All together, our adjusted gross income was $91,752. How much tax did we pay on such a high figure? You guessed it… $0http://www.gocurrycracker.com/the-go-curry-cracker-2013-taxes/
Oops, I did it again. Another year of nearly $100k [Ed. Note: $95,644] in investment income, but with a very budget friendly income tax bill of $0http://www.gocurrycracker.com/go-curry-cracker-2014-taxes/
Separately, I just realized that the "Roth Sucks" post isn't included in the Go Curry Cracker sticky, so I would also suggest adding it there:
http://www.gocurrycracker.com/roth-sucks/
...and maybe also his overview on the impact of utilizing tax-advantaged accounts:
http://www.gocurrycracker.com/turbocharge-savings/
I have a feeling I'm going to like this new category ;)
A few questions regarding these strategies.
1. Are the gains on a Conversion Roth able to be withdrawn penalty free?
2. How are Conversions taxed? Marginal Rate? IE: should I be doing only a certain amount every year?
My thinking is, sure I could set it up so I can pay no taxes, but is that really ideal, aren't you just frontloading your tax payments and potentially taking an overall hit?
A Conversion Ladder is something I see thrown around a lot, and that leads me to believe that Conversions are taxed at the marginal rate and that the gains are not able to be withdrawn penalty free, so I should be converting over money every year (to be used 5 years later) and paying taxes on it every year, instead of front loading my tax liability.
Is my thinking wrong? How so? Help me out here.
1. Are the gains on a Conversion Roth able to be withdrawn penalty free?Yes, subject to the age 59.5 restriction. It's not quite that simple, but close enough for now....
2. How are Conversions taxed?As ordinary income.
Marginal Rate?Depends how you define your income streams (see below)
IE: should I be doing only a certain amount every year?Up to you.
My thinking is, sure I could set it up so I can pay no taxes, but is that really ideal, aren't you just frontloading your tax payments and potentially taking an overall hit?Don't understand this question. If you "pay no taxes" what tax payments are you "frontloading"?
A Conversion Ladder is something I see thrown around a lot, and that leads me to believe that Conversions are taxed at the marginal rate and that the gains are not able to be withdrawn penalty free, so I should be converting over money every year (to be used 5 years later) and paying taxes on it every year, instead of front loading my tax liability.Conversions are taxed as ordinary income. If you think of conversions as your "last" dollars of income, then yes they are taxed at your marginal rate. If you think of conversions as your "first" dollars of income, then some of those dollars come tax free, some at 10% tax, some at 15%, etc. In general it is best to think of optional income as your "last" dollars and thus analyze that option using your marginal rate.
So, Conversions count as ordinary income. So that gets you a standard deduction and a personal deduction, but still leaves you just shy of $20k.
The other $70k is coming from Long Term Capital Gains Space, Correct? So in order to harvest that I need some taxable accounts, right? Is there any other way to harvest that space then by having taxable accounts? Taxable accounts which were funded using post tax dollars (IE frontloading taxes)?
So, Conversions count as ordinary income. So that gets you a standard deduction and a personal deduction, but still leaves you just shy of $20k.
The other $70k is coming from Long Term Capital Gains Space, Correct? So in order to harvest that I need some taxable accounts, right? Is there any other way to harvest that space then by having taxable accounts? Taxable accounts which were funded using post tax dollars (IE frontloading taxes)?
Yes. Note that the title of article is "Never Pay Taxes Again" - not "Never Pay Taxes Ever".
A common question when planning for ER is "What will my taxes look like?"
Well, if you've done it right, you can make your tax liability close to $0 in ER.
You are arguing against something no one has stated. Yes, pretty much everyone agrees you should max out tax sheltered accounts before taxable accounts.
It's a misleading thread.....Making your taxes zero in retirement is not/should not be a goal and the amount of taxes you pay is irrelevant to whether you have "done it right."
It's a misleading thread.....Making your taxes zero in retirement is not/should not be a goal and the amount of taxes you pay is irrelevant to whether you have "done it right."
I disagree completely on all your points....respectfully.
No one is arguing you should pay more taxes now. You don't have to pay any more now with this strategy, or any more later with this strategy; this is a way to pay the least amount over the course of your lifetime by spreading the taxable income out.
