Math Formula needed

[LauraMo]

I am 45 and my husband is 41. We will be non-mortgage debt free at Christmas and will start contributing $3000 a month to our retirement starting this January. After reading Mad FIentist’s Guinea Pig articles, I am interested in maxing out all retirement accounts before contributing to taxable accounts. But being much older than Mad FIentist, I wanted to account for Required Minimum Distributions (RMDs).  1. I want to stay in the 15% tax bracket or lower because I just don’t want to pay higher taxes. 2. If the RMDs kick us up into the 25% tax bracket, it would then make us have to pay taxes on certain monies earned in the taxable accounts as well.
 
Depending on how much we make next year, maxing out retirement accounts will put us in the 10% tax bracket now. In retirement, the amount of money we will need to withdraw from the IRA ladder each year would put us in the 10% tax bracket as well.
 
While it would be wonderful to stay in the 10% tax bracket, I’m of the opinion that tax rates will rise at some point over the next 30 to 40 years.  So I’m wondering if it wouldn’t be better to stay instead in the 15% tax bracket now (by contributing some money now to taxable accounts instead of retirement accounts); and then in ER, Roth ladder more than the 10% we need to live on so that most of our retirement money will have been moved to Roth IRA at 15% by the time tax rates do rise.
 
I want to play around with contribution amounts to taxable vs. nontaxable accounts. How do I play with the numbers? Is there a formula I can use? For example, what would the taxes look like before retirement, during retirement before RMDs apply and after RMDs apply if we currently contribute $2k to our retirement accounts and $1k each month to taxable accounts? Vice versa? $100% in tax deferred accounts? 100% in taxable accounts?
 
What would it look like if we only pulled 10% out during ER? 15%? How much would we lose in future earnings by taking the 15% tax hit now(opportunity cost)?
 
Is there a way to integrate any earned income we may have during retirement into the formula? Although the amounts will be small (about $750 in today’s dollars combined), we both have pensions. I would like to throw social security in the mix as well. I know it’s not popular to count on social security but I don’t think it will go away completely. I just think it will be reduced.
 
Thanks for your help!

[catccc]

I have to admit I didn't read the whole thing, because my first thought was, why do you need to worry about RMDs?  I think they start at 70 and 1/2?  How much money are you planning to have then?

Plus, let's say you were 71 today, and you had a $1M portfolio left in your nest egg.  RMD on this would be about $37K.  You get personal exemptions of $8K, a standard deduction of $12.4K, leaving you with taxable income of $16.6K, which is within the 10% tax bracket.  And that's if you leave everything in 401Ks and don't dole out funds into a roth pipeline to control your taxable income.

Don't forget that it's a progressive tax system.

[LauraMo]

We have pensions. I want to retire early but my husband does not. He's debating whether to stay with his employer. If he continues with his employer then his pension alone (not counting mine or social security) will already put us in the 25% tax bracket. And that's not counting any part time work we may want to do in retirement.

Also, I'm not a math person. I've read and re-read Go Curry Cracker, Root of Good, Millionaire educator, MMM, Tresidder, etc. I just don't get the math. It sort of makes sense but it's still beyond me. I don't understand enough to see for myself that I may not need to concern myself with RMDs. Right now I'm relying on your statement (for ex) that I don't have to worry about it. I need to see for myself that I don't need to worry about it, if that's the case.

Does anyone know how I should set up my spreadsheet?

[MDM]

I am 45 and my husband is 41. We will be non-mortgage debt free at Christmas and will start contributing $3000 a month to our retirement starting this January. After reading Mad FIentist’s Guinea Pig articles, I am interested in maxing out all retirement accounts before contributing to taxable accounts. But being much older than Mad FIentist, I wanted to account for Required Minimum Distributions (RMDs).  1. I want to stay in the 15% tax bracket or lower because I just don’t want to pay higher taxes.

LauraMo, welcome to the forums.  Not sure I can answer all your questions, but let's see.
Certainly understand your desire to pay no more in taxes than legally required.  Of course, if someone offered me $1 million I'd take it even though that would put me in the 39.6% bracket. ;)

2. If the RMDs kick us up into the 25% tax bracket, it would then make us have to pay taxes on certain monies earned in the taxable accounts as well.

If by "certain monies" you mean qualified dividends and long term capital gains, then yes.
 

Depending on how much we make next year, maxing out retirement accounts will put us in the 10% tax bracket now. In retirement, the amount of money we will need to withdraw from the IRA ladder each year would put us in the 10% tax bracket as well.
 
While it would be wonderful to stay in the 10% tax bracket, I’m of the opinion that tax rates will rise at some point over the next 30 to 40 years.  So I’m wondering if it wouldn’t be better to stay instead in the 15% tax bracket now (by contributing some money now to taxable accounts instead of retirement accounts); and then in ER, Roth ladder more than the 10% we need to live on so that most of our retirement money will have been moved to Roth IRA at 15% by the time tax rates do rise.

You may be correct.  No way to know for sure until we can don our hindsight glasses and see what happened.
 

I want to play around with contribution amounts to taxable vs. nontaxable accounts. How do I play with the numbers? Is there a formula I can use? For example, what would the taxes look like before retirement, during retirement before RMDs apply and after RMDs apply if we currently contribute $2k to our retirement accounts and $1k each month to taxable accounts? Vice versa? $100% in tax deferred accounts? 100% in taxable accounts?
 
What would it look like if we only pulled 10% out during ER? 15%? How much would we lose in future earnings by taking the 15% tax hit now(opportunity cost)?
 
Is there a way to integrate any earned income we may have during retirement into the formula?

You can find several formulas here: http://en.wikipedia.org/wiki/Time_value_of_money

It is also helpful to remember the commutative property of multiplication: P * (1 - tax) * (1 + i)ⁿ = P * (1 + i)ⁿ * (1 - tax)
In other words, given
  - P, Amount of money
  - tax, tax rate
  - i, annual interest rate
  - n, years for money to grow
it doesn't matter whether you pay taxes up front (Roth IRA) or when withdrawing (traditional IRA).  The net amount is the same either way.
That is the basis for the rule of thumb "if your tax rate before and after retirement is identical, then it doesn't matter whether you use traditional or Roth".

Careful, however, of some assumptions embedded in that rule of thumb.  The biggest assumption is that "tax" is a single percentage.  That is a good assumption if one has other income in retirement (as you will - noted below), so IRA contributions and withdrawals can both be treated with marginal rates.  For someone with no other income, traditional IRA withdrawals start tax-free (up to the deduction + exemption amount), then 10%, then 15%, etc.

If you want some spreadsheet formulas for tax calculations, feel free to dig into the formulas in the spreadsheet linked in this post: http://forum.mrmoneymustache.com/ask-a-mustachian/how-to-write-a-'case-study'-topic/msg274228/#msg274228

So that's a bunch of words but I'm not sure I'm answering your questions...?  If not, could you narrow it down to 1 or 2 questions and we could start there.

Although the amounts will be small (about $750 in today’s dollars combined), we both have pensions. I would like to throw social security in the mix as well. I know it’s not popular to count on social security but I don’t think it will go away completely. I just think it will be reduced.
 
Thanks for your help!

Having pensions and SS will definitely help.  Looking at taxes on SS earnings is a can of worms unto itself.  E.g. see http://www.oregonlive.com/finance/index.ssf/2014/09/when_an_rmd_knocks_you_in_rang.html and http://www.oregonlive.com/finance/index.ssf/2014/10/social_security_tax_torpedo_ho.html

[LauraMo]

Oh, thank you so much! I will start playing around with these. Thank you for your help