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Old 11-07-2018, 09:50 AM
 
71,471 posts, read 71,652,652 times
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Quote:
Originally Posted by Perryinva View Post
So true, and taxes are/can be a big part of it. Mathjakís argument is not centered on net income thanks to a tax difference, just earnings and compounding. His posts are more about the bottom line of estate value, not net income. In my explanation above, the elephant in the room is that ďSure, you have $5k more a year that way, but thatís mainly because you now only have a nest egg of $650k vs $1M. I would have essentially purchased a $24k ($19k +$5k/yr) annuity for $200k.

But if we take taxes in to account it looks better than that, depending on your tax rate and source of other funds. If all your income post age 70 is already tax free, (all Roth and SS, and maybe LTCGs) then the delaying is less advantageous. In my own case, our pensions are taxed, so we automatically are in the 22/25% tax bracket. So everything drawn from an IRA to supplement income is both Fed & State taxed for us. About 30% after age 68 for me)

So in addition to the ďextraĒ $5k in the annuity, delaying until 70 allows me to back door more to my Roth from tIRA while taxes are still 22%, so when they go back to 25%, that is an instant 3% tax savings. That net amount could easily be 3% of $200k or $6k.

Plus, the $44k@70 vs the $25k@62 SS means I only pay 25% rate on 85% of the best difference; $19k or $4037 in taxes on just that (SS is tax free in my state), so NET take home of that difference is $14963. This is compared to taking a gross amount from a tIRA to be the equal net, where the full amount is taxed at 30%. In order to net $14963, I need to take out 14963/.7= $21,375. So the reality is, thanks to taxes (for me), I get to keep an extra 21375- 19000 = $2375 in my taxable account, which is an extra $1662 net to me. So for me, the $200k annuity is really buying me a taxed $26375/yr annuity. This drops any break even argument to a much shorter time frame. And for our circumstances, net income is my driver, not gross estate so more can be left to heirs.

YMMV, as everyone has a different circumstance.
It is impossible to take everyoneís tax situation in to the picture. Some donít even have federal taxes on ss
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Old 11-07-2018, 10:03 AM
 
Location: RVA
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Exactly. That’s my point. It’s the net amounts that matter. The lower your tax rate, the less advantageous delaying is.

I am not an advocate of delayed SS filing to age 70 for everyone. That is ridiculous, which is why Orman’s advice is so useless.
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Old 11-07-2018, 12:04 PM
 
13,874 posts, read 7,386,288 times
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Quote:
Originally Posted by Perryinva View Post
Exactly. Thatís my point. Itís the net amounts that matter. The lower your tax rate, the less advantageous delaying is.

I always look at cash flow instead of income. You're calling that net which is the same thing. You can't spend income. You can only spend what's left over after you pay the taxes.



Even the relationship between tax rate and delaying isn't universally true. I want to try to stay in the 12% bracket when I stop working since it's so tax-efficient. Using mostly IRA/401(k) distributions and filing single, that's $50K/year AGI which gives me $45K/year to spend. That's the same cash flow as my delay-to-70 Social Security check. I can live comfortably on $4K/month and use after-tax assets to fund big ticket things as they pop up.
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Old 11-07-2018, 01:49 PM
 
Location: Midwest
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I have accidentally watched Zuse a couple of times. She strikes me as somewhat crazy. I'd never listen to anything she has to say.
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Old 11-07-2018, 02:40 PM
 
Location: RVA
2,164 posts, read 1,264,598 times
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Quote:
Originally Posted by GeoffD View Post
.....
Even the relationship between tax rate and delaying isn't universally true. I want to try to stay in the 12% bracket when I stop working since it's so tax-efficient. Using mostly IRA/401(k) distributions and filing single, that's $50K/year AGI which gives me $45K/year to spend. That's the same cash flow as my delay-to-70 Social Security check. I can live comfortably on $4K/month and use after-tax assets to fund big ticket things as they pop up.
All I was saying, assuming the same retirement age (62) and income, if you were to file at 62, and invest what you would have spent buying the SS annuity, you would still pay essentially zero federal taxes in retirement. SS is tax free at that level (either way) and any monies invested for LTCGs would be untaxed because income is low. Probably would have higher state taxes. So the net gain is very little if any. Delaying until 70 allows more time to back door Roths and possibly eliminate future taxes all toether. And It is a lot simpler for sure to have essentially all your income simply come from SS, and reduce income from investments, but the tax advantages are just not as big a part of the reason as it is for someone in the 25% and above tax zones.
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Old 11-08-2018, 04:02 AM
 
