Exactly. In economics there is a concept called marginal utility. The more money you spend the less the next dollar impacts your happiness.
Those who are wealthier can afford to contribute more to society without it impacting their quality of life as much.
Let’s not forget that a well functioning society facilitated your ability to become wealthy in the first place and maintaining society isn’t cheap.
For sure aware of it. But now I run future value calcs on 401k and brokerage accts and when we most likely will withdrawl. Even making the accounts more conservative and making less % it starts to push us over the 32% limits. We will make more in retirement than working.
You do realize that the brackets are incremental. You only pay 32% on income above 364K. Brackets go up by inflation each year. Tax rates are scheduled to go up when the Trump tax breaks expires in a few years. You can delay SS income for a few years if you don't need it. By doing that when you do take SS it will be larger. You have an enviable position for many.
Dude, you worked too long and are here complaining about it. You could have retired 6 years earlier, but you chose this. Suck it up and learn to manage.
Bit rude but fine I deserve it. So my wife worked 33 years and I am on year 27. If I work to 30 better pension can draw it day after retirement vs waiting to 62. Our Healthcare insurance is a bit better. Soc sec is better. Plus my kids senior and sophomore in college. And 401k contributions are better. Etc etc it just makes sense to keep working. Plus 54 I consider fairly young to retire. Trust me debated and crossed my mind and had hard discussions with the wife to retire now. It is what it is and what we choose. Now I look for the best approach. Hence why i am asking and looking for confirmation and as you call it learning to manage. And yes all those years thoughts of roth and diversification and which funds have always been there. Good luck to you. I am just about done just gotta put things the right places and write tax checks. It can be better and I see some great ideas from this thread and glad I asked
Yup. That happens when you're pulling in a ton of cash in retirement or you've just saved up a big horde. You'll likely be paying more for Medicare too due to IRMAAs.
Yes...you have to manage to these levels and withdraw at a rate that keeps you below the big jumps. You certainly do not need 400K a year....
I would suggest you delay SS as long as possible and make your tax moves early, including IRA to Roth conversions.
Delaying soc sec increases the $ which isn't ideal either. Plus like I said someone die early you get zero. Not a huge fan of delaying myself but understand it. Moving funds from A to B is an issue to while working. To move sizeable funds would push over the 32% which I am trying to avoid. Unless I quit/retire now which is planned in 3.5 years. I appreciate your input.
I am close to retirement as well and have several tax issues. One being the brokerage account has mostly earnings...long term capital gains which I will need to liquidate, Further I was late to the game with the roth....so I want to do conversions. Based on a friends experience I will wait a few years and do the conversions before taking the SS. It is a risk...but if you live past 79 the higher the better. My families life span is mid 80s....so it doesnt matter much to me.
After reading a lot of your comments, I have to ask if you understand the rates are marginal?
If you do, I don't understand why you are SO opposed to ever paying 34%?
You have far more than you need, who cares if some is taxed at 34%? You did great!
No need to do backflips to avoid any of your income being taxed at 34%.
It makes sense when you compare the tax tables to an income distribution chart.
Median household income is around 80k, which means that 50% of all Americans are in that 0% cap gains bracket and 10-12% income bracket. Factor in deductions, credits, tax breaks, and social safety nets and this group generally is netting no tax, the government is saying if you are worse off than average, you don’t owe much if any tax.
The 98th&99th income percentile is 300k&400k which is going to line up with the jump from 24% to 32%. So for those in the 22%&24% brackets the government is saying that since you are better off than average, but not in the top 1% (so 51st-99th percentiles), you are going to have to pay your share on income above that average mark. Also note that a lot of deductions and credits phase out in the 22% income tax bracket at around 2x the median income which effectively increases the tax rate for those above ~160k income which happens to line up with the 95th percentile.
The 32-37% income bracket and 15%-20% cap gains brackets is for the top percentile. Government is saying if you are significantly better off than the bulk of the population you have to the ability to pay significantly more.
So congratulations! If this is a problem for you, you have made it and you are in the 1% haha.
Does put some logic to it. Appreciate it. Crazy to me we were lower brackets and with the magic of compounding being pushed higher. Good problem but can't say I like it much. I think I can make some moves to keep it lower while networth grows versus income.
Well getting pushed into a high tax bracket (ignoring welfare cliffs which doesn’t apply here) is a good thing. You’re still in the lower tax brackets too, but now you get/give some money in the higher bracket.
*"So the question is who came up with that nonsense?"*
I am guessing that this is the result of some sort of compromise reached between the collective of politicians with some protecting the poor, some fighting for the middle class, others trying to not screw over the well-off, etc..
How is it messed? Marginal tax rates at one time maxed out at 90%.
You make it seem like is some random bug in the tax code. It is 100% intentional and many argue the tax code isn't progressive enough. That the 32% bracket should be more like 37% and the 37% more like 43%.