I'm trying to understand the "GoCurryCracker" methods explained in the above links. Do these long term capital gains and qualified dividends have to come from a separate brokerage account or can one "harvest" long term capital gains and qualified dividends from a 401K or Roth IRA?
I'm trying to figure out what our tax bill might look like in "retirement" ~13 years from now. I have gone to the Turbo Tax TaxCaster, but do not know whether to count money drawn from a 401K or Roth IRA as income or possibly LTCG or QD?
Would the same apply to tax loss harvesting?
DW and I each have a Roth IRA, which are funded after tax. Will LTCG and tax loss harvesting work in those accounts?
I had no idea that wash sale rules didn't apply to profits.Yeah it is pretty cool. However, with the ACA, keep an eye on those subsidies too. Before ACA, tax-gain harvesting was closer to a no-brainer. But if you bump your income up high enough, you could lose many thousands of dollars in health insurance subsidies, so you know, tread carefully there.
That is great! Cool deal that you can upgrade the cost basis in the 15% bracket with no tax!
DW and I each have a Roth IRA, which are funded after tax. Will LTCG and tax loss harvesting work in those accounts?
No. I can see why you might want to use tax loss harvesting there, but given a Roth's tax free withdrawal why would you want to apply LTCG tax?
I have a feeling I'm going to like this new category ;)
EDIT: Some of GCC's other tax-related posts, per a suggestion:It's worth noting that, while much (all?) of the remaining advice is good, GCC is incorrect when advising people how to evaluate the tax effects of traditional vs. Roth. Bogleheads, Michael Kitces, and The Mad Fientist clearly get it right. Comments from The White Coat Investor (TWCI) and The Finance Buff (TFB) are less clear, but TWI seems to err the same way as GCC, while TFB gets it right.QuoteSeparately, I just realized that the "Roth Sucks" post isn't included in the Go Curry Cracker sticky, so I would also suggest adding it there:
http://www.gocurrycracker.com/roth-sucks/
I have a feeling I'm going to like this new category ;)
I love your site. I have read all of your articles. You are my hero Jeremy!
EDIT: Some of GCC's other tax-related posts, per a suggestion:It's worth noting that, while much (all?) of the remaining advice is good, GCC is incorrect when advising people how to evaluate the tax effects of traditional vs. Roth. Bogleheads, Michael Kitces, and The Mad Fientist clearly get it right. Comments from The White Coat Investor (TWCI) and The Finance Buff (TFB) are less clear, but TWI seems to err the same way as GCC, while TFB gets it right.QuoteSeparately, I just realized that the "Roth Sucks" post isn't included in the Go Curry Cracker sticky, so I would also suggest adding it there:
http://www.gocurrycracker.com/roth-sucks/
Bracket | AGI | 25X Amount |
Single | ||
10.0% | $10,350 | $258,750 |
15.0% | $19,625 | $490,625 |
25.0% | $48,000 | $1,200,000 |
28.0% | $101,500 | $2,537,500 |
33.0% | $200,500 | $5,012,500 |
35.0% | $423,700 | $10,592,500 |
39.6% | $425,400 | $10,635,000 |
MFJ | ||
10.0% | $20,700 | $517,500 |
15.0% | $39,250 | $981,250 |
25.0% | $96,000 | $2,400,000 |
28.0% | $172,600 | $4,315,000 |
33.0% | $252,150 | $6,303,750 |
35.0% | $434,050 | $10,851,250 |
39.6% | $487,650 | $12,191,250 |
Not incorrect. Not a trick.I guess you'll have to explain the assumptions you are using, because the simple math supports the use of marginal withdrawal rates.
