A single tax filer hits the 25% tax bracket at about $36,000 so taxes in retirement can be significant for one who will be receiving a taxable pension.
I personally think it is naive to assume that there is zero chance that tax laws will change in ways that are unfavorable to early retirees. Certainly changes to property and sales taxes are possible. I am not retired, but when it happens,I will plan for a fudge factor to account for these kinds of hard to predict issues.
I told a few coworkers about MMM and they decided they would each save up $1,000,000. They each showed me a yearly budget of $40,000 but they forgot to include taxes in their budget. So I told them they need to increase their nest egg by $100,000 or decrease annual budget by $4,000 to deal with the taxes. One of them also forgot to include health insurance, he was so happy before I told him about the issues with his budget, and afterwards he was pretty upset and said he might as well just forget about early retirement. My guess is there are a lot of people who forget to include taxes, has anyone else found this to be true?
You're right, if have 40k income in retirement you will be paying some taxes.
On a related topic - Why does the financial world seem to assume that everyone will be making less in retirement and not more?
Urmm, I think you're talking about expenses, and I'm speaking of income. My earnings early in my career seem laughably low in comparison to my later years. Since DH still works, we are not touching our 'stache yet, but every calculation we run shows that our annual income in retirement (once we start collecting SS and pension) will exceed our current annual income. This makes me think that the tax bite in retirement will be bigger in comparison. FWP, to be sure, but I've always wondered about this, so I just tossed it out there.On a related topic - Why does the financial world seem to assume that everyone will be making less in retirement and not more?
Usually because they assume that some significant portion of your expenses are job related. Fancy car. Fancy clothes. Lunches out. Long commute. Golf membership. Dry cleaning. Professional fees. Gold plated stationary.
And in some cases, because they're a little loose with the term "expenses" and use it to mean everywhere your money goes, including taxes like OASDI that will stop in retirement, and contributions to your retirement accounts that you will stop making in retirement.
| Category | Monthly | Comments | Annual |
| Salary/Wages | $12,804 | $153,650 | |
| HSA | $721 | $8,650 | |
| FICA base salary/wages | $12,083 | $145,000 | |
| Traditional IRA | $1,083 | At maximum | $13,000 |
| 401(k) / 403(b) / TSP / etc. | $4,000 | At maximum | $48,000 |
| 457 plans | $4,000 | At maximum | $48,000 |
| Federal Total Income | $3,000 | $36,000 | |
| Federal tax | $0 | $0 |
| Filing Status | 2 | 1=S, 2=MFJ | |
| # of earners | 2 | ||
| Total Income | $36,000 | ||
| Std. Deduct. | $12,600 | ||
| # Exempt. | 2 | ||
| Exemption | $8,000 | ||
| AGI | $36,000 | ||
| MAGI | $49,000 | ||
| Taxable | $15,400 | ||
| Tax | $1,540 | ||
| Savers' credit | $2,000 | ||
| Tax after n-r credit | $0 |
| Category | Monthly | Comments | Annual |
| Salary/Wages | $9,804 | $117,650 | |
| HSA | $721 | $8,650 | |
| FICA base salary/wages | $9,083 | $109,000 | |
| Traditional IRA | $739 | At maximum | $8,863 |
| 401(k) / 403(b) / TSP / etc. | $4,000 | At maximum | $48,000 |
| 457 plans | $4,000 | At maximum | $48,000 |
| Income subject to IRS tax | $345 | $4,137 | |
| Qualified dividends | $7,614 | $91,365 | |
| Federal Total Income | $7,959 | $95,502 | |
| Federal tax | $0 | $0 |
| Filing Status | 2 | 1=S, 2=MFJ | |
| # of earners | 2 | ||
| Total Income | $95,502 | ||
| Std. Deduct. | $12,600 | ||
| Act. Deduct. | $12,600 | ||
| # Exempt. | 2 | ||
| Exemption | $8,000 | ||
| AGI | $95,502 | ||
| MAGI | $104,365 | ||
| Taxable | $74,902 | ||
| Tax | $0 |
On a related topic - Why does the financial world seem to assume that everyone will be making less in retirement and not more?
