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I don’t get what the big deal is about staying below a certain tax rate. If you go over that tax rate, only the amount that is over is taxed at the higher rate, not the entire amount.
“The reason your marginal tax rate (tax bracket) is higher than your effective tax rate is because your income is taxed at different rates along the way.
Let’s say you’re a single taxpayer who earns $50,000 in taxable income per year. Here’s how that income gets taxed:
The first $9,524 is taxed at 10% (amounting to $952.40 in taxes).
The next $29,175 is taxed at 12% ($3,501).
Finally, the last $11,301 is taxed at 22% ($2,486).
The total tax owed would be about $6,939. So while $50,000 falls into the 22% tax bracket, your effective tax rate is actually just 13.9%. The higher your income, the more tax brackets you pass through to arrive at your effective tax rate.”
I don’t get what the big deal is about staying below a certain tax rate. If you go over that tax rate, only the amount that is over is taxed at the higher rate, not the entire amount.
“The reason your marginal tax rate (tax bracket) is higher than your effective tax rate is because your income is taxed at different rates along the way.
Let’s say you’re a single taxpayer who earns $50,000 in taxable income per year. Here’s how that income gets taxed:
The first $9,524 is taxed at 10% (amounting to $952.40 in taxes).
The next $29,175 is taxed at 12% ($3,501).
Finally, the last $11,301 is taxed at 22% ($2,486).
The total tax owed would be about $6,939. So while $50,000 falls into the 22% tax bracket, your effective tax rate is actually just 13.9%. The higher your income, the more tax brackets you pass through to arrive at your effective tax rate.”
If one slips into the 22% or 24% bracket while doing a conversion now it's still less than the 25% tax bracket one will be paying in perpetuity after 2026.
ETA: And it will be a higher 25% bracket only if the government decides to never raise taxes again as long as we live despite the gigantic growing deficit & ballooning costs of SS - Medicare - Medicaid - Defense Dept. What are the chances of it staying 25%?
Because most people don’t like to pay anymore taxes than necessarily, even Warren Bufffet said he liked to pay more taxes than his secretary, but the last time I’ve looked he relocated Burger King to Canada to avoid paying tax.
Also they may want to avoid the Hump in marginal tax rate. There’s a link from a Bogglehead about this. But this calculator has not been updated since the tax law changed.
Those who have Long Term Capital Gains (LTCG) want to stay in the 12% taxable income bracket (formerly the 15%) to avoid paying any taxes on their LTCG. Going up another tax bracket increases the LTCG tax rate to 15%. Then there is the SS hump where the tax increases from 0% to 50% or 85% just by exceeding a certain income threshold. So a small increase in income can make a huge difference in taxes for some.
Then there are ACA subsidies, IRMAA Medicare Part B premiums, etc. that don't correlate directly to Taxable Income brackets but are related. In my case, I see my taxes going up in the future and just want to take advantage of the current lower tax rates to make some small Roth conversions each year while staying below the next IRMAA tier. I am single and my pension alone puts me in a higher tax bracket so there are few things I can control to reduce taxes. It is not clear what the OP is intending as they are not providing us the whole picture of their finances - I think they are trying to avoid future RMDs.
keep in mind though if you leave the money in a 401k and the company goes under you can be cut off fom that money for months ..
it happened to me ... the company fell on hard times and stopped the 401k and paying the custodian who locked the plan ..
it had to run through the courts as the courts appoint a new custodian to disburse the funds ...
so i am not a fan of leaving 401k with any company i am not actively working for .
Yes! ^^^^^
Always take your money with you! Either roll it into your new employer's 401(k) plan, or roll it into a Roll-over IRA with a broad array of investment choices.
Don't leave it behind! Once you leave a company you tend to stop following their success and their changing parameters associated with your old 401(k) plan.
Employers are notorious for sweeping people out once they hit their mid-50's, and the special penalty avoidance provision for pre-age 59-1/2 access to 401(k) funds only applies to dollars in the plan of the company which is pushing you out the door. It does not apply to funds left elsewhere during your working career.
The 72(t) rule is still available for penalty avoidance of these 'nearly abandoned' dollars, but it is not as convenient as taking whatever you need, whenever you want, as the other special 401(k) exclusion allows.
Corrected my comment from Special Tax Treatment to Penalty Avoidance, as taxes are still due, but you will not need to pay the additional 10% penalty for accessing these tax deferred funds
Regarding 401k accounts, it’s not a good idea to have multiple 401k accounts. The IRS requires distribution from each account, unlike IRA account, you only have to distribute base on the total of all your IRA accounts.
ETA: And it will be a higher 25% bracket only if the government decides to never raise taxes again as long as we live despite the gigantic growing deficit & ballooning costs of SS - Medicare - Medicaid - Defense Dept. What are the chances of it staying 25%?
General Federal Tax Revenues fund:
0% of Social Security (100% funded via FICA payroll with-holdings, not Income Taxes)
Part of Medicare (the remainder coming from a separate FICA with-holding)
Part of Medicaid (the remainder coming from the States, likely via State Income Tax)
Regarding 401k accounts, it’s not a good idea to have multiple 401k accounts. The IRS requires distribution from each account, unlike IRA account, you only have to distribute base on the total of all your IRA accounts.
Once you retire, roll 401k's into IRA.
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