Retirement’s Most Common Tax Obstacle | Explained
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- čas přidán 23. 07. 2024
- Does your retirement plan ensure you are overcoming some of retirement's more common tax obstacles? You can schedule an appointment with one of our Retirement Experts to look at your situation and help you plan for your future. Call us at (920) 544-0576 or go to www.safeguardinvest.com/contact.
Timestamps:
0:00 Retirement's Most Common Tax Hike
0:23 Marginal Tax Rate Explained
1:29 The Social Security Tax Torpedo
2:03 How to Calculate Social Security Taxation
6:13 The 12% Brackets Turns into 22.2%?
7:28 Retirement Tax Brackets
10:17 The 12% Bracket Turns into 49.95%?
11:43 Avoidance Strategies
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I am a 73 year old retiree with no Roth IRAs. Once I had to start taking RMDs my taxes almost tripled! Have had the Medicare IRMAA penalty too .
Don't get too giggly about all of those tax-deferred accounts. Paying the piper ain't cheap.
Listen to Dave, because he is really good at this. You will be happy that you have a plan.
I’m retired 6 years but I remember years ago it occurred to me that taxes only go up and all this tax deferred money would eventually be problematic. I stopped contributing as I had no company match and put it all in my Roth.
Your financial videos are among the best on CZcams. You present a great deal of useful information in a concise understandable way.
I only look at the effective rate and actually the dollar amount these days. I am now aware of the tax brackets and IRMAA brackets so try to keep the overall tax amount before a specific dollar amount. Online tax calculators help tremendously with that.
I am planning to blast through the tax torpedo / tax hike zone once or twice for Roth conversions. Small pension, plus SS Survivors benefit... no wiggle room for low / no tax conversions. And no reasonable room in my last year of work.
You are the best... no rambles straight to the point
Watching these videos really open up my eyes to life after work. I dont have a Roth yet but I plan to start it next year. This is the first time I heard about provisional income and how its calculated. I definitely need a tax plan moving forward.
❤❤❤Excellent Explanation 💯 Thank you !!!!
Great video Eric! I have learned so much about retirement planning by watching your videos.
I would love to see a video and get some guidance on retirement tax planning if MFJ with $65,000 in pension income. We are 59. And when we get SS we can’t avoid the SS tax torpedo. So what can we do to minimize its effect?
I discovered this several years ago. When you mentioned 22.2%, I knew where you were going.
I used an online 1040 tax estimator and did a step process of adjusting things like capital gains, and IRA distributions to come up with the tax amounts. I wasn't astonished as I had guessed where this was going.
I spend more time in tax mitigation than I do adjusting my portfolio. I have lots of unrealized gains which will be realized after my retirement. :)
yep... crazy, isn't it!
I also use an on line 1040 form to get a tax estimate. It's nice when the fed tax matches the amount on the actual return when I file.
Finally an accurate video on Social Security taxation. Good work.
Most financial advisors never talk about the Social Security income taxation because of distributions from traditional IRAs/401ks; they all talk about your tax bracket being less when your retire vs when you are working. Outside an inherited taxable brokerage account and an inherited traditional IRA. 100% of my dedicated retirement accounts are a Roth IRA and Roth 401k.
@@martinguldner3990 that is fine for you, but has nothing to do with the topic of the video. Frankly I think the reason most financial advisors don't talk about taxes in any detail is because they don't really understand how the tax laws work. The few videos I see on topics like this are full of errors.
