How much do YOU think YOU need to retire? ...and at what age will you (and spouse) retire? (Part 1)

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5501

@colorado_mom‌

If you look at this Social Security notice on how to determine if your SS is taxable, it lists:
– pensions, wages, interest, ordinary dividends and capital gain distributions

http://www.irs.gov/pub/irs-pdf/n703.pdf

The SS Benefit Worksheet (from 2013) requires you to add the following items from Form 1040 in order to figure your income threshold:

http://apps.irs.gov/app/vita/content/globalmedia/social_security_benefits_worksheet_1040i.pdf

Line 7: wages
Line 8a: taxable interest
Line 8b: non-taxable interest
Line 9a: ordinary dividends
Line 10 thru 14: Schedule C and D income, etc.
Line 15b: TAXABLE IRA DISTRIBUTIONS
Line 16b: TAXABLE PENSION AND ANNUITIES
Lines 17 thru 19: Schedule E income, etc.
Line 21: other income

All IRA distributions go on Line 15a.
Roth distributions are not taxable and are not included on Line 15b.

5502

I think this is easier to read in a way…

http://www.ssa.gov/planners/taxes.htm

I think most people on CC are going to pay taxes on SS.

5503

Thanks @dstark. :slight_smile:

I should have waited for you to post!

5504

Thanks @Attorney and @dstark. I did realize that traditional (non-Roth) IRA would get taxed by the IRS. We look at that as a tradeoff for the investment growth on the tax we didn’t pay in the early years.

I wanted to make sure “reduce SS” did not mean our SS also got dinged, like earned income from a job reduces SS.

5505

"I wanted to make sure “reduce SS” did not mean our SS also got dinged, like earned income from a job reduces SS

@colorado_mom, I think what they mean is that the distributions from the non-Roth IRA’s could throw you into the income bracket where your SS is massively taxed, therefore getting far less of it. Almost the same thing. I’m assuming that’s what they mean.

5506

Thanks for all the good inputs.

5507

“massively taxed” - That would be tolerable at today’s tax rates. But admittedly there is a risk of future tax increases. (Just a comment. Not wanting to start political debate.)

5508

No political debate, colorado_mom, just reality. But consider what some of the taxes, at today’s tax rates are. God forbid they get even higher.

Federal 39.6%.
Medicare 2.35%

Total of almost 42%. Add state tax, what if you live in a high tax state, like California, where you could pay up to 13.3%?

So you could pay income tax of over 55% on some of your income, if you were in a high tax bracket. That sounds like massively taxed to me. Not even including whatever AMT you have to pay, and what deductions you are disallowed.

I know people are thinking, “Oh, it doesn’t matter, it doesn’t apply to ME. It’s those rich people who have to pay it.” Of course, most of the truly rich pay far lower rates, as their income is not taxed as ordinary income. Regardless, some people are paying it, and when you are paying more in tax than you are getting in income, I define that as massively taxed. And that doesn’t even include sales or property tax. When we actually have to start paying on some of this incredible debt we are racking up, that high tax scale is going to start sliding down and hitting the people who think they are safe from those high taxes that other people have to pay. Sadly.

5509

@busdriver11, I tend to agree but also think that an easy way for the government to increase revenues will be to lower the estate tax exemption as baby boomers are dying. I’m hoping there will be money left for our kids.

5510

Only way we are ever seeing the 39.6% rate with today’s brackets is if we hit the lottery. Tomorrow, who knows.

The AMT top rate is 28%, with a small region of 35% when the 26% bracket phases out. High income people almost never get bagged by AMT any more because their top marginal rate exceeds the AMT rate by quite a bit, so their regular income tax exceeds AMT.

AMT is now largely an upper-middle class tax. At least the yearly “patch” has been made permanent, so we don’t have to go through that song and dance any more.

Our retirement income will likely cause our SS to be taxable anyway, so the Roth/non-Roth issue will be moot for us as it relates to SS. But if the majority of your income will come from SS and IRA/401k distributions, you could in effect be increasing the marginal rate on taxable distributions by 10 percentage points or more if they come from non-Roths. . I don’t generally see this talked about ever in Roth/non-Roth discussions, probably because it depends so much on your indivudual situation.

Conversely, no one ever really analyzes the effect of making deductible contributions in a high-tax state and taking distributions in a no- or -low tax state. It gets complicated to figure out the edge effects.

5511

Here is another “how much” article.

http://www.businessinsider.com/retirement-savings-guide-2015-3

Using the same EXAMPLE, 55 year old making $150K, that person (family) should have about $1,050,000 saved.

Has no clue how could that person do it with only continue to contribute 5% of salary annually. Unless they start to have $150K income from day 1.

5512

Right, @attorneymother, @IxnayBob and @igloo. So if one is not eligible for a Roth IRA due to income limits, the alternatives are a backdoor Roth, or a Roth 401k rolled into a Roth IRA upon retirement or leaving the company, to avoid RMDs. Is that correct?

5513

@College4K, that’s my understanding, under current law.

ETA: also Mega Backdoor Roth.