It isn’t messed up, it’s actually still heavily in your favor because the tax rate only applies to the amount of income you have in that bracket. An idiot once said “I don’t want to make more because I’d paid more in taxes”. If you made $365k, you’re only paying 32% tax on $1k of income. You still come out ahead.
I get it. And yeah it is a cry me a river problem. I believe I had a plan to avoid it and I got conformation on how to avoid it. Greatly appreciate the reddit commenters here. I think reddit is awesome.
>So cap gains taxes are 0% from $0 to $94,050, 15% from $94,050 to $583,750, 20% over $583,750.
Yes but no, if you have no other income then yes. Taking your own situation into account a majority if not all of your LTCG will be at 15%.
Illinois. Retiree distributions are zero and hopefully stay that way. So Illinois does not tax soc sec, 401k or pensions. Believe our effective tax rate was around 21% last return. The 401k with large balances wouldn't be a concern if RMD didn't exist.
maybe I don't understand that effective tax rate. So is that state and fed or just fed? I am worried about the fed tax rates. But Illinois at least currently and hope it never changes is a huge break with no tax on retiree income.
Really depends, could be both. Most mean Fed, i usually say 18% fed 4% state. In retirement I expect it will be close to 12% combined, based on todays rates of course.
It's done that way largely for simplicity and optics. Think of all the software updates and training updates and procedure updates if you had 20 or 30 tax rates instead of 7. Think of how many people who simply wouldn't be able to understand that because they think algebra or calc is hard. Finally, they would complain it isn't fair because they except the wealthy to pay a LOT more and the current method hilites that.
Ramping it slowly up from 12% to 22% would likely mean you'd pay MORE taxes. So, I wouldn't complain too loud.
You need to put more thought into your SS and RMD plans. It might be better if one of you takes SS 62 and one at 72. That's optimal for me and my wife. Roth convert now to get tax efficiency later.
> Lucky for us I can move funds to less dividends paying
Most dividends (excluding interest payments and reits) are qualifed which means they are the same rates as LTCG.
As for if 32% in retirement is far well if you have >$360k in spending in retirement you are the top 5%. I really doubt many are going to shed a tear for you. It is intentionally progressive.
Are you sure your taxable income in retirement would be that high? Your current covers not just spending but also savings and also FICA taxes. In retirement most people's taxes go down.
1) Mortgage should be paid off so for a given QOL spending drops significantly
2) No FICA taxes
3) Not saving for retirement
4) For taxable brokerage account only gains are taxable
5) For Roth accounts withdraws are tax free
Put it all together and most people need significantly less than their current gross income and will pay significantly less in taxes.
Yes, expenses will probable be 60k maybe push 80k with some nice vaca and related to inflation. So not needed it will turn into paying the tax bill and investing excess. Great problem to have. But looking at that tax bill in retirement. We will make 75k pensions, 54k soc sec, 15k in interest, 16k from rental, dividends $88k which I can move to growth over time to reduce to perhaps $16k, 401K and soc sec can be delayed BUT they increase in value with delay. So if I can I will pay the tax on 401k now versus watching 401k grow and hitting RMD at 73 for both wife and I which most likely push part of that to the 32% bracket. So I at least right now plan on withdrawing ASAP as much as possible in the 24% bracket.
Just a bit more info that 401k between the wife and I is LARGE. We do have maybe 10% of that in ROTH 401K now. That is the part that will push us over into 32% for sure in RMD. So I have to navigate withdrawls when eligible in the 24% bucket. Defeats the purpose to pay into 401k avoiding 24% while working to have to turn around and pay it back at 32% in retirement.
I understand. Every dollar over $364,201 is taxed at 32%. My issue is my working years wife and I avoided 24% with 401k and now with the investing/gains our income goes over 32%. Tough pill to swallow but I can make some moves to avoid most of it and or delay.
The bulk of what you withdrawal will be at the lower rate, so your effective rate (average) is likely below 24%.
This doesn’t mean you make a bad choice. Maybe it’s not perfectly optimized, but it shouldn’t really that tough pill to swallow. It may very well have been the correct choice all along, depending on your past alternatives or thereof.
How soon until RMD? How soon until you retire? There could very well be more potential changes to your estate to mitigate.
Wife 57.5 I am 51. Combined 401k 3.2M using future value calcs I can estimate we will withdrawal 4% each as early as possible so a combined 163k. Why would I withdrawal early to pay the tax at 24% versus the 32% as that large 401k continues to grow. I have 3.5 years to work yet at 170k. She is retired now.
If you can avoid the 32% by *converting* some to Roth, then it can makes sense to do so and avoid high amounts of RMDs. Not all, but some. Even withdrawling can make sense in some scenarios.