Dear Eric, Thank you so much for your Video for Singles! ❤ This seems to be the Best Tax Torpedo Zone Modeling Chart and the Marginal Tax Rates and Side by Side Comparison for Ordinary Income Tax Brackets now and after TCJA Tax Cuts sunset after 2025 when Tax Brackets JUMPING BY A WHOPPING 3% for most Tax Brackets. Thank you for going through a more clear explanation of Marginal Tax Brackets for how much Extra Tax Rate it's going to cost one for withdrawing of Extra $1k while in Tax Torpedo Zone (which is very personal with different Income). Besides Tax Torpedo Zone another point you brought up is that Taxable Income below $44,625 for Singles is resulting in 0% Long Term Capital Gains Tax Rate, while even $1 extra would push your Capital Gains Tax Rate to Jump to 15%. IRMAA Extra Surcharge for MEDICARE Premiums is also a must avoid MAGI Income which for 2023 was under $97k for Singles Income in 2021 (2 Years Ago)... Would be interesting to see how COLA in December 2023 would impact IRMAA in 2024 January... I am now frightening myself with MAGI and IRMAA I must pay so much extra for if not careful. It seems the best thing is to only consult on at least annual basis a financial advisor with Tax Expertise especially starting 10-15 years before Retirement Income and Social Security and RMDs are going to CAUSE MUCH TAX DAMAGE & PAIN in Retirement, especially when on Fixed Income and less and less things and procedures and medications and doctors and hospitals are covered by MEDICARE Unaffordable Mandatory retirement insurance for 65+ or disabled.
this is a really excellent video......i intend to start contributing more to my roth immediately
Super job!! Give more pauses so we can digest it
Use pause button or rewind abit. I know what you mean, if not it might be too long for everyone else :).
Why not:
1. Defer Social Security as long as possible, to Age 70 if possible, which will also give you a larger benefit.
2. Do serial Roth conversions every year. Depending on individual circumstances, make total income just below the limit for 22%/25%, or at least below the first IRMAA trigger. The tax brackets for your conversions for 2023 are 0%, 10%, 12%, and maybe some at 22%.
3. Withdraw funds for expenses from the Roth funds -- you were going to spend them someday anyway.
4. Get as much pre-tax converted to Roth at reasonable rates as you can.
5. Keep hugging the upper bracket even while receiving, and accounting for, Social Security.
6. Getting pre-tax funds converted will make the Widow Trap much less painful, or maybe even non-existent.
@@johndoedoe4840 Correct. Sooner or later you have to pay the tax on it, so pay the tax with "other resources" as they say, if you have them, or pay the tax using the converted funds. Whatever (extra) you don't spend from the conversions you can leave invested in the Roth account, where it will grow, and you'll never have to pay tax on it again.
Finally a man with common sense, IRAS and 401k have always been a tax trap. You save 1 dollar and then are taxed for 100 dollars on the back end. ONLY INVEST in a ROTH or a TAXABLE ACCOUNT then you are not forced to take RMDS which force you or your living spouse into a tax trap.
Absolutely NO TO #3! Withdrawal from NON-TAXABLE ROTH ACCOUNT IS A NO NO unless you are in a though Tax Situation and have no other funds or options! You must Preserve and Nurture this Tax Free in Retirement Bucket which you can't replenish unless you are working!
@@annamartino5681 Please read my suggestion again. Remember, you use all of your "other resources" After-Tax funds to shelter the Roth conversions until you finally have to pay tax out of converted funds.
I've done the calculations enough times to know that, so long as you are paying tax at the same rate, there is no net difference whether you pay tax for Roth conversions on less money sooner, or pay tax on the greater amount of money that it will grow to later. The key is to keep away from higher tax rates. I used to agree with you, and had the opinion defer-defer-defer on paying tax on Roth withdrawals -- until I saw the "Widow Trap" in the "Forward-Looking Tax Plan" in my retirement plan. RMD rates are low at first, and your IRA will continue to grow for the first few years even though RMDs have begun. However, when you get older, RMD rates increase greatly, and you cannot avoid making RMDs in a higher tax bracket. (It's worse for a surviving spouse. Not only do the RMD rates shoot up, but the Standard Deduction and size of the tax brackets become half of what they were, with no reduction in the dollar amount of the RMD that must be taken. The tax rate and tax paid become *much* higher.)
Here's a simplified way to look at the options. First, assume that you have used all of your After-Tax funds for living expenses and tax on Roth conversions. *All* of your money is in a Traditional IRA. Also assume that you still have several years to go before your RMDs start.
You could *withdraw* from your Traditional IRA funds only the money you need to cover your living expenses, after tax, and pay tax out of the withdrawn funds.
