Author Topic: Do lots of people forget that they will still need to pay tax in retirement?  (Read 18912 times)

Jeremy E.

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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?

arebelspy

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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
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clifp

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The huge drop in taxes was one of the pleasant surprises of taxes.  No payrolls taxes, 0% tax on cap gains in the15% bracket and only 15% on cap gains on dividends. Much of your income compounds tax free in tax exempt (ROTH) or tax deferred accounts.

Last year I paid 0 in State and Federal taxes,now that was a special case, and it took some planning on my part.  Still I have seen huge 70- 80% drop in my overall taxes since retiring over the last 15 years.

frugalecon

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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.

Dee18

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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.

sol

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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.
« Last Edit: June 24, 2015, 04:56:19 PM by sol »

Jeremy E.

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My tax calculator shows about $4,000 per year in federal taxes if you have $40,000 in taxable income(for head of household). This doesn't include potential tax loss harvesting, but that is not possible every year.

Eric

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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.

You're not counting the standard deduction ($6200) or personal exemption ($3950) though.  You can have $47K of taxable income and still be in the 15% bracket. (2014 numbers)

https://turbotax.intuit.com/tax-tools/calculators/taxcaster/

ender

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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 think the main ones which might change is the capital gains tax rates or the Roth conversion pipeline.

But most of us are planning on having at most $40k income in retirement. It's easy to hypothesize about taxes hitting this, but it's also not hard to imagine the public outcry if this income range (or less if you have Roth money) had increased taxes.

chucklesmcgee

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Lots of people forget simply because they don't plan for retirement well. They've saved a teeny tiny sliver they really need and end up simply having to deal with whatever amount they have left when the time comes. Making retirement calculations might as well go with fantasizing about winning the lottery or looking for bunnies in the clouds.

deborah

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You can probably see more bunnies in clouds. As others have said, a mustashian retirement can easily include almost no tax.

FIRE me

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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.

I will pay little to no income tax in retirement. My expenses are low and I can live just fine on a 15k draw per year. The first 10k is tax free due to the Standard deduction plus one dependent (myself).  Of the 5k I will pay Federal and State tax on, there will be no SS tax, no Medicare tax, and no local income tax (a city income tax on wages that I currently pay).

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.

My biggest tax will be on my house (about $900 per year), and the sales tax that my state imposes on most items.

arebelspy

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You're right, if have 40k income in retirement you will be paying some taxes.

Did you read the GCC links from the first reply?  2014 income=$95,600. Taxes=$0.

It's worth looking through, cause things can be done to make your quoted statement not necessarily true. :)
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Dicey

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On  a related topic - Why does the financial world seem to assume that everyone will be making less in retirement and not more? With inflation factored in, I can't help but wonder if 401k's are the smartest option for people early in ther careers and low on the earnings curve. Might they be better off paying their taxes up front (a la Roth) since their incomes (and tax rates) will tend to rise over the course of time?

Also, I second ARS's GCC recommendation. Good stuff.

sol

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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.

Dicey

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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.
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.
« Last Edit: June 25, 2015, 10:59:12 AM by Diane C »

MDM

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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).

CategoryMonthly
Comments
Annual
Salary/Wages$12,804$153,650
HSA$721$8,650
FICA base salary/wages$12,083$145,000
Traditional IRA$1,083At maximum$13,000
401(k) / 403(b) / TSP / etc.$4,000At maximum$48,000
457 plans   $4,000At maximum$48,000
Federal Total Income$3,000$36,000
Federal tax$0$0

Filing Status21=S, 2=MFJ
# of earners2
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.

CategoryMonthly
Comments
Annual
Salary/Wages$9,804$117,650
HSA$721$8,650
FICA base salary/wages$9,083$109,000
Traditional IRA$739At maximum$8,863
401(k) / 403(b) / TSP / etc.$4,000At maximum$48,000
457 plans   $4,000At 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 Status21=S, 2=MFJ
# of earners2
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?
« Last Edit: June 25, 2015, 12:01:49 AM by MDM »

arebelspy

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On  a related topic - Why does the financial world seem to assume that everyone will be making less in retirement and not more?

Because if you can save to ER, by definition you're spending less than you make.

Say you spend 80% and save 20%.  Now you ER, you only need that 80%, so your income is lower.  Plus everything sol said.
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Dee18

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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? 

teen persuasion

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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.

partgypsy

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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.
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!
http://www.journalofaccountancy.com/Issues/2012/Mar/20114558.htm
« Last Edit: June 25, 2015, 08:00:56 AM by partgypsy »

neo von retorch

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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...)

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.

Jeremy E.

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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...)

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.
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?

Kris

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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.
« Last Edit: June 25, 2015, 09:22:18 AM by Kris »

dandarc

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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.

rubybeth

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Following for more info. Excited about keeping taxes low or non-existant in retirement. :)

sol

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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.

Low spending is one way.  Big family is another.  MFJ plus a few kids can easily convert 40k/year without any tax burden.

dandarc

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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.
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.

Cheddar Stacker

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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.

Kris

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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.