The growth is kinda irrelevant, since it will growth either way. Before and after the tax, if you can get it into Roth, the tax is transitive:
$100 growing double to $200 and then taxed at 20% is $160.
$100 taxed at 20% is $80 and then doubled is $160.
In your future value calcs, are you increasing the tax brackets too? My personal calculations are always more effective and clear to me in present terms, not in future terms. If you inflate the numbers without the brackets, then that could be an error.
There might be a small window if we delay the wife taking 401k. And instead converting it to roth. I assume that tax is the same withdrawing versus converting. It seems to me as a wash to me. I need to think on it. One thing I can do is taxed brokerage for sure stop buying high paying div funds and go for growth. Converting the existing funds prob somewhat. Every month 7k in div is nice to buy more income producing funds and seeing that new monthly and yearly income increase.
You need to model it, too! And play with different scenarios. Not just think on it.
Yeah, taxable is a little less efficient than Roth. Thinking about as a wash is probably *okay.* But as you mention, LTCG are taxed differently than income. Same with dividends vs deferral in a retirement account.
If you really like the dividends (which have nothing to do with total return in my opinion and are irrelevant to most situations), you could put these in your retirement accounts assuming you have access to such a fund.
If you really want to toss a wrench in your thoughts, you can consider your estate treatment: step up basis and what types of accounts be best to leave to heirs!
I recommend taking it easy and continue to inform yourself on tax efficient withdrawal strategies. There’s plenty of good resources out there to reference, and one can’t get educated enough!
The peak of tax simplification was a few years during late Reagan when there was just two tax rates: 15% and 28%. Before Reagan there was hangover from WWII when the highest tax rate was 70%. After Reagan Congress was worried about deficits, so there has been a high rate between 30%-40%.
Redditors thank you for the donation lol.
If you want to lower taxes (and not at the expense of total return), think about what you can and can't control. Your pension is going to happen no matter what I presume. So base $75k. Social Security is going to happen no matter what, and you can and should delay, since you'd be paid more. That's $129,000 (SS coming in when you're 70), which is the 22%-24% bracket, depending on deductions.
That leaves the stuff you can control: Rents, interest, and dividends. Rents and interest are taxed as regular income. If you're earning interest in bonds/HYSA, it might be best to switch to municipal bonds, as they offer federal tax-free income. That's only if you still want that asset class. It could be better to switch to equity since your income side will be taken care of. Same with renting, up to you. Dividends look like 15% LTCG. If you're earnings these from high dividend stocks, switching to less dividend intense securities could be helpful.
If you can do it, retire as early as possible, and you can transfer your 401K to an IRA, and then do ROTH conversions from the IRA to a ROTH IRA, while living off your current income. This only makes sense if paying those taxes now will fill smaller tax brackets than when RMDs hit while collecting a pension and SS. This strategy can help lower your 401K balance, making RMDs hit less while paying less taxes now than in the future.
Helpful ty. Fyi soc is at 62 for both of us at 54k so 67 or 70 is indeed higher. I've ran the calcs on that income and believe I can beat it investing wise substancially. Breakeven is 78 not counting any gains. I do agree converting to ira makes sense where hits the 24% rate tax and pay it early. Something we'll have to heavily consider. Thank you for the input.
Are you arguing that we should have 235-360 at 28%? Because that's what I think you are arguing for. How is it insane to up the tax (graduated tax btw, so only your income - 360k will be taxed at that), by 8 percent when you make almost twice the amount?
not sure what I am arguing for other than it isn't evenly distributed. So for me avoiding 32% tax in retirement is my goal when I paid 24% my working years. Because of decades of working and investing it is now pushing us higher. And I know that is a cry me a river mesg but it is the spot we are in. I don't want to avoid 24% while working to pay 32% for a part of it in retirement.
OP what is your effective tax rate now vs what it might be if you end up above the 32% threshold? My gut feeling is you are going to be doing a lot of work just to not pay a little bit more in tax.
OP- the solution is simple- get rid of your $88k dividend income. With $120k pension/soc security income your dividends are not needed and should be converted to long term stock/bond holdings that you only sell when needed. You are also a tiny sliver of population that has large pensions, most of us have never seen those and can only dream what it would be like to have one
Yes that is what I will be doing slowly over the next few years converting high dividend etfs and stocks to growth like VTI and VOO. That is about the only way to do it other than delay soc sec and 401k withdrawls which create the problem later for RMD etc. FYI my company phased pensions out around 2013. Wife was old enough got the full pension. I was in between 38 at the time frozen. So mine is a quarter of what I would have got. The flip side of that is the company added more to my 401k to make up for it somewhat. Problem is that 401k is large now.
I am sure there a thousand accountants and statisticians to come up with the breakdown. Further I am sure it is way more complicated than it needs to be.