You could *convert* from your Traditional IRA funds only the money you need to cover your living expenses, after tax, and pay tax out of the converted funds. (This is what I meant by "You were going to spend that money anyway.")
You could *convert* from your Traditional IRA funds all the way up to the top of the 12%/15% tax bracket, and pay tax out of the converted funds. Spend only the money that you need to cover your living expenses, and invest the funds remaining from your Roth conversion. (i.e., don't let it sit 100% in Cash.) You might have deducted your IRA contributions from out of the 25% or 28% tax bracket, but so far, you have not paid more than 15% tax on any Roth conversion. You'll never pay tax again on the money invested in the Roth IRA.
If your Forward-Looking Tax Plan indicates that it is necessary, you could *convert* from your Traditional IRA funds into the 22%/25% tax bracket, but safely below the lowest Income-Related Monthly Adjustment Amount (IRMAA) trigger. Again, you spend only what you need, and invest the funds remaining in your Roth IRA.
Ideally, you execute serial Roth conversions annually and convert 100% of your Traditional IRA to Roth IRA funds, paying no more than 12%/15% tax on the conversions. You pay income tax on a lot of your IRA at a lower rate than what you avoided when you made the contributions ("income tax rate arbitrage"), and you avoid paying tax at a higher rate on your IRA funds when you are elderly.
@@brucestiles6477 Your cogent tax strategy summary, above, deserves to be pinned by the host within this comment section, Bruce:
1. Execute serial Roth conversions annually.
2. Convert 100% of your Traditional IRA to Roth IRA funds.
3. Pay no more than 12%/15% tax on the conversions.
4. Pay income tax on your IRA at a lower rate than when you made the contributions ("income tax rate arbitrage").
5. Avoid paying tax at a higher rate on your IRA funds when you are elderly.
Excellent video. I've learned a lot from you. I'm 62 and retiring in a few weeks. I have a large amount in a pre-tax 401k and will be taking SS at 67. I plan on doing aggressive Roth conversions to avoid RMDs.
Sir the income tax consequences of doing Roth conversions vs just taking distributions from traditional IRAs/401ks at your age is like 6/ half dozen on the other. I would hoped you started Roth IRA and Roth 401k contributions when you realized the tax time bomb! Best first to withdraw from traditional IRAs/401ks once you retire and use as income. Second try to wait until 70 to take Social Security. Last withdraw from Roth IRA and Roth 401k .
@@martinguldner3990 I appreciate your advice but I have a plan and a goal that you don't know about. I'm converted everything to Roth because I don't need it to retire. It will continue to grow tax free until I die and will be a legacy inheritance for my children.
@@billh4285that’s all good so long as you live the life you want.
Hey Eric - Love your content. Really helpful info to us lay people. I am onboard with the additional $222 at a 22.2% marginal rate. That makes sense to me. I am curious if the effective rate might fit into our analysis? In your example at $30k IRA income, we have a net effective rate of 5.2% ($3,668 FIT / $70k gross). In the $31k example, we have a net rate of 5.5% ($3,890 FIT / $71k). While the $222 is absolutely $222 in additional tax, it appears to be a rather small piece of the overall tax situation.
I am struggling with this idea in assessing whether to convert to Roth? We're in 22% marginal bracket, with estimated net rates of 14% no conversion and 16% with conversion. Should net rates even enter the equation?
Is there a good reasonably priced software program that will map this out for you?
Very hard to follow this video on my phone. Graphs are microscopic. Is this a problem for incomes below 40k-ish, or is there an ability to mitigate this with higher incomes. I will have a military retirement in the ballpark of 5500 per month and a SS estimate (@67) of around 3600 per month. This doesn’t include IRAs/401ks and a Roth conversion strategy.
I just had an epiphany. If I wait til 70 to draw SS, this will give me a little more room for Roth conversations before hitting IRMAAs (?).
I have a roth ira, a 401k, standard ira , and I'll be receiving a pension. My brain is going to explode in 8 years when I have to figure all this out.
Roth conversions!!! 22% now, even out of the principal is better than 40+ later!