5514

I assume that the retirement calculators re how much you should have saved (such as that referenced in post # 5510) provide a number that is assumed to be after-tax savings? In other words, monies held in 401-k and tIRA accounts would need to be discounted to what they would actually provide on an after-tax basis?

5515

^ I think generally they are not after-tax, that is, they are pre-tax.

The amounts they come up with are usually based on your current salary, which is always listed as before-tax.

Of course if a lot of your money is in Roths this can have a big impact on how much you need to save.

You could always plug your after-tax pay into the calculator and come up with an after-tax number for savings, but then you have to guess what your tax rate is going to be. Trying to build tax analysis into the calculators is pretty hard because everyone’s tax situation is different.

5516

My dad told me that back in the 80’s some people paid almost 80% in total taxes! Take a look at 1980’s tax rates. Its insane! The highest marginal rate was 70%! That is why they are saying we are paying one of the lowest tax rates in the history. Yes, it is sad. I really hope it doesn’t go up.

Also look at 1962 - 91% marginal tax rate. Are they nuts?

http://taxfoundation.org/sites/taxfoundation.org/files/docs/fed_individual_rate_history_adjusted.pdf

5517

newjersey17, I can’t see how anyone was actually paying almost 80% in total taxes, by looking at your chart. Even though the top tax rates were very high, that was not on total income, that was just on the upper part of people’s income. And remember, everything was deductible back then, people were able to whittle down their incomes to much lower than they can now. Plus the fact that very, very few people were in the top tax brackets that got taxed (like what, 20 people)? Plus the fact that after 1981, the tax rates went way down. Maybe the very tip top income earners for one year in the eighties, didn’t file for any deductions, and paid almost 80% on a portion of his income? Otherwise, based on your chart, those numbers don’t make sense.

5518

Busdriver11, just to be a little more accurate, these are marginal tax rates on income that is taxed at ordinary income rates.

A lot of income is not taxed at ordinary income tax rates. There are deductions. There are their are retirement accounts. There are subsidies. Some income may not be taxed. Etc. Calif taxes are a deduction on the federal rax return.

If you look at what you really pay, your average tax rate is much lower.

Calif income taxes are deductions.

If somebody is paying AMT, some of his or her income is tax free and the top rate is much lower than 39 percent. The average income tax rate is a lot lower than 39 percent.

As far as estate taxes go, unless there is a bug political shift, why wiuld estate taxes go up?

Estate tax rates were just changed and although the rates were raised, the amount taxed is now inflation adjusted. This ended up being a big tax break for sone people. Just in a few years, the $5 million exclusion has increased and that number us going to comoound higher.

There are wealthy people in both sides of the aisle and they don’t want to pay an estate tax. Many of these people voted themselves an estate rax cut. The people in power do not sant an estate tax increase.

Look at the dynasty trusts. They still exist. Wealthy people want those trusts to exist. There is not a big movement to get rid of these trusts or raise estate taxes.

People who benefit by these policies care more than people who don’t benefit by these policies.

Medical costs increases have been running well below long term trends. If this continues, this country does not have to gave a long term budget problem.

I am not that nervous about the debt. I am more concerned about how income and wealth is distributed because that affects the economy and which policies are going to be pursued going forward.

5519

@College4K

Yes, the Mega Backdoor Roth is the only option.

For those considering Roth conversion during the donut hole years, the following helped me with some calculations:

A few pages back, I linked Turbo Taxcaster which I played with to see, using 2014 numbers for mutual fund dividends, capital gains distributions (i.e., “income over which I have no control” because they result from taxable accounts held for the retirement pot), added in incrementally tIRA distributions to see when they (1) wipe out deductions and exemptions, (2) push us into the next higher bracket or (3) incur AMT, or a combination of the above. It’s far more useful to see the calculations than to read tax tables for me.

Then I add in the hypothetical SS amounts once those years come. It is fairly easy to see when SS taxable.

Also useful is distinguishing between incremental / marginal tax rate and the effective rate (which is often lower and depends on individual circumstances). The calculator displays both. For me, this exercise demonstrates why the more accurate analysis does take into account post-tax retirement effective rate.

Then you also realize, that if you are side funding the big tax payment for conversion, that should be part of the consideration. Clearly I should have just taken the word of the FP, but I like to understand the why. And perhaps it has taken me longer but now I get it.

There is also no way to predict how tax policy will evolve in the next couple decades except that revenues have to be raised. And they will have to come from the likeliest sources to yield big bucks. Hence the reason why FAs and promoters advise that it’s “best” to act now to maximize the opportunity to / chances of grandfathering should the Tax Code change.

It is in this context that I am weighing between acting now vs. later.

5520

Yes, dstark, I do understand about the tax rates. However, not everyone can take full advantage of every break. Many are limited by the AMT, and some are not allowed at certain income levels at all. If we were smart, we’d figure out how to get more of our income from unearned, as opposed to earned income sources. But we’re not, so very few places to hide it. I am not complaining, but I think that I really don’t want tax rates to go up further. We pay over 30% in taxes on all of our income overall, if I include federal, FICA, Medicare, property and state (which is zero here). Not including sales tax, because that is too variable. I realize others pay more, but for me that’s enough.