I intend to (legally) pay no income tax in retirement. Zero.
Standard deduction for mfj is 12.6k of tax free income.
Personal exemptions 4k each for you, spouse, and each child including college students. Another 16k of tax free income for a family of four.
Plus 1k child tax credits per child. Credit, not deduction.
LTCG are tax free if you show under about 75k in taxable income. All contributions to taxable investment accounts come out tax free. All Roth money comes out tax free.
Between these options, rental property depreciation, and the American opportunity and lifetime learning credits, I expect to keep my Roth ira pipeline funded at zero percent taxes due.
I'll still be stuck with sales tax, gas tax, and property tax.
nope I lived in another state, had a scholarship but unless the student is earning more than 50% of their upkeep AND has another permanent residence, the parent can claim dependent status. Heck my parents tried to continue to claim me as a dependent even after I graduated and moved out, and told them to cut it out!I intend to (legally) pay no income tax in retirement. Zero.
Standard deduction for mfj is 12.6k of tax free income.
Personal exemptions 4k each for you, spouse, and each child including college students. Another 16k of tax free income for a family of four.
Plus 1k child tax credits per child. Credit, not deduction.
LTCG are tax free if you show under about 75k in taxable income. All contributions to taxable investment accounts come out tax free. All Roth money comes out tax free.
Between these options, rental property depreciation, and the American opportunity and lifetime learning credits, I expect to keep my Roth ira pipeline funded at zero percent taxes due.
I'll still be stuck with sales tax, gas tax, and property tax.
You may pay zero fed income tax, but I suspect the trade-off will be paying college tuition. College kids can be your dependent, if you pay more than 50% of their support. I have found that if they live on campus (pay inflated living costs) and have scholarships and loans, they are effectively supporting themselves, in the eyes of the IRS at least. No dependent for you, no AOG for you, they claim it (after also claiming taxable scholarships as income).
The Roth pipeline is an excellent tool, but it is counterproductive from a FAFSA POV - it increases your income, lowering aid. I've been crunching the numbers for a while, you can optimize only one or the other, not both, it seems.
The CTC is also excellent, especially when your state partially matches it, like mine does. However, it ends at age 16. How old are your kids? When they are little, that seems far off, but it comes sooner than you think. I'm down to only one under 16 now, of five kids. We've had 5 figure refunds (funding our Roth IRAs), but my projections for FIRE/empty nest might have us paying taxes, definitely state taxes.
Just pointing out that you have to project based on future circumstances, too. You will not be a family of four forever.
First - don't get confused by marginal tax rates. If you pay $0 with $36k income, you won't suddenly pay $10k with $40k income because you've edged into the 25% tax bracket. (This isn't possible, anyway, but I digress. But if the structure worked this way, you'd pay $1k in taxes...)in the "roth conversion pipeline" or whatever you want to call it, if you transfer 40k from your IRA to a Roth IRA, Assuming you are Single Head of Household. My understanding is you'll get about 9k standard deduction, be taxed 10% on 12k so $1200, then be taxed 15% on the last 19k, $2850, so that's $4050 in taxes. So this person will be in the 15% tax bracket, so they won't have to pay any taxes on dividends because they are qualified dividends and they only have to pay 5% on capital gains, also because they're in the 15% bracket, so if you have a taxable account you basically will have to pay 0% on any retunrs you get from it. But you still have to count the 40k transferred to the Roth IRA as "taxable income" don't you?
Second - how do you define income in retirement? Let's say I have a $1m portfolio generating $20k in dividends and growing by $60k each year. I need $40k to pay my expenses. Perhaps I use $20k in dividends, and I sell $20k of my portfolio. When I make that sale, I won't be selling $20k of "growth" - I will be selling xx number of shares that have each grown yy% - I will pay taxes on the growth only. Not on the original share value when I purchased it. So even if they grew 100%, I would only be registering $10k in capital gains on my $20k sale. Then I'd also pay taxes on those dividends.