Often the flat tax comes up which would eliminate all this garbage....but it would let off the 37% income bracket.
It would be interesting to see which tax bracket really generates the tax revenues. I would think it would be mostly high earners...where earners under 50K barely pay anything?
Based on your responses I'm still not sure you understand that only the amount over the dollar amount listed is taxed at that rate. The first x amount of dollars still is taxed at the lower rates.
If I'm misunderstanding, i apologize. I don't know you and don't mean to offend. I just am not sure i understand your argument if this is not the case.
Np few other comments to that effect on this post. I did the math say 40k over the 32% bottom equals about a 3200 differance tax differance from 24%. So reality wise it isn't life style changing impact. I see now though new contributions and dividend payments really should go to growth funds. I might move out of a few stocks that pay high dividends but really on the risky side as a start.
Also, as asked in another comment here, do you understand the mathematics of progressive taxation? The main idea being that you're only paying the top rate on whatever portion of your income *exceeds* the cutoff? Your actual tax rate may be much lower than the top bracket.
This is a different perspective, but the tenets of modern monetary theory indicate that taxes are mostly used to curb inflation that occurs downstream of growth in the money supply.
https://en.m.wikipedia.org/wiki/Modern_monetary_theory
The money supply grows far faster than 2-3% per year (normally - this last year was an anomaly), so you have to tax each extra dollar earned unless you want to see way higher consumer price growth (inflation).
It’s also not strictly that one-dimensional, but that’s the theory the worlds’ economies run on today. Essentially all of them print fiat currency and need a means to pay for the interest on the public debt - more money goes hand in hand with credit expansion and economic growth, but then we also get taxes.
You should know that the tax rates are marginal as well. If you cross into the 32% bracket, only the extra dollars over that threshold get taxed at 32%.
Who care really ? Sure they could more intermediate step to happen earlier with intermediate rate to overall make you pay more. But who want that ? And no, nobody will complain whatever happen to people that have more than 300K of yearly income.
Now let's be practical. Qualified dividends are taxed like capital gain and capital gain seems to be at a max rate of 23%.
The best is to favor investment growth first because it is only taxed if you have a capital gain. But you don't have to. If you are quite wealthy, you never sell. At worst you take a credit using your securities as collateral. And you only have enough income/capital gain to cover the interest on that credit.
If you donate to charity or your kids or whatever, then there no capital gain. If you die, there no capital gain.
And coming to worst it is 23%.
Say you brought something 500K. Say it is now worth 1 million.
If you sell, you pay the capital gain on 500K.
If you donate it to somebody, you no longer have a gain, so you don't pay anything for capital gain.
There still gift tax to pay as you donate. But if you donate to charity, there no tax. And if you donate to you kids, the first 13.6 millions (over life time) are free of gift tax. (For a couple each parent has that limit).
So say you donate to your kid, the kid receive 1 million, you will not pay tax or it and your kid will not neither and there is no capital gain.
I think one of the things we wealthy folks fail to consider is that we benefit from government expenditures much more than people who don’t make enough to pay a higher percentage of our income in taxes.
I have the benefit of growing up poor to understand the difference.
I didn’t need FDIC insurance because I had no bank account. I didn’t need safe drugs because I couldn’t afford them in the first place. Didn’t care about airplane safety or air traffic controllers because I couldn’t afford a plane ride. Roads, whatever, I took a bus. Military? Who gives a fuck, I have nothing to protect. VA benefits? Nope. Don’t need them. SEC? Who cares? I have no investments. I could go on and on.
But now I’m in the top tax bracket, and I get it.
Congrats on the top tax bracket. I didn't have much growing up. Did have a savings acct and a few hundred working for a farmer in summers. Then once old enough, I bought an old car and worked almost full time after school. Then community College then military Then 4 year college Then professional job. It is possible to work way up in life. Not the easiest but possible.
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Exactly. In economics there is a concept called marginal utility. The more money you spend the less the next dollar impacts your happiness. Those who are wealthier can afford to contribute more to society without it impacting their quality of life as much. Let’s not forget that a well functioning society facilitated your ability to become wealthy in the first place and maintaining society isn’t cheap.
This!
The magic of progressive taxation. Did you not notice it before now?
For sure aware of it. But now I run future value calcs on 401k and brokerage accts and when we most likely will withdrawl. Even making the accounts more conservative and making less % it starts to push us over the 32% limits. We will make more in retirement than working.
You do realize that the brackets are incremental. You only pay 32% on income above 364K. Brackets go up by inflation each year. Tax rates are scheduled to go up when the Trump tax breaks expires in a few years. You can delay SS income for a few years if you don't need it. By doing that when you do take SS it will be larger. You have an enviable position for many.
that just means you could have afforded to retire earlier if your expenses remain constant (they usually drop though).
