal exemptions) = 8.3k of taxable income, total federal tax liability for the year is \$830. That's 10%, because Jeremy and Martha never leave the 10% bracket.

Last edited by Petunia 100; 03-17-2015 at 09:34 AM..

03-17-2015, 09:33 AM
 8,860 posts, read 5,143,460 times Reputation: 10144
Quote:
 Originally Posted by bUU While true, it doesn't solve the problem for many, and the trend is markedly trending in that direction, rather than the direction your logic supports. For example: America the Gutted: Glenda Bell | GlobalPost

Actually, the trend supports the logic of proactively acquiring new marketable skills. There is no logic at all whatsoever behind not acquiring any marketable skills and then being surprised that no one is willing to pay you for what you don't bring to the table.

03-17-2015, 10:36 AM
 71,713 posts, read 71,829,507 times Reputation: 49278
Quote:
 Originally Posted by Petunia 100 Except they aren't in the 15% bracket. These examples are totally ignoring the fact that AGI is before standard deduction and personal exemptions. AGI of 31k - 22.7 (MFJ, both over 65, 2 personal exemptions) = 8.3k of taxable income, total federal tax liability for the year is \$830. That's 10%, because Jeremy and Martha never leave the 10% bracket.
You are missing what is being said. the marginal tax rate on additional income beyond a certain point when dealing with ss can be insane. PULLING AN EXTRA 1K OUT OF AN IRA CAN GET THAT EXTRA 1K CREAMED IN TAXES as an example depending how the two moving targets align.

THE POINT IS MANY TIMES YOU MAY BE BETTER OFF EITHER ACCELERATING INCOME IN A YEAR OR DELAYING IT AND COMBINING IN ANOTHER YEAR.

take this example from kitces . this hypothetical poor sole took an extra 1,000 bucks from his ira and was actually taxed on that extra 1k at over a 46% marginal tax rate .

these are the foul ups he is pointing out you can get trapped in. imagine taking out 1,000 bucks and paying 462.50 tax on it while all the rest of your money is in a far lower bracket ? you would have been better not taking it or maybe better off taking a lot more at this point out .

Harry is an individual with \$36,000 of income but a hefty \$22,000/year of Social Security benefits. His Social Security provisional income is \$36,000 + \$11,000 = \$47,000, which is \$13,000 over the upper threshold for individuals. As a result, \$15,550 of his Social Security benefits are subject to taxation (which is 50% of the amount from \$25,000 to \$34,000, plus 85% of the excess of provisional income above the \$34,000 threshold), which puts his AGI at \$51,550. Even after a standard deduction and one personal exemption, Harry's taxable income would be \$51,550 - \$6,100 - \$3,900 = \$41,550, which places him in the 25% tax bracket.

If Harry now takes an additional \$1,000 from his IRA, his provisional income increases to \$48,000, his taxable Social Security benefits increase to \$16,400, and his AGI rises to \$53,400. The net result: Harry's AGI increased by \$1,850 for "just" a \$1,000 IRA withdrawal, and with a 25% tax bracket his liability will be \$1,850 x 25% = \$462.50, which equates to a whopping \$462.50 / \$1,000 = 46.25% marginal tax rate!

Last edited by mathjak107; 03-17-2015 at 11:16 AM..

03-17-2015, 11:59 AM
 382 posts, read 353,034 times Reputation: 1989
Agree with Mathjak ^^^^^^ I sure did not understand this when we saved, saved to the IRA for so many years. We are over 70 1/2 yrs of age. No choices at this point.