" | A single person makes enough traditional contributions in previous years to give (with growth) a $1.2MM balance at retirement. Withdrawing 4%/yr would be $48K/yr, which after standard deduction and exemption, is $37,650/yr. The tax on $37,650 is ~$5,184 or 10.8%. But, $37,650 is also the start of the 25% bracket, so any additional ordinary income will be taxed at 25%. Now, for the new year, the person continues to work and again has a choice of traditional or Roth. They can't go back and change what was done in previous years, but they can choose for the new year. Assume in this new year she is in the 15% bracket. Using marginal vs. average the comparison would be 15% vs. 10.8% and the choice would be traditional. Using marginal vs. marginal the comparison would be 15% vs. 25% and the choice would be Roth. Because an additional year's traditional contribution would cause (again, assuming a 4% WR) taxable income to increase above $37,650, the marginal rate applies and the new year's contribution should be Roth." |
I guess you'll have to explain the assumptions you are usingAgain?
Are there assumptions you are using that differ from the ones in the example given above
For the target audience of my blog (median to high income earners who are happy to save a high percentage of income to retire early) they will have greater lifetime wealth (and minimize their lifetime taxes) by choosing Traditional over Roth. They will benefit greatly from the 0% and 10% marginal tax rates on withdrawals.
Thanks, the part above is where we are in "violent agreement." :)I guess you'll have to explain the assumptions you are usingAs I mentioned:For the target audience of my blog (median to high income earners who are happy to save a high percentage of income to retire early) they will have greater lifetime wealth (and minimize their lifetime taxes) by choosing Traditional over Roth. They will benefit greatly from the 0% and 10% marginal tax rates on withdrawals.Very clearly stated assumptions:
- living on 50% of after-tax income
- plan to continue to spend that amount in retirement
- retirement is early - have years to do Roth IRA conversions at 0/10% marginal rates - 0/10% is lower than working tax rate
Now, for the use of marginal vs effective tax rates...This is the only issue where it seems there is a difference of opinion. For situations such as the non-pensioned, high savings, low expenses early retiree you describe above, and for the ultra-high income person described by White Coat Investor, one can use either marginal or effective and get the same answer: traditional is better. But what about different, very real and non-contrived situations?
This is what it means to be wrong. For a contrived example that will never happen. (I think efficient is a better word.)But it's not just contrived examples, is it? It doesn't matter whether it is a pension, or previous traditional contributions, or anything else (e.g., as Spork notes, inheritance (http://forum.mrmoneymustache.com/taxes/roth-401(k)-vs-traditional-401(k)-i'm-getting-some-surprising-numbers/msg1282361/#msg1282361)) that fills lower brackets. Once those are filled, the results of any future traditional contributions are withdrawn at marginal rates.
My interest in debating this further is much lower than my interest in doing anything else.No problem, people can read the thread and come to their own conclusions.
In all cases, the early retirees reading my post will pay less taxes by choosing Traditional.
Today I fixed a toy car using a spoon as a screwdriver. The right tool is the one that works.
Quote from: mptfanGreenberry, I think you misunderstood what I have said. I have never said that it is ALWAYS better to contribute to a 401k than a Roth....As I think I said, I agree with your conclusion that traditional 401k is usually better than Roth and it seems we are almost completely in agreement about that and other points. However, the reasoning you use about effective tax rate to arrive there is mathematically incorrect. The only thing my post above was addressing is that the PROCESS you use to arrive at that conclusion is just plain wrong.
Example:Quote from: mptfanRedbeard is correct in his explanation, and with all due respect, mptfan, it is you who is not understanding the math.Quote from: redbeardIt really is the marginal tax rate you need to consider in the future, notredbeard, I understand your point, but it is wrong.
the average one. At some point if you trade off enough from the IRA to the Roth, you will start to impact your future marginal tax rates. However, even then it is still the marginal tax rates you need to consider, not the new average tax rates.
Today I fixed a toy car using a spoon as a screwdriver. The right tool is the one that works.
Today I fixed a toy car using a spoon as a screwdriver. The right tool is the one that works.
I really hope this analogy is true, and not just to prove a point; makes it so much better. :D
Awesome. Time to start marketing the Spoondriver! (Patent pending.)Making money in retirement is just too easy
It's really just luck whether you are going to be paying taxes in retirement or not. No one should be setting themselves up to pay no taxes in retirement, but if that happens, good for them.
I guess you'll have to explain the assumptions you are usingAgain?Are there assumptions you are using that differ from the ones in the example given above
It isn't necessary to find other examples to compare to, I've provided two of them in the post that shall not be named that very clearly outline all of the assumptions. There are even graphs.