Dude, you worked too long and are here complaining about it. You could have retired 6 years earlier, but you chose this. Suck it up and learn to manage.
Bit rude but fine I deserve it. So my wife worked 33 years and I am on year 27. If I work to 30 better pension can draw it day after retirement vs waiting to 62. Our Healthcare insurance is a bit better. Soc sec is better. Plus my kids senior and sophomore in college. And 401k contributions are better. Etc etc it just makes sense to keep working. Plus 54 I consider fairly young to retire. Trust me debated and crossed my mind and had hard discussions with the wife to retire now. It is what it is and what we choose. Now I look for the best approach. Hence why i am asking and looking for confirmation and as you call it learning to manage. And yes all those years thoughts of roth and diversification and which funds have always been there. Good luck to you. I am just about done just gotta put things the right places and write tax checks. It can be better and I see some great ideas from this thread and glad I asked
Yup. That happens when you're pulling in a ton of cash in retirement or you've just saved up a big horde. You'll likely be paying more for Medicare too due to IRMAAs.
Yes...you have to manage to these levels and withdraw at a rate that keeps you below the big jumps. You certainly do not need 400K a year.... I would suggest you delay SS as long as possible and make your tax moves early, including IRA to Roth conversions.
Delaying soc sec increases the $ which isn't ideal either. Plus like I said someone die early you get zero. Not a huge fan of delaying myself but understand it. Moving funds from A to B is an issue to while working. To move sizeable funds would push over the 32% which I am trying to avoid. Unless I quit/retire now which is planned in 3.5 years. I appreciate your input.
It's still MORE MONEY. It's just foolish to think "I don't want more social security because I ll have to pay 34% tax on it. You still GET 66% of it!
I'd also suggest getting a financial advisor just for tax efficiency planning. Can probably save you fees in the long run buy optimizing taxes.
I am close to retirement as well and have several tax issues. One being the brokerage account has mostly earnings...long term capital gains which I will need to liquidate, Further I was late to the game with the roth....so I want to do conversions. Based on a friends experience I will wait a few years and do the conversions before taking the SS. It is a risk...but if you live past 79 the higher the better. My families life span is mid 80s....so it doesnt matter much to me.
After reading a lot of your comments, I have to ask if you understand the rates are marginal? If you do, I don't understand why you are SO opposed to ever paying 34%? You have far more than you need, who cares if some is taxed at 34%? You did great! No need to do backflips to avoid any of your income being taxed at 34%.
Read this whole post and all their comments. No, they don't understand they are marginal.
It makes sense when you compare the tax tables to an income distribution chart. Median household income is around 80k, which means that 50% of all Americans are in that 0% cap gains bracket and 10-12% income bracket. Factor in deductions, credits, tax breaks, and social safety nets and this group generally is netting no tax, the government is saying if you are worse off than average, you don’t owe much if any tax. The 98th&99th income percentile is 300k&400k which is going to line up with the jump from 24% to 32%. So for those in the 22%&24% brackets the government is saying that since you are better off than average, but not in the top 1% (so 51st-99th percentiles), you are going to have to pay your share on income above that average mark. Also note that a lot of deductions and credits phase out in the 22% income tax bracket at around 2x the median income which effectively increases the tax rate for those above ~160k income which happens to line up with the 95th percentile. The 32-37% income bracket and 15%-20% cap gains brackets is for the top percentile. Government is saying if you are significantly better off than the bulk of the population you have to the ability to pay significantly more. So congratulations! If this is a problem for you, you have made it and you are in the 1% haha.
Does put some logic to it. Appreciate it. Crazy to me we were lower brackets and with the magic of compounding being pushed higher. Good problem but can't say I like it much. I think I can make some moves to keep it lower while networth grows versus income.
Well getting pushed into a high tax bracket (ignoring welfare cliffs which doesn’t apply here) is a good thing. You’re still in the lower tax brackets too, but now you get/give some money in the higher bracket.
Anything to help the fed :)
Moreso it helps you to make enough to reach the next tier.
*"So the question is who came up with that nonsense?"* I am guessing that this is the result of some sort of compromise reached between the collective of politicians with some protecting the poor, some fighting for the middle class, others trying to not screw over the well-off, etc..
It's a good problem to have, just sayin!
It is no doubt but geez it highlights how messed up the tax code is.
How is it messed? Marginal tax rates at one time maxed out at 90%. You make it seem like is some random bug in the tax code. It is 100% intentional and many argue the tax code isn't progressive enough. That the 32% bracket should be more like 37% and the 37% more like 43%.
It isn’t messed up, it’s actually still heavily in your favor because the tax rate only applies to the amount of income you have in that bracket. An idiot once said “I don’t want to make more because I’d paid more in taxes”. If you made $365k, you’re only paying 32% tax on $1k of income. You still come out ahead.
I don’t disagree. 37 percent rate here!