Definitely.  I'm pretty good with personal finance, but I am extremely weak regarding tax stuff.  I have been telling myself that I need to start getting a handle on that before we retire in 3 1/2 years, but have been putting it off because I haven't been able to decide where to start.  This was exactly what I needed to hear/learn. 

expectopatronum

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Who here has forgotten they will still need to pay tax in ER?

*raises hand*

Who here has now learned a sh*tton of ways to reduce said taxes through deductions?

*raises hand*

I had two great gifs from Mean Girls, but haven't figured out how to insert them. So they're attached. Dammit. :X

MDM

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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. 

Have you (and maybe several colleagues) approached your employer about offering the 457 and HDHP?

Spork

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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.

Spork

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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.
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).

It's the younger SS receivers that are at risk.  When the tax kicked in, it was low enough as to never hit you.  (It only applied to 3% of SS receivers.)   But with no inflation index, it is starting to hit folks that are in their 60s -- it hits more than 30% of SS receivers.  If you're 50, 40, or younger... it will most definitely hit you harder as inflation increases the relative tax rate.

http://assetbuilder.com/scott_burns/the_stealth_tax_on_retiree_income

Dee18

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MDM, Yes we did ask for a 457 plan and we were told the university used to have 457s, but dropped them a few years ago.  However, the most recent 990 tax forms show that the top ten earners at the university (such as the football coach) have significant deferred compensation.  Is there another form of deferred compensation other than a 457?

MDM

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It's likely a special type of 457 called a "top hat plan" - you can google that phrase, and/or see https://en.wikipedia.org/wiki/457_plan or http://www.457bwise.com/faqs/.

Are you considered a government employee at your university?

teen persuasion

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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.
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!
http://www.journalofaccountancy.com/Issues/2012/Mar/20114558.htm

From the article you supplied:
Quote
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.

I'm not saying that all students will or won't be dependents, I'm saying that it depends on details.  For a Mustachian family living on less, the inflated college costs can loom larger than parent supplied "support".

Christof

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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.

Bearded Man

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If your expenses are low enough, and you own rental property, you can essentially pay zero taxes from what I understand.

arebelspy

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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).
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Cheddar Stacker

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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).

Mo' money, mo' problems.

MidWestLove

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"It's likely a special type of 457 called a "top hat plan" - you can google that phrase, and/or see"

+2 , my experience with both organizations in which I have family and close friends that have and run 457 plans , both plans are for very highly compensated employees only (210k+ in base comp). Check with HR, they will confirm for sure and show you the summary plan description (SPD).

Davids

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I include taxes in my RE plan, the intent will be to make it as close to zero as possible.

dude

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While I enjoy reading about tax-evasion* strategies, I'm pretty well fooked.  Pension alone as a single filer will put me in the 25% bracket; MFJ with a wife still working will have us in the 28% bracket.  When SS eventually kicks in, I'll likely be in the 28% bracket as a single filer.  And that's before I ever take a dime from the 401k.  I'm not psyched about handing over money to Uncle Sam, but it's a good problem to have the way I see it.

*it's a joke, relax

Bob W

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One of the best ways to avoid taxes is to have very little income and to spend very little.    Your small house paid off?  Less income needed.  Your cars paid off?  Less income needed.   Vacations paid via mileage hacking?   Less income needed.     

One can easily see a situation for many MMM types where their total individual spending and income needs are less than 10K per year.   If you are able to structure your income from investments to equal your expenses you will be near zero in income taxes and very low on property and sales taxes.

In our state there is no tax on food so that is a bonus.   No car = no gas tax.  Small house = small real estate tax.   Pass your house on when you die to  your kids and you can even somewhat avoid the inflation tax by stepping up the basis.  I could be wrong but I think you can also step up your IRAs when you pass them to your grandkids and avoid the cap gains and inflation taxes as well.

Curious Cheddar or any other CPA types?   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?   I understand that they will be mandated to withdraw something like 4%.     

If that is the case it would be my impression that our family would benefit from me taking the minimum amount of IRAs at age 72 and keeping that puppy as full as possible.   

dandarc

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Bob - what you are referring to is called a "Stretch IRA".

http://www.investopedia.com/terms/s/stretch-ira.asp

And the RMD for a 10 year old wouldn't be nearly as high as 4%.

MDM

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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.

dandarc

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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.
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.

Bob W's bigger problem will be when he lives to be 115 - the RMD's get absolutely crazy at the higher ages.

WerKater

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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.
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.


Source:
https://upload.wikimedia.org/wikipedia/commons/0/06/ESt_D_Tarif_2014_Splitting_120kEUR.svg

The much more annoying part might be if you need (or want) public health insurance which (If I understand correctly) will cost you 15-16% of your total income unless you are employed.

MDM

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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.

Yes to all that.

It then could become a complex problem to estimate whether it is better for Bob W to convert the IRAs to Roths so there is neither RMD nor tax to the grandchildren.  If we assume 10 year old grandchildren, for the first several years they may be able to withdraw tax free (depending on the amount and any other passive income for the grandchildren) so inheriting the traditional is better.  When the grandchildren start working, however, their marginal bracket may be higher than Bob W's is now and it would have been better to inherit a Roth. 

Not a bad problem to have but the answer is not clear, due to the uncertainty in the grandchildren's future tax brackets.