As I mentioned:For the target audience of my blog (median to high income earners who are happy to save a high percentage of income to retire early) they will have greater lifetime wealth (and minimize their lifetime taxes) by choosing Traditional over Roth. They will benefit greatly from the 0% and 10% marginal tax rates on withdrawals.
Very clearly stated assumptions:
- living on 50% of after-tax income
- plan to continue to spend that amount in retirement
- retirement is early - have years to do Roth IRA conversions at 0/10% marginal rates - 0/10% is lower than working tax rate
For some reason, I think you want my post to be a generic one size fits all and covers every situation kind of post. That is not what it is. Perhaps you can write that post on your own blog.
Now, for the use of marginal vs effective tax rates... I show a clear example of a median income family withdrawing ~5x their annual spending from a Traditional 401k/IRA in one year. Why would they do this? Maybe to prove a point, I dunno. The effective tax rate for that year is 13.2%. (As compared to their effective 1.0% rate to cover their normal spending.)
Some of those dollars (the marginal dollars, if you will) are taxed at 25%. Yes, in this contrived and infinitesimally small probability example that nobody will every choose to do ("very specific and limited circumstance"), this particular family could have had lower lifetime taxes by contributing a small percentage of their portfolio to a Roth back in the day at a 15% marginal rate.
But their 13.2% effective tax rate is still lower than the 15% marginal rate they saved on the contribution. They are still ahead of the game by 1.8%.
Now, importantly, how much of a difference does this make in their life? Should they spend hours debating the merits of the different types of tax deferred accounts with strangers on the Internet? Should they agonize annually over their contribution amounts and ideal Roth/Traditional/Brokerage split?
With the small 15% marginal rate Roth contribution years earlier to replace the portion of this massive one-time withdrawal that is taxed at 25%, they instead have an effective tax rate of 10.8%. This is very clearly shown in the graph in my post.
Averaged over a 30 year retirement, with 29 years at a 1% effective tax rate and one year at 10.8% or 13.2%, the effective tax rate during retirement is a difference of 1.32% vs 1.40%.
This is what it means to be wrong. For a contrived example that will never happen. (I think efficient is a better word.)
I understand the argument for trad'l over Roth, unfortunately the AGI limit for deductability is much lower than it is for Roth. That removes the decision making from folks making over the limit making the only option Roth or backdoor non deductible converted to Roth.IRA is not the only traditional vs. Roth decision most people make. 401Ks, 403Bs, 457Bs all have Roth options.
I understand the argument for trad'l over Roth, unfortunately the AGI limit for deductability is much lower than it is for Roth. That removes the decision making from folks making over the limit making the only option Roth or backdoor non deductible converted to Roth.IRA is not the only traditional vs. Roth decision most people make. 401Ks, 403Bs, 457Bs all have Roth options.
Go Green!I understand the argument for trad'l over Roth, unfortunately the AGI limit for deductability is much lower than it is for Roth. That removes the decision making from folks making over the limit making the only option Roth or backdoor non deductible converted to Roth.IRA is not the only traditional vs. Roth decision most people make. 401Ks, 403Bs, 457Bs all have Roth options.
Good point. I didn't think about that.
http://www.gocurrycracker.com/roth-sucks/
In general it is not. There are some exceptions. E.g., when your investments lose money (so you can tax loss harvest in a taxable account), or you need to withdraw all the money, including investment gains, within a short time, but in general Roth is better than taxable. If you can deduct a traditional IRA, that may or may not be better than a Roth IRA. See Traditional versus Roth - Bogleheads (https://www.bogleheads.org/wiki/Traditional_versus_Roth) for more on that comparison.Quotehttp://www.gocurrycracker.com/roth-sucks/
I read through this article and I'm still perplexed to why if I maxed out my 403b, a taxable brokerage account is more advantageous than a Roth IRA?
I'm in the accumulation phase and I get the aspect of having liquid more readily available but wouldn't I be taxed on the interest and dividends (from the taxable account) every year?Yes. How much you are taxed depends on your bracket.
I can see why after FIRE it makes sense but does it also make sense while I'm still working full-time?See the "in general..." parts above. Good luck!