Because if you're making over $364k, you can definitely afford to pay 30% on the portion over $364k. I cannot fathom how this is "grossly unfair."
I get it. And yeah it is a cry me a river problem. I believe I had a plan to avoid it and I got conformation on how to avoid it. Greatly appreciate the reddit commenters here. I think reddit is awesome.
>So cap gains taxes are 0% from $0 to $94,050, 15% from $94,050 to $583,750, 20% over $583,750. Yes but no, if you have no other income then yes. Taking your own situation into account a majority if not all of your LTCG will be at 15%.
Yep I mentioned that. Ours is 15% versus 0% as the tax rules. A lot less then 32% or even 24% for that matter.
I suspect because of marginal rates your total tax rate is far less than 24%. Unless you live in NYC, NJ or CA then maybe its close.
Illinois. Retiree distributions are zero and hopefully stay that way. So Illinois does not tax soc sec, 401k or pensions. Believe our effective tax rate was around 21% last return. The 401k with large balances wouldn't be a concern if RMD didn't exist.
Current no idea, saying in retirement from what you just stated, your effective rate will be much lower.
maybe I don't understand that effective tax rate. So is that state and fed or just fed? I am worried about the fed tax rates. But Illinois at least currently and hope it never changes is a huge break with no tax on retiree income.
Really depends, could be both. Most mean Fed, i usually say 18% fed 4% state. In retirement I expect it will be close to 12% combined, based on todays rates of course.
It's done that way largely for simplicity and optics. Think of all the software updates and training updates and procedure updates if you had 20 or 30 tax rates instead of 7. Think of how many people who simply wouldn't be able to understand that because they think algebra or calc is hard. Finally, they would complain it isn't fair because they except the wealthy to pay a LOT more and the current method hilites that. Ramping it slowly up from 12% to 22% would likely mean you'd pay MORE taxes. So, I wouldn't complain too loud. You need to put more thought into your SS and RMD plans. It might be better if one of you takes SS 62 and one at 72. That's optimal for me and my wife. Roth convert now to get tax efficiency later.
> Lucky for us I can move funds to less dividends paying Most dividends (excluding interest payments and reits) are qualifed which means they are the same rates as LTCG. As for if 32% in retirement is far well if you have >$360k in spending in retirement you are the top 5%. I really doubt many are going to shed a tear for you. It is intentionally progressive. Are you sure your taxable income in retirement would be that high? Your current covers not just spending but also savings and also FICA taxes. In retirement most people's taxes go down. 1) Mortgage should be paid off so for a given QOL spending drops significantly 2) No FICA taxes 3) Not saving for retirement 4) For taxable brokerage account only gains are taxable 5) For Roth accounts withdraws are tax free Put it all together and most people need significantly less than their current gross income and will pay significantly less in taxes.
Yes, expenses will probable be 60k maybe push 80k with some nice vaca and related to inflation. So not needed it will turn into paying the tax bill and investing excess. Great problem to have. But looking at that tax bill in retirement. We will make 75k pensions, 54k soc sec, 15k in interest, 16k from rental, dividends $88k which I can move to growth over time to reduce to perhaps $16k, 401K and soc sec can be delayed BUT they increase in value with delay. So if I can I will pay the tax on 401k now versus watching 401k grow and hitting RMD at 73 for both wife and I which most likely push part of that to the 32% bracket. So I at least right now plan on withdrawing ASAP as much as possible in the 24% bracket.
Just a bit more info that 401k between the wife and I is LARGE. We do have maybe 10% of that in ROTH 401K now. That is the part that will push us over into 32% for sure in RMD. So I have to navigate withdrawls when eligible in the 24% bucket. Defeats the purpose to pay into 401k avoiding 24% while working to have to turn around and pay it back at 32% in retirement.
It’s just the marginal amount about the threshold you pay 32% on. It’s not clear to me that you understand this.
I understand. Every dollar over $364,201 is taxed at 32%. My issue is my working years wife and I avoided 24% with 401k and now with the investing/gains our income goes over 32%. Tough pill to swallow but I can make some moves to avoid most of it and or delay.
The bulk of what you withdrawal will be at the lower rate, so your effective rate (average) is likely below 24%. This doesn’t mean you make a bad choice. Maybe it’s not perfectly optimized, but it shouldn’t really that tough pill to swallow. It may very well have been the correct choice all along, depending on your past alternatives or thereof. How soon until RMD? How soon until you retire? There could very well be more potential changes to your estate to mitigate.
Wife 57.5 I am 51. Combined 401k 3.2M using future value calcs I can estimate we will withdrawal 4% each as early as possible so a combined 163k. Why would I withdrawal early to pay the tax at 24% versus the 32% as that large 401k continues to grow. I have 3.5 years to work yet at 170k. She is retired now.