Taxes should be pretty close to zero in early retirement.
See the GoCurryCracker posts on taxes:
https://www.google.com/search?q=go+curry+cracker+taxes
in the "roth conversion pipeline" or whatever you want to call it, if you transfer 40k from your IRA to a Roth IRA, Assuming you are Single Head of Household. My understanding is you'll get about 9k standard deduction, be taxed 10% on 12k so $1200, then be taxed 15% on the last 19k, $2850, so that's $4050 in taxes. So this person will be in the 15% tax bracket, so they won't have to pay any taxes on dividends because they are qualified dividends and they only have to pay 5% on capital gains, also because they're in the 15% bracket, so if you have a taxable account you basically will have to pay 0% on any retunrs you get from it. But you still have to count the 40k transferred to the Roth IRA as "taxable income" don't you?More or less right, for 2015 the standard deduction is $6300 for a single person + $4,000 for a personal exemption. The 10% bracket goes up to $9,225. I get $3,993.75 as the taxes in this scenario.
The low spending requirement is critical to the whole "don't pay any taxes in retirement" deal. Way easier to do if you can get by on 20K compared to 40K or 100K.
Just noticed you mentioned head of household. So standard deduction is $9250, you probably have 2 $4K exemptions. Long story short, the tax is under $3K rather than close to $4K.in the "roth conversion pipeline" or whatever you want to call it, if you transfer 40k from your IRA to a Roth IRA, Assuming you are Single Head of Household. My understanding is you'll get about 9k standard deduction, be taxed 10% on 12k so $1200, then be taxed 15% on the last 19k, $2850, so that's $4050 in taxes. So this person will be in the 15% tax bracket, so they won't have to pay any taxes on dividends because they are qualified dividends and they only have to pay 5% on capital gains, also because they're in the 15% bracket, so if you have a taxable account you basically will have to pay 0% on any retunrs you get from it. But you still have to count the 40k transferred to the Roth IRA as "taxable income" don't you?More or less right, for 2015 the standard deduction is $6300 for a single person + $4,000 for a personal exemption. The 10% bracket goes up to $9,225. I get $3,993.75 as the taxes in this scenario.
Also the long-term capital gains rate is 0% just like dividends.
Of course, another withdrawal strategy would be to pipe-line only up to the standard deduction + exemption, then fill in the rest of your income needs from existing Roth Basis or by cashing in a bit in your taxable account (and doing it smartly so that you don't incur any taxes).
The low spending requirement is critical to the whole "don't pay any taxes in retirement" deal. Way easier to do if you can get by on 20K compared to 40K or 100K.
Taxes should be pretty close to zero in early retirement.
See the GoCurryCracker posts on taxes:
https://www.google.com/search?q=go+curry+cracker+taxes
This is gold -- thanks! You sent me down a rabbit-hole, but it is a good one.
Taxes should be pretty close to zero in early retirement.
See the GoCurryCracker posts on taxes:
https://www.google.com/search?q=go+curry+cracker+taxes
This is gold -- thanks! You sent me down a rabbit-hole, but it is a good one.
I love that there are people like Kris who I've seen here many, many times for many months, yet they still haven't been down that rabbit hole yet. I guess we need to just keep plugging all the great FI/Tax/401K/Life/Psychology bloggers out there. Even the forum veterans can benefit.
MDM, I appreciate your example but also find it frustrating as my employer does not offer 457 accounts (although it is a private university that could) and does not offer any high deductible insurance plan, so no HSA accounts they tell me. I contribute the max to my 403(b) and an IRA, but am I missing some other obvious possibility to reduce taxes?Probably not, especially if you use one of the commercial tax preparation software packages and describe your family situation accurately.
Once I'm old enough for Social Security, I will pay even less. The first 24k of SS benefits are not taxed by the Federal and my state. At that point, I will only need to draw 5k per year out of my 401k and traditional IRA, which will put me in the zero tax bracket.