03-17-2015, 12:15 PM
 8,860 posts, read 5,143,460 times Reputation: 10144
Quote:
 Originally Posted by mathjak107 You are missing what is being said. the marginal tax rate on additional income beyond a certain point when dealing with ss can be insane. PULLING AN EXTRA 1K OUT OF AN IRA CAN GET THAT EXTRA 1K CREAMED IN TAXES as an example depending how the two moving targets align. THE POINT IS MANY TIMES YOU MAY BE BETTER OFF EITHER ACCELERATING INCOME IN A YEAR OR DELAYING IT AND COMBINING IN ANOTHER YEAR. take this example from kitces . this hypothetical poor sole took an extra 1,000 bucks from his ira and was actually taxed on that extra 1k at over a 46% marginal tax rate . these are the foul ups he is pointing out you can get trapped in. imagine taking out 1,000 bucks and paying 462.50 tax on it while all the rest of your money is in a far lower bracket ? you would have been better not taking it or maybe better off taking a lot more at this point out . Harry is an individual with \$36,000 of income but a hefty \$22,000/year of Social Security benefits. His Social Security provisional income is \$36,000 + \$11,000 = \$47,000, which is \$13,000 over the upper threshold for individuals. As a result, \$15,550 of his Social Security benefits are subject to taxation (which is 50% of the amount from \$25,000 to \$34,000, plus 85% of the excess of provisional income above the \$34,000 threshold), which puts his AGI at \$51,550. Even after a standard deduction and one personal exemption, Harry's taxable income would be \$51,550 - \$6,100 - \$3,900 = \$41,550, which places him in the 25% tax bracket. If Harry now takes an additional \$1,000 from his IRA, his provisional income increases to \$48,000, his taxable Social Security benefits increase to \$16,400, and his AGI rises to \$53,400. The net result: Harry's AGI increased by \$1,850 for "just" a \$1,000 IRA withdrawal, and with a 25% tax bracket his liability will be \$1,850 x 25% = \$462.50, which equates to a whopping \$462.50 / \$1,000 = 46.25% marginal tax rate!
Yes, I realize that if one is not fully taxed on SS benefits, additional income can change that.

Bundling taxable income and deductible expenses is a great strategy for those who happen to fall in those ranges.

03-17-2015, 12:24 PM
 71,713 posts, read 71,829,507 times Reputation: 49278
What most , self included never realized is just how much that extra income is taxed . holy cow you can have some nasty situations at income levels that are not very high.

seems the less you have the more careful and aware you need to be about just how much damage these marginal rates can do to you.

I never imagined that taking an extra 1k at those income levels could evaporate 1/2 the money.

03-17-2015, 02:20 PM
 Location: USA 1,815 posts, read 2,244,798 times Reputation: 4139
Quote:
 Originally Posted by mathjak107 What most , self included never realized is just how much that extra income is taxed . holy cow you can have some nasty situations at income levels that are not very high. seems the less you have the more careful and aware you need to be about just how much damage these marginal rates can do to you. I never imagined that taking an extra 1k at those income levels could evaporate 1/2 the money.

So a single person, no pension, and with accounts that are not designated 401K or IRA (meaning I can withdraw any time I want and any amount) is in a better position tax-wise?

03-17-2015, 02:25 PM
 71,713 posts, read 71,829,507 times Reputation: 49278
it varies by taxable income vs ss amount. can be any source of taxable income.

the two moving targets between your regular tax rate and your ss taxable amount can make for some wild marginal rate tax events regardless of the source of other income if that other income is taxable or muni bond interest..

03-17-2015, 02:34 PM
 29,784 posts, read 34,885,423 times Reputation: 11710
Quote:
 Originally Posted by freemkt What bad choices? I chose to stay in school, to get great grades, to not have kids, to not do drugs, to not do crime. I think I avoided the 'culture of poverty' stuff pretty well.
Yet it still found you

03-17-2015, 03:22 PM
 8,860 posts, read 5,143,460 times Reputation: 10144
Quote:
 Originally Posted by Red On The Noodle So a single person, no pension, and with accounts that are not designated 401K or IRA (meaning I can withdraw any time I want and any amount) is in a better position tax-wise?
If you don't have a pension or some other source of taxable income, you want some money in a tax-deferred account. You want to fill up your 0% tax bracket. For 2014, a single person aged 65 or older could have 11.7k of income taxed at 0%. Assuming a 4% withdrawal rate, that equates to a nest egg of 292.5k.

If your taxable accounts are throwing off dividends and interest, that counts towards the 11.7k too.
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