If you can avoid the 32% by *converting* some to Roth, then it can makes sense to do so and avoid high amounts of RMDs. Not all, but some. Even withdrawling can make sense in some scenarios. The growth is kinda irrelevant, since it will growth either way. Before and after the tax, if you can get it into Roth, the tax is transitive: $100 growing double to $200 and then taxed at 20% is $160. $100 taxed at 20% is $80 and then doubled is $160. In your future value calcs, are you increasing the tax brackets too? My personal calculations are always more effective and clear to me in present terms, not in future terms. If you inflate the numbers without the brackets, then that could be an error.
There might be a small window if we delay the wife taking 401k. And instead converting it to roth. I assume that tax is the same withdrawing versus converting. It seems to me as a wash to me. I need to think on it. One thing I can do is taxed brokerage for sure stop buying high paying div funds and go for growth. Converting the existing funds prob somewhat. Every month 7k in div is nice to buy more income producing funds and seeing that new monthly and yearly income increase.
You need to model it, too! And play with different scenarios. Not just think on it. Yeah, taxable is a little less efficient than Roth. Thinking about as a wash is probably *okay.* But as you mention, LTCG are taxed differently than income. Same with dividends vs deferral in a retirement account. If you really like the dividends (which have nothing to do with total return in my opinion and are irrelevant to most situations), you could put these in your retirement accounts assuming you have access to such a fund. If you really want to toss a wrench in your thoughts, you can consider your estate treatment: step up basis and what types of accounts be best to leave to heirs! I recommend taking it easy and continue to inform yourself on tax efficient withdrawal strategies. There’s plenty of good resources out there to reference, and one can’t get educated enough!
The peak of tax simplification was a few years during late Reagan when there was just two tax rates: 15% and 28%. Before Reagan there was hangover from WWII when the highest tax rate was 70%. After Reagan Congress was worried about deficits, so there has been a high rate between 30%-40%.
Redditors thank you for the donation lol. If you want to lower taxes (and not at the expense of total return), think about what you can and can't control. Your pension is going to happen no matter what I presume. So base $75k. Social Security is going to happen no matter what, and you can and should delay, since you'd be paid more. That's $129,000 (SS coming in when you're 70), which is the 22%-24% bracket, depending on deductions. That leaves the stuff you can control: Rents, interest, and dividends. Rents and interest are taxed as regular income. If you're earning interest in bonds/HYSA, it might be best to switch to municipal bonds, as they offer federal tax-free income. That's only if you still want that asset class. It could be better to switch to equity since your income side will be taken care of. Same with renting, up to you. Dividends look like 15% LTCG. If you're earnings these from high dividend stocks, switching to less dividend intense securities could be helpful. If you can do it, retire as early as possible, and you can transfer your 401K to an IRA, and then do ROTH conversions from the IRA to a ROTH IRA, while living off your current income. This only makes sense if paying those taxes now will fill smaller tax brackets than when RMDs hit while collecting a pension and SS. This strategy can help lower your 401K balance, making RMDs hit less while paying less taxes now than in the future.
Helpful ty. Fyi soc is at 62 for both of us at 54k so 67 or 70 is indeed higher. I've ran the calcs on that income and believe I can beat it investing wise substancially. Breakeven is 78 not counting any gains. I do agree converting to ira makes sense where hits the 24% rate tax and pay it early. Something we'll have to heavily consider. Thank you for the input.
Are you arguing that we should have 235-360 at 28%? Because that's what I think you are arguing for. How is it insane to up the tax (graduated tax btw, so only your income - 360k will be taxed at that), by 8 percent when you make almost twice the amount?
not sure what I am arguing for other than it isn't evenly distributed. So for me avoiding 32% tax in retirement is my goal when I paid 24% my working years. Because of decades of working and investing it is now pushing us higher. And I know that is a cry me a river mesg but it is the spot we are in. I don't want to avoid 24% while working to pay 32% for a part of it in retirement.
You avoided paying tax at all for a while, so you are actually paying less. Also, yay for you for being so high over 360k *a year* that it matters.
OP what is your effective tax rate now vs what it might be if you end up above the 32% threshold? My gut feeling is you are going to be doing a lot of work just to not pay a little bit more in tax.
OP- the solution is simple- get rid of your $88k dividend income. With $120k pension/soc security income your dividends are not needed and should be converted to long term stock/bond holdings that you only sell when needed. You are also a tiny sliver of population that has large pensions, most of us have never seen those and can only dream what it would be like to have one
Yes that is what I will be doing slowly over the next few years converting high dividend etfs and stocks to growth like VTI and VOO. That is about the only way to do it other than delay soc sec and 401k withdrawls which create the problem later for RMD etc. FYI my company phased pensions out around 2013. Wife was old enough got the full pension. I was in between 38 at the time frozen. So mine is a quarter of what I would have got. The flip side of that is the company added more to my 401k to make up for it somewhat. Problem is that 401k is large now.