In general it is not. There are some exceptions. E.g., when your investments lose money (so you can tax loss harvest in a taxable account), or you need to withdraw all the money, including investment gains, within a short time, but in general Roth is better than taxable. If you can deduct a traditional IRA, that may or may not be better than a Roth IRA. See Traditional versus Roth - Bogleheads (https://www.bogleheads.org/wiki/Traditional_versus_Roth) for more on that comparison.Quotehttp://www.gocurrycracker.com/roth-sucks/
I read through this article and I'm still perplexed to why if I maxed out my 403b, a taxable brokerage account is more advantageous than a Roth IRA?QuoteI'm in the accumulation phase and I get the aspect of having liquid more readily available but wouldn't I be taxed on the interest and dividends (from the taxable account) every year?Yes. How much you are taxed depends on your bracket.QuoteI can see why after FIRE it makes sense but does it also make sense while I'm still working full-time?See the "in general..." parts above. Good luck!
Thanks for collecting so many great links in one place!
A common question when planning for ER is "What will my taxes look like?"I guess I haven't "done it right." My pension alone puts me right at the cliff for the highest Obamacare subsidies. My son graduated from college and now I am no longer Head of Household, so now I am taxed at the higher single rate. My healthcare costs are going up from about $950 a month to $1600 (add on another $600 a month for cutting edge treatment to preserve my eyesight but not approved for insurance and is not reportable for tax purposes). The medical expense deduction is raised from 7.5% in 2018 to 10% in 2019. For my 2019 income, I have to pay regular income taxes on my spousal support, pension, and on about $10,000 in various inherited royalties and moneymarket dividends at the regular income tax rate. I have a small amount of self-employment income (less than $2,000 so far this year.)
Well, if you've done it right, you can make your tax liability close to $0 in ER.
The blog GoCurryCracker has some great posts on taxes, which I've gathered here for your enjoyment/edification.
First, the concept/theory on how to "Never Pay Taxes Again":
http://www.gocurrycracker.com/never-pay-taxes-again/
Then the "7 minute taxes" on the exact steps to take to calculate what you need to do at the end of the calendar year:
http://www.gocurrycracker.com/7-minute-taxes/
There's information on the "Social Security Tax Torpedo" about how your social security can be taxed if you have other income, and ways to mitigate that:
http://www.gocurrycracker.com/social-security-tax-torpedo/
And finally, the proof is in the pudding.
They have posted their actual 1040 tax returns from 2013:QuoteAll together, our adjusted gross income was $91,752. How much tax did we pay on such a high figure? You guessed it… $0http://www.gocurrycracker.com/the-go-curry-cracker-2013-taxes/
And 2014:QuoteOops, I did it again. Another year of nearly $100k [Ed. Note: $95,644] in investment income, but with a very budget friendly income tax bill of $0http://www.gocurrycracker.com/go-curry-cracker-2014-taxes/
EDIT: Some of GCC's other tax-related posts, per a suggestion:QuoteSeparately, I just realized that the "Roth Sucks" post isn't included in the Go Curry Cracker sticky, so I would also suggest adding it there:
http://www.gocurrycracker.com/roth-sucks/
...and maybe also his overview on the impact of utilizing tax-advantaged accounts:
http://www.gocurrycracker.com/turbocharge-savings/
2. If I am figuring this correctly, I should be able to deduct my health insurance premiums from my self employment. My hours are flexible. I am thinking I should increase my hours and then take as much of a self-employment health insurance deduction so I have zero earnings for my self-employment. (ie, earn $5000 and deduct most of that for self-employment health insurance) So, does that mean I can work more but not actually increase my taxable income at all this year by doing that "above the line" deduction? It would mean I would take less of my health insurance premiums/expenses as part of my regular medical deduction on the 1040, but as I am hovering on being able to itemize, I don't think that actually matters. Working more would help my cash flow in the second half of the year (Ugh, I didn't send in estimated taxes in the earlier part of this year, now I have bumped up my withholdings in my pension check so that means less money every month for the remainder of the year.)Yes, the self-employment health insurance (SEHI) deduction can be valuable if you aren't an active employee also covered by an employer-subsidized policy. See self-employment health insurance deduction - Google Search (https://www.google.com/search?client=firefox-b-1-d&q=self-employment+health+insurance+deduction).