13,874 posts, read 7,386,288 times
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I don’t see back door Roths as a viable strategy if I retire in my early 60s. I’d pull from my IRA and 401(k) accounts to get to the top of the 12% bracket, pay the $4,500 in income tax, and spend the rest. I recall that’s $50,300 AGI filing single. If I pull more out to slide it to a Roth, it’s 22% bracket money. I’m trying to stay out of that bracket.

Before 2018 and the tax law changes, I thought I would be doing Roth conversions. Now, it only makes sense while I’m working.
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Old 11-08-2018, 04:15 AM
 
71,471 posts, read 71,652,652 times
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Backdoor roths wonít work for me either . At this point it is locking the barn after the horse ran away .

Once you each your higher earning years you lost the biggest advantage . Most of us ramp up in our careers over 30-40 years . Our long term average tax bracket is usually going to be lower than our retirement bracket .

We tend to have lifestyles that are closer to our final years but over all that career average is much lower so Rothís can be great even if tax rates are a bit lower at retirement .

Most compare tax rates wrong . They go by their final years of working and compare to retirement . It is really all about that 30-40 year average not comparing your ending years
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Old 11-08-2018, 08:25 AM
 
Location: SoCal
13,191 posts, read 6,308,074 times
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Quote:
Originally Posted by GeoffD View Post
I don’t see back door Roths as a viable strategy if I retire in my early 60s. I’d pull from my IRA and 401(k) accounts to get to the top of the 12% bracket, pay the $4,500 in income tax, and spend the rest. I recall that’s $50,300 AGI filing single. If I pull more out to slide it to a Roth, it’s 22% bracket money. I’m trying to stay out of that bracket.

Before 2018 and the tax law changes, I thought I would be doing Roth conversions. Now, it only makes sense while I’m working.
My understanding is while you are working, you can do backdoor Roth, when you retire you can do Roth Conversion. Backdoor Roth is for people who can’t contribute to Roth account, so they have to contribute to non deductible IRA and then do an immediate conversion to Roth. We did many years of these backdoor Roths until the last five years where our income was not high enough for Roth conversion. Not with maximizing contribution to 401k for 2 persons.
I think it’s possible PerryinVa was thinking of Roth conversion.
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Old 11-08-2018, 09:59 AM
 
1,049 posts, read 513,133 times
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Quote:
Originally Posted by mathjak107 View Post
Backdoor roths wonít work for me either . At this point it is locking the barn after the horse ran away .

Once you each your higher earning years you lost the biggest advantage . Most of us ramp up in our careers over 30-40 years . Our long term average tax bracket is usually going to be lower than our retirement bracket .

We tend to have lifestyles that are closer to our final years but over all that career average is much lower so Rothís can be great even if tax rates are a bit lower at retirement .

Most compare tax rates wrong . They go by their final years of working and compare to retirement . It is really all about that 30-40 year average not comparing your ending years
You’re not the only one with loose horses....I totally whiffed on that opportunity too.
Maybe when the ACA gets destroyed, there will be a window to convert.
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Old 11-08-2018, 11:35 AM
 
8,820 posts, read 5,121,165 times
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Quote:
Originally Posted by GeoffD View Post
I donít see back door Roths as a viable strategy if I retire in my early 60s. Iíd pull from my IRA and 401(k) accounts to get to the top of the 12% bracket, pay the $4,500 in income tax, and spend the rest. I recall thatís $50,300 AGI filing single. If I pull more out to slide it to a Roth, itís 22% bracket money. Iím trying to stay out of that bracket.

Before 2018 and the tax law changes, I thought I would be doing Roth conversions. Now, it only makes sense while Iím working.
If you have money in taxable accounts, you can spend that down while converting tax-deferred to Roth.
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