This is what my Mom did. Started SS at 62 and added a bit as needed from a taxable IRA and never paid a cent in income tax for the 20 years she did that until she died at 82. No tax on the SS and able to keep the IRA withdrawals at a level below the taxable amount (i.e. single standard deduction and exemption).
Once I'm old enough for Social Security, I will pay even less. The first 24k of SS benefits are not taxed by the Federal and my state. At that point, I will only need to draw 5k per year out of my 401k and traditional IRA, which will put me in the zero tax bracket.
The gotcha with SS is: the taxation on it is not indexed to inflation. In other words, the bite taken out of it will grow year by year. Depending on when you'll be getting it, it could be pretty significant. That's not to say there might still be clever ways to reduce your taxes.... just keep your eyes open.
nope I lived in another state, had a scholarship but unless the student is earning more than 50% of their upkeep AND has another permanent residence, the parent can claim dependent status. Heck my parents tried to continue to claim me as a dependent even after I graduated and moved out, and told them to cut it out!I intend to (legally) pay no income tax in retirement. Zero.
Standard deduction for mfj is 12.6k of tax free income.
Personal exemptions 4k each for you, spouse, and each child including college students. Another 16k of tax free income for a family of four.
Plus 1k child tax credits per child. Credit, not deduction.
LTCG are tax free if you show under about 75k in taxable income. All contributions to taxable investment accounts come out tax free. All Roth money comes out tax free.
Between these options, rental property depreciation, and the American opportunity and lifetime learning credits, I expect to keep my Roth ira pipeline funded at zero percent taxes due.
I'll still be stuck with sales tax, gas tax, and property tax.
You may pay zero fed income tax, but I suspect the trade-off will be paying college tuition. College kids can be your dependent, if you pay more than 50% of their support. I have found that if they live on campus (pay inflated living costs) and have scholarships and loans, they are effectively supporting themselves, in the eyes of the IRS at least. No dependent for you, no AOG for you, they claim it (after also claiming taxable scholarships as income).
The Roth pipeline is an excellent tool, but it is counterproductive from a FAFSA POV - it increases your income, lowering aid. I've been crunching the numbers for a while, you can optimize only one or the other, not both, it seems.
The CTC is also excellent, especially when your state partially matches it, like mine does. However, it ends at age 16. How old are your kids? When they are little, that seems far off, but it comes sooner than you think. I'm down to only one under 16 now, of five kids. We've had 5 figure refunds (funding our Roth IRAs), but my projections for FIRE/empty nest might have us paying taxes, definitely state taxes.
Just pointing out that you have to project based on future circumstances, too. You will not be a family of four forever.
http://www.journalofaccountancy.com/Issues/2012/Mar/20114558.htm
Support. The student must not provide over half of his or her own support (Sec. 152(c)(1)(D)). The parents do not necessarily have to provide over half the support. College tuition and fees are included in the cost of support. If the parents pay these costs, the child may meet the support test even if the child pays most of his or her own living expenses. However, if a student pays the cost of tuition and fees or receives a student loan to pay them, that amount is counted as support provided by the student and can cause the child to fail the support test and thereby not qualify as a dependent.
In Germany I am well aware that I will have to pay 25% (at the current rate/shit will change in 10+ years for sure) capital gains tax on any money I withdraw from my investment account.
This effectively means I have a 3% safe withdrawal rate to consider instead of 4%.
If your expenses are low enough, and you own rental property, you can essentially pay zero taxes from what I understand.
If your expenses are low enough, and you own rental property, you can essentially pay zero taxes from what I understand.
Not if that rental property throws off lots of cash.
Depreciation is nice, but if it's a rental bought for cash flow, depreciation won't cover its own income.
If it's a very expensive property with mediocre returns, yes, the depreciation might be high enough to shelter all of its income (and even more).
Can an IRA be passed from me to grandchildren at my death on a tax free basis, assuming I have less than 5 mill to pass on?If only. Unfortunately not (unless it is a Roth IRA, but I think you mean traditional).
