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Actually the taxing of ss is pretty complex . Just reading it makes my hair hurt
If your combined income exceeds the threshold amounts, an IRS formula is applied to determine how much of your benefits are taxable. The result of these calculations will be that you pay taxes on the lower of:
85% of your Social Security benefits
50% of the benefits plus 85% of the amount of combined income over the second threshold amount
50% of the amount of combined income over the first threshold amount, plus 35% of the amount of combined income over the second threshold amount
I'm 67 now. I did a test case and tried what would happen if I had to take the MRD this year. This is hard to believe but 89 cents of every dollar of the MRD went for taxes. 11 cents ended up in my pocket. I need some people to interact with to find a way to reduce this tax burden.
Before everyone tells me I made a mistake. Some details:
As I said, I get to keep only 11 cents out of each dollar of the MRD. But my marginal tax rate is about 28% on the federal and 6% on the New York state. I arrive at that figure by increasing my MRD by $100 and seeing that my taxes go up by $28 on the federal and $6 on NY State.
As for why so much of my MRD goes to taxes.
(1) I have very little taxable income. Total Federal taxes are less then $300.
New York State income taxes are actually more then the Federal taxes (by $6.00).
(2) Very little of my SS is taxed.
(3) The only income over SS is Qualified dividends and Long Term capitol gains.
Both very favorable tax wise at the Federal level but not the state level.
Hence why the NYS tax exceeds the Federal.
(4) The Traditional IRA is very large.
Almost 24 times as large as my AGI before the MRD.
(5) The MRD exceeds my before MRD AGI by 110% thus more then doubling my income.
(6) That makes most of my SS taxable. It also takes away most of any advantage of the Qualified dividends and Long term Capitol gains.
So, for all those years I did without so I could put as much as possible in my 401K (which became this Traditional IRA) and now I find most of it goes to the government.
So, how can I keep more of it?
(a) Convert it all to a ROTH and pay a really gigantic tax, more medicare, etc etc etc? But then have almost zero income thereafter.
(b) Convert to a ROTH is stages before age 70.5?
(c) Convert smaller amounts for years?
(d) Some kind of annuity?
Any help would be greatly appreciated.
Pete
Tax planners and legislators saw this coming years ago and created the Roth to avoid taxes when you could least afford them. Even though we put money in our IRA to the max, we knew the taxman would eventually show up.
Tax planners and legislators saw this coming years ago and created the Roth to avoid taxes when you could least afford them. Even though we put money in our IRA to the max, we knew the taxman would eventually show up.
If you convert close to retirement, and do not plan to touch your Roth except for emergencies and/or until the much later part of retirement, your Roth will grow and grow, and the taxman will never again show up for it.
I did not take the poll but I will tell you what I have been doing for the last 7 years.
I have two mutual fund IRA's. Two as one was my late wife's. I also have 2 non-IRA mutual funds. I did not want to take, but I must take the MRD. I use a bit as play money (this year plantation shutters for my house) but the Lion's share gets invested in the 2 non-IRA Mutual Funds which I do draw monthly on. I have yet to and I see no need in the foreseeable future to draw on my IRA principals other than the MRDs.
To clarify. My monthly income is from SS and two non-IRA mutual funds which I draw some from monthly.
Thanks so much. THIS is the kind of analysis I've been looking for.
Also, as for Roth conversion.....
-- How far up into the tax brackets is it worth it to do, IF the person is only going to be able to get a fraction converted....
-- Is is worth it to go into the 24%, 32% or higher tax bracket to get more converted. I mean a person with even just a half-million dollar Trad IRA, who only has say years 65-72 convert...won't get much converted over if they're trying to stay under 24% marginal rate.
This is how I converted my SEP IRA:
1. I put aside money that I didn't need in any foreseeable future, earmarked for payment of tax on Roth conversion.
2. I waited for the market to go low, and then converted on a day when my IRA lost a lot of value. This minimized taxes on Roth conversion (since I was converting substantially less money).
The account which was formerly my IRA, and now is my Roth, is now worth about 20% more than in Feb 2020, and 50% more than it was worth in March 2020 (when the market bottomed, and I did the conversion.
For a person with an account worth $500k now, that means the same account would have been worth about $400 in Feb 2020, and about $320k in March. If the person converted to Roth in March, and paid about $80k tax on the conversion (from the savings previously allocated to this expected tax payment), the person would have still gained, in less than a year, net $100k which (along with all other future gains in Roth account) will never be taxable. I think it is hard to beat that by spreading the conversion over several years to avoid a higher marginal tax bracket.
I believe the most important things about Roth conversion are 1. to convert early enough so the money has time to grow tax-free before any major withdrawal, and 2. to convert on a day when the market is very low, in order to minimize taxes on the conversion (and one has to have some money sitting somewhere ready to pay tax on the conversion. Do not pay tax on Roth conversion with money from the account which you are converting, because that money is better used for the future tax-free growth).
I’ve spent a bit of time studying the tax torpedo. The highest effective federal rate I’ve been able to create is 49.95%. This is due to an interaction between three different types of income... SS benefits, ordinary income, and long-term capital gains,
The OP mentions a rate of 89%, which includes both federal and state (NY) taxes. Knowing nothing about NY taxes, I will take this at face value, and also as a reminder to not move to NY, haha.
For my own situation I’ve concluded the best course of action is to drain most or all of the Trad accounts after retirement, but before taking SS benefits. Money not needed for current expenses could be converted to Roth, of course.
I’ve spent a bit of time studying the tax torpedo. The highest effective federal rate I’ve been able to create is 49.95%. This is due to an interaction between three different types of income... SS benefits, ordinary income, and long-term capital gains,
The OP mentions a rate of 89%, which includes both federal and state (NY) taxes. Knowing nothing about NY taxes, I will take this at face value, and also as a reminder to not move to NY, haha.
For my own situation I’ve concluded the best course of action is to drain most or all of the Trad accounts after retirement, but before taking SS benefits. Money not needed for current expenses could be converted to Roth, of course.
My nyc and nys taxes are so low in retirement because so much is exempt that I couldn’t even take a 1600 tax credit in full that the state gives me for having a long term care policy ...that is on a six figure income.
Our ss is not taxed , my wife’s pension is not taxed , up to 20k in retirement money isn’t taxed and we got a lot of interest from treasury bonds which isn’t taxed.
Ny is a lot more tax friendly to retirees than many realize
Last edited by mathjak107; 01-25-2021 at 04:26 AM..
My nyc and nys taxes are so low in retirement because so much is exempt that I couldn’t even take a 1600 tax credit in full that the state gives me for having a long term care policy ...that is on a six figure income.
Our ss is not taxed , my wife’s pension is not taxed , up to 20k in retirement money isn’t taxed and we got a lot of interest from treasury bonds which isn’t taxed.
Ny is a lot more tax friendly to retirees than many realize
Interesting. California is similar. It has a reputation for being tax unfriendly, but it also does not tax SS benefits. The income tax has many brackets, starting at 1% and on up to 13.3%. So at least from an income tax point of view it’s not bad for a retiree with modest income.
An interesting result of the computation: a person with a total income of $60,000 where $30,000 of it is from ss pays tax on 46% of ss income --- but a person with a total income of $60,000 where $20,000 of it is from ss pays tax on 85% of ss income. So, between two people with the exact same total annual retirement income, the one who saved more to support self independent of ss is "rewarded" by higher taxation of a smaller ss benefit.
Higher taxes on a higher income is nothing new. It doesn't matter whether you scraped and saved, or inherited.
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