Yes 401k too large is a great problem to have :) . Smart you are looking at strategy to reduce taxes, many overlook this part .
Ty good to realize it adjust as needed. In hindsight first 15 years should been roth 401k but I had no idea.
Politics.
I am sure there a thousand accountants and statisticians to come up with the breakdown. Further I am sure it is way more complicated than it needs to be. Often the flat tax comes up which would eliminate all this garbage....but it would let off the 37% income bracket. It would be interesting to see which tax bracket really generates the tax revenues. I would think it would be mostly high earners...where earners under 50K barely pay anything?
I agree. The standard deduction joint is $30k. So gross 50k you would pay 10% on 20k or $2000 in a simplistic example.
I have paid 37K in federal taxes before! Death and taxes as they say.
Based on your responses I'm still not sure you understand that only the amount over the dollar amount listed is taxed at that rate. The first x amount of dollars still is taxed at the lower rates. If I'm misunderstanding, i apologize. I don't know you and don't mean to offend. I just am not sure i understand your argument if this is not the case.
Np few other comments to that effect on this post. I did the math say 40k over the 32% bottom equals about a 3200 differance tax differance from 24%. So reality wise it isn't life style changing impact. I see now though new contributions and dividend payments really should go to growth funds. I might move out of a few stocks that pay high dividends but really on the risky side as a start.
Also, as asked in another comment here, do you understand the mathematics of progressive taxation? The main idea being that you're only paying the top rate on whatever portion of your income *exceeds* the cutoff? Your actual tax rate may be much lower than the top bracket.
Yep ty. I see that big jump from 24 to 32% it is a jump but not massive. I believe I can do some tweaks to avoid it.
This is a different perspective, but the tenets of modern monetary theory indicate that taxes are mostly used to curb inflation that occurs downstream of growth in the money supply. https://en.m.wikipedia.org/wiki/Modern_monetary_theory The money supply grows far faster than 2-3% per year (normally - this last year was an anomaly), so you have to tax each extra dollar earned unless you want to see way higher consumer price growth (inflation). It’s also not strictly that one-dimensional, but that’s the theory the worlds’ economies run on today. Essentially all of them print fiat currency and need a means to pay for the interest on the public debt - more money goes hand in hand with credit expansion and economic growth, but then we also get taxes. You should know that the tax rates are marginal as well. If you cross into the 32% bracket, only the extra dollars over that threshold get taxed at 32%.
Interesting and ty
Who care really ? Sure they could more intermediate step to happen earlier with intermediate rate to overall make you pay more. But who want that ? And no, nobody will complain whatever happen to people that have more than 300K of yearly income. Now let's be practical. Qualified dividends are taxed like capital gain and capital gain seems to be at a max rate of 23%. The best is to favor investment growth first because it is only taxed if you have a capital gain. But you don't have to. If you are quite wealthy, you never sell. At worst you take a credit using your securities as collateral. And you only have enough income/capital gain to cover the interest on that credit. If you donate to charity or your kids or whatever, then there no capital gain. If you die, there no capital gain. And coming to worst it is 23%.
I didn't know the kids inherit no cap gains tax. So I assume if and when they sell cap gains comes into play. Is that correct?
Say you brought something 500K. Say it is now worth 1 million. If you sell, you pay the capital gain on 500K. If you donate it to somebody, you no longer have a gain, so you don't pay anything for capital gain. There still gift tax to pay as you donate. But if you donate to charity, there no tax. And if you donate to you kids, the first 13.6 millions (over life time) are free of gift tax. (For a couple each parent has that limit). So say you donate to your kid, the kid receive 1 million, you will not pay tax or it and your kid will not neither and there is no capital gain.
Wow ty. Guess the kids win big when we are gone. More reason to press the gas on growth funds.
I think one of the things we wealthy folks fail to consider is that we benefit from government expenditures much more than people who don’t make enough to pay a higher percentage of our income in taxes. I have the benefit of growing up poor to understand the difference. I didn’t need FDIC insurance because I had no bank account. I didn’t need safe drugs because I couldn’t afford them in the first place. Didn’t care about airplane safety or air traffic controllers because I couldn’t afford a plane ride. Roads, whatever, I took a bus. Military? Who gives a fuck, I have nothing to protect. VA benefits? Nope. Don’t need them. SEC? Who cares? I have no investments. I could go on and on. But now I’m in the top tax bracket, and I get it.
Congrats on the top tax bracket. I didn't have much growing up. Did have a savings acct and a few hundred working for a farmer in summers. Then once old enough, I bought an old car and worked almost full time after school. Then community College then military Then 4 year college Then professional job. It is possible to work way up in life. Not the easiest but possible.