I'm reading this as no tax on the inheritance transfer itself, but they have to take RMD's immediately, which obviously does trigger income tax. But when you're dividing by life expectancy's in the 70's and 80's, the RMD is much lower - for a 10 year old it is less than 1.4%. So long as the funds stay invested reasonably, you'd expect that account to grow quite a bit even after the distribution.Can an IRA be passed from me to grandchildren at my death on a tax free basis, assuming I have less than 5 mill to pass on?If only. Unfortunately not (unless it is a Roth IRA, but I think you mean traditional).
E.g., see https://www.fidelity.com/viewpoints/retirement/non-spouse-IRA.
This. And to be more specific, the first 8354€ are tax-free and after that the marginal tax rate starts at 14%, quickly reaching 25% at about 16k€. And there are probably a few more deductions I don't know about. Even without them, the average tax rate for an income of 20k€/year (for a single) is about 13%, so you would be paying 2600€ (+5.5% or 143€) in taxes.In Germany I am well aware that I will have to pay 25% (at the current rate/shit will change in 10+ years for sure) capital gains tax on any money I withdraw from my investment account.
This effectively means I have a 3% safe withdrawal rate to consider instead of 4%.
It's actually closer to 28% due to the Solidaritätszuschlag and depending on church tax. However, that's not necessarily the amount you have to pay, just the theoretical maximum. If your personal tax rate is lower, you can request the difference to be paid back to you on your tax statement.
I'm reading this as no tax on the inheritance transfer itself, but they have to take RMD's immediately, which obviously does trigger income tax. But when you're dividing by life expectancy's in the 70's and 80's, the RMD is much lower - for a 10 year old it is less than 1.4%. So long as the funds stay invested reasonably, you'd expect that account to grow quite a bit even after the distribution.
Thanks for explaining the top hat deal....seems so unfair the highest paid get to avoid taxes that way.Another example of the lesser-known Golden Rule: "those who have the gold make the rules".
Just for fun, a quick calculation shows a couple between the ages of 55 and 65 (i.e., eligible for the maximum HSA deduction) can earn $153,650 in W-2 wages and owe $0 federal income tax They would owe some FICA tax. This allows for the maximum HSA, tIRA, 403b and 457 deductions. It does not include children and the tax opportunities typically associated with them, e.g., exemptions, child tax credit, and education credits (although in theory the adults could have education credits themselves).I didn't think you could max out your 457K and still contribute to an IRA. Plus, I don't know of any one who can both contribute to a 457K and a 401K. Am I correct?
Category Monthly Annual Salary/Wages $12,804 $153,650 HSA $721 $8,650 FICA base salary/wages $12,083 $145,000 Traditional IRA $1,083 At maximum $13,000 401(k) / 403(b) / TSP / etc. $4,000 At maximum $48,000 457 plans $4,000 At maximum $48,000 Federal Total Income $3,000 $36,000 Federal tax $0 $0
Filing Status 2 1=S, 2=MFJ # of earners 2 Total Income $36,000 Std. Deduct. $12,600 # Exempt. 2 Exemption $8,000 AGI $36,000 MAGI $49,000 Taxable $15,400 Tax $1,540 Savers' credit $2,000 Tax after n-r credit $0
Even better, by throwing long term capital gains (and/or qualified dividends) into the mix, our happy couple could gross $209,015 and still have $0 federal income tax due.
Category Monthly Annual Salary/Wages $9,804 $117,650 HSA $721 $8,650 FICA base salary/wages $9,083 $109,000 Traditional IRA $739 At maximum $8,863 401(k) / 403(b) / TSP / etc. $4,000 At maximum $48,000 457 plans $4,000 At maximum $48,000 Income subject to IRS tax $345 $4,137 Qualified dividends $7,614 $91,365 Federal Total Income $7,959 $95,502 Federal tax $0 $0
Filing Status 2 1=S, 2=MFJ # of earners 2 Total Income $95,502 Std. Deduct. $12,600 Act. Deduct. $12,600 # Exempt. 2 Exemption $8,000 AGI $95,502 MAGI $104,365 Taxable $74,902 Tax $0
Of course, YMMV, but is there anything amiss with the calculations given the assumptions? Anyone have a more extreme example?