2. If I am figuring this correctly, I should be able to deduct my health insurance premiums from my self employment. My hours are flexible. I am thinking I should increase my hours and then take as much of a self-employment health insurance deduction so I have zero earnings for my self-employment. (ie, earn $5000 and deduct most of that for self-employment health insurance) So, does that mean I can work more but not actually increase my taxable income at all this year by doing that "above the line" deduction? It would mean I would take less of my health insurance premiums/expenses as part of my regular medical deduction on the 1040, but as I am hovering on being able to itemize, I don't think that actually matters. Working more would help my cash flow in the second half of the year (Ugh, I didn't send in estimated taxes in the earlier part of this year, now I have bumped up my withholdings in my pension check so that means less money every month for the remainder of the year.)Yes, the self-employment health insurance (SEHI) deduction can be valuable if you aren't an active employee also covered by an employer-subsidized policy. See self-employment health insurance deduction - Google Search (https://www.google.com/search?client=firefox-b-1-d&q=self-employment+health+insurance+deduction).
The SEHI deduction will not affect the amount of "self-employment" (i.e., FICA) tax you owe, so some withholding adjustment may be needed, but it will decrease your AGI and thus the amount of federal (and perhaps state) income tax you owe.
Does anyone have any tax-wise ideas for me? Here is what I have come up with so far:
1. Get a 2% cashback card to put all insurance premiums and medical expenses on (the cash rebate is tax-free, and I don't charge anything else on the card, so getting my total medical expenses for the year is very easy for taxes.) The card is in the mail.
2. If I am figuring this correctly, I should be able to deduct my health insurance premiums from my self employment. My hours are flexible. I am thinking I should increase my hours and then take as much of a self-employment health insurance deduction so I have zero earnings for my self-employment. (ie, earn $5000 and deduct most of that for self-employment health insurance) So, does that mean I can work more but not actually increase my taxable income at all this year by doing that "above the line" deduction?
3. I am considering moving more of the money in my brokerage account to a Schwab Total U.S. Market ETF. I already did this with a small portion of the brokerage account, to SCHB. I am still unclear as to when the dividends become qualified dividends (if it takes a year), and what percentage of the dividends are qualified. But I still need some emergency cash, so I cannot put all of it into the ETFs.
Does anyone have any tax-wise ideas for me? Here is what I have come up with so far:
1. Get a 2% cashback card to put all insurance premiums and medical expenses on (the cash rebate is tax-free, and I don't charge anything else on the card, so getting my total medical expenses for the year is very easy for taxes.) The card is in the mail.
Sounds like a fine plan. Cash back cards can really pay off.Quote2. If I am figuring this correctly, I should be able to deduct my health insurance premiums from my self employment. My hours are flexible. I am thinking I should increase my hours and then take as much of a self-employment health insurance deduction so I have zero earnings for my self-employment. (ie, earn $5000 and deduct most of that for self-employment health insurance) So, does that mean I can work more but not actually increase my taxable income at all this year by doing that "above the line" deduction?
Basically, yes. The half of your self-employment tax that you can deduct above the line can't be deducted again for health insurance premiums, but between those two deductions you should be able to earn up to the amount of your health insurance premiums without increasing your AGI. You'll still owe self-employment tax on this income though.
Also consider making traditional IRA contributions if that means lowering your AGI enough to get an ACA subsidy. If you sign up for an HSA-eligible plan and make HSA contributions this is another way to further reduce your AGI.Quote3. I am considering moving more of the money in my brokerage account to a Schwab Total U.S. Market ETF. I already did this with a small portion of the brokerage account, to SCHB. I am still unclear as to when the dividends become qualified dividends (if it takes a year), and what percentage of the dividends are qualified. But I still need some emergency cash, so I cannot put all of it into the ETFs.
Are you selling appreciated assets to buy these ETFs? If so, the capital gains will count toward your AGI. If you're buying the ETFs with cash that was sitting uninvested this isn't an issue.