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If I leave my current job (74K gross) and go to a much lower income (none actually) then how long before I get into a lower tax bracket? I ask this question because I want to minimize my taxes on withdrawing my 401K.
Withdraw next year when you will have no other income.
My comments below are periphery to this discussion, but directly related. It is two 'gotcha' things that took me somewhat by surprise.
1.) For those just going onto Medicare when they retire. The amount you pay monthly for medicare is based on how much you earned the past year, not how much you earned this year. I have to pay almost $400 a month for Part B.
However, there is an appeal process. I filled out a form and turned it into the SS office. On the form, I explained that I had a "live changing event", (retirement), and that my income is almost nothing, (I have not yet applied for SS benefits). About a month later, I received a letter basically saying, "Okay, we believe you. You Medicare payment is now what everybody else pays." You do not get a refund for overpaying. Those funds will be applied to future month's payments.
2.) I'll have to go through the appeal process again next year because I withdrew a large chunk from my 403(b) to pay for the new retirement house. That will show this year's income back up there again, and bump my monthly Medicare payment back up to the tropopause. The appeal next year will state the reason as, "One-time distribution".
If you make a dollar into the next tax bracket, ONLY that dollar is taxed at that higher rate.
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If you make a dollar into the next tax bracket, ONLY that dollar is taxed at that higher rate.
Exactly. Every year I estimate how much I should convert to Roth IRA. If I go over for a few hundred dollars, I won't worry about recharacterization. Too much trouble and not worth my effort. So what if I pay $25 for every $100 I'm over my prefer bracket, which is 15%.
Last edited by NewbieHere; 08-10-2017 at 11:57 AM..
This isn't quite accurate. Your tax bracket is determined at the end of a year, usually calendar, when you total up all your taxable income.
This can cause havoc in several ways, including increased Medicare Part B costs, unless you successfully appeal.
Part time job? It's still taxable income, and will affect how much, if any, of your SSA is taxable. Be aware of the rules for taxing SSA, because it can lead to a big tax bill AND push you into a higher bracket. For me, for example, my marginal tax rate (tax on each additional $ of income) is higher than when I was working: $1 of extra income causes 85% of a $ of SSA to be taxed too. Only the feds could make 1 = 1.85.
If you have enough income, your marginal rate heads back to normal because all your SSA is taxed. It's very strange to me to have such a hump for middle income folks like me.
Be aware of the rules for taxing SSA, because it can lead to a big tax bill AND push you into a higher bracket. For me, for example, my marginal tax rate (tax on each additional $ of income) is higher than when I was working: $1 of extra income causes 85% of a $ of SSA to be taxed too. Only the feds could make 1 = 1.85.
If you have enough income, your marginal rate heads back to normal because all your SSA is taxed. It's very strange to me to have such a hump for middle income folks like me.
Yup. Very important to understand how this works before applying for SS benefits. It's difficult to give general advice here, so each person should look at their own numbers IMO.
Professional advice may not be a bad idea. I built an excel model to help me scenario test, but I also have a financial background and enjoy this kind of challenge, and even I was surprised at how things could play out. You can't just assume. You need to calculate the taxes under different scenarios.
One final note: In withdrawing 401k et al, don't forget tax will be due, and allow for with-holding or you get a big tax bill and an underwith-holding penalty. Messy stuff.
Professional advice may not be a bad idea. I built an excel model to help me scenario test, but I also have a financial background and enjoy this kind of challenge, and even I was surprised at how things could play out. You can't just assume. You need to calculate the taxes under different scenarios.
One final note: In withdrawing 401k et al, don't forget tax will be due, and allow for with-holding or you get a big tax bill and an underwith-holding penalty. Messy stuff.
Good Lord, my head is spinning. Good thing I have 4 years to figure all this out. You wrote what seems like a simple little paragraph and I lost you at "et al", LOL.
I had to look it up "Et al. is an abbreviation of the Latin loanphrase et alii, meaning and others. It is similar to etc. (short for et cetera, meaning and the rest), but whereas etc. applies to things, et al."
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