I don't know of any one who can both contribute to a 457K and a 401K. Am I correct?
I didn't think you could max out your 457K and still contribute to an IRA.You can.
Plus, I don't know of any one who can both contribute to a 457K and a 401K. Am I correct?See http://money.cnn.com/retirement/guide/401k_457plans.moneymag/index2.htm.
I don't know of any one who can both contribute to a 457K and a 401K. Am I correct?
Are you correct that you don't know anyone like that? I'm not sure who you know, so maybe?
Are you correct that nobody has access to both a 457 and 401k? No, you are not correct.
I don't know of any one who can both contribute to a 457K and a 401K. Am I correct?
Are you correct that you don't know anyone like that? I'm not sure who you know, so maybe?
Are you correct that nobody has access to both a 457 and 401k? No, you are not correct.
Okay wise guy I'll play. Do you know anyone that can take advantage of, or any employer that offers both a 457k and/or a 401K/403B?
(would you feel better if I went back and rephrased my question so it was perfectly accurate as opposed to getting my question out there where most people would understand it?)
Edit - I see that you can contribute to a traditional IRA or Roth AND a 401K, etc. under certain circumstances. Apparently, I do not qualify for that and thought that applied to all individuals.
Okay wise guy I'll play. Do you know anyone that can take advantage of, or any employer that offers both a 457k and/or a 401K/403B?
I don't know of any one who can both contribute to a 457K and a 401K. Am I correct?
Are you correct that you don't know anyone like that? I'm not sure who you know, so maybe?
Are you correct that nobody has access to both a 457 and 401k? No, you are not correct.
Okay wise guy I'll play. Do you know anyone that can take advantage of, or any employer that offers both a 457k and/or a 401K/403B?
(would you feel better if I went back and rephrased my question so it was perfectly accurate as opposed to getting my question out there where most people would understand it?)
Edit - I see that you can contribute to a traditional IRA or Roth AND a 401K, etc. under certain circumstances. Apparently, I do not qualify for that and thought that applied to all individuals.
I could... I contribute to a defined benefit pension plus a 401(a). I should have contributed to an 457(b) too but didn't know about this site to educate myself on the benefits of doing so. https://www.arizonadc.com/iApp/tcm/arizonadc/about/index.jsp
Edit - I see that you can contribute to a traditional IRA or Roth AND a 401K, etc. under certain circumstances. Apparently, I do not qualify for that and thought that applied to all individuals.Being pedantic: you can always contribute to a traditional IRA, but the IRS limits how much you can deduct.
Okay wise guy I'll play. Do you know anyone that can take advantage of, or any employer that offers both a 457k and/or a 401K/403B?
Yes, I know several professionally.
For someone you might know from the forum, read up on Root of Good's tax planning: http://rootofgood.com/make-six-figure-income-pay-no-tax/ (http://rootofgood.com/make-six-figure-income-pay-no-tax/)
Edit - I see that you can contribute to a traditional IRA or Roth AND a 401K, etc. under certain circumstances. Apparently, I do not qualify for that and thought that applied to all individuals.Being pedantic: you can always contribute to a traditional IRA, but the IRS limits how much you can deduct.
Being (possibly) helpful: are you aware of the ability to do a "Backdoor Roth"? ...a Mega Backdoor Roth?
Edit - I see that you can contribute to a traditional IRA or Roth AND a 401K, etc. under certain circumstances. Apparently, I do not qualify for that and thought that applied to all individuals.
I don't know of any one who can both contribute to a 457K and a 401K. Am I correct?
Are you correct that you don't know anyone like that? I'm not sure who you know, so maybe?
Are you correct that nobody has access to both a 457 and 401k? No, you are not correct.
Okay wise guy I'll play. Do you know anyone that can take advantage of, or any employer that offers both a 457k and/or a 401K/403B?