@@lindad6223 I'm doing them now (I'm 63 and just retired). I'm converting so total income just below the second IRMAA level. Keeps me in the 24% bracket and will keep medicare from exploding in two years time. I have 11 years to complete conversions before RMDs. So between now and then I'll convert ~$600K. In 2035 my RMDs, pension and SS will place me in the middle (post Jobs act) of the 28% marginal bracket. Without this conversion the RMDs would push me well into the 33% bracket.
Better to deal with the problem now when there are still things you can do about it. Some examples that may be applicable before retirement (not all of these will apply to everyone) :
1. Consider contributing to a Roth 401K until you max out the 24% bracket, then switch to conventional 401K.
2. After maxing out your 401K contributions, take advantage of the mega backdoor Roth if you can.
3. Avoid keeping high-dividend investments in taxable brokerage accounts. Instead use your IRA and 401K accounts for high-dividend investments, and restrict your taxable accounts to low-dividend growth funds and some short-term money markets. Even if you have to realize some long-term gains to fix this, it may be worth it in the long run. It'll be worse if you wait until the Social Security or IRMAA taxes become an issue.
@@captsorghum another option is to shift your 401k contribution to pay for a 401k traditional --> roth conversion up to the top of the 22% bracket. I'm using this approach.
@@jskweres2 Yeah variations on a theme. My main point was to figure it out before you retire, preferably at least a few years before, because your options will be more limited later.
You may not be able to optimize much now, but you can at least learn how to keep from painting yourself into a corner. One way to learn is just go through the videos on this channel, one per night or something.
I was wondering why the first step in the graph for married couples at 9 min in the video is at about $18K? Shouldn't it be the standard deduction for over 65, or about $29K? Even assuming reverting to pre-tax-act rules and values, it was more than 20K when including 2 'exemptions', and about $27K in today's dollars after adjusting for inflation.
I don’t think I can avoid the SS taxation. By delaying SS our combined payment will be at least $70k so $35k counts in calculation plus a $17k pension puts me over right?
Most financial advisors never talk about the Social Security income taxation because of distributions from traditional IRAs/401ks; they all talk about your tax bracket being less when your retire vs when you are working. Outside an inherited taxable brokerage account and an inherited traditional IRA. 100% of my dedicated retirement accounts are a Roth IRA and Roth 401k.
Likely because it's more complicated to explain, plus taxation of social security benefits isn't limited to distributions from tax deferred accounts. It's affected by all taxable income. So any side hustles, dividends, long term capital gains, etc. Unless you can completely eliminate taxable income in retirement while collecting social security, you'll be subjected to this. This is going to be very difficult for us to avoid, and we don't expect to delay taking social security.
Thank you for this video. I finally understand what you have been talking about. However, given the math wouldn't a filer whose PI crosses into the 85% zone have the same problem with each dallar/$1,000 they add in income? Doesn't seem to be worth it to worry much as it applies to every dollar in that zone.
The 85% zone applies until you get to 85% of social security taxed. After you reach that point no more social security is taxable.
Yes but each dollar you take out your IRA still has the higher tax rate that was the scare tactic used in the video.
I had trouble wrapping my mind around that, too. I think I need more coffee. Thanks @@todddunn945 for the explanation.
I've done the calculations on this "Torpedo" using IRS Form1040 ... grinding away on this subject seems to me to be MUCH ADO ABOUT LITTLE!
Background (for me): In the 1980's, they decided to tax social security. Done deal, not going to change ... I consider SS base "income" and all that income is more or less wiped out by the Standard Deduction. See there ... I didn't pay any taxes on my Social Security at all, just IRA, Pension, Interest ... Just a matter of perspective.
And yes, I realize some people are much more sensitive about paying taxes than I.
anyone know where i can get a DIY annual tax roadmap? I'm not willing for Safeguard to manage my assets and they aren't willing to create an annual tax roadmap unless they manage my assets
Why would you expect them to?
@@truckinpoppop6777 Thanks for the non-answer i'd expect them to offer a fee based service for it... yes.
I feel the same way. It would be nice if places like Safeguard would do consultations for people who want to manage their own assets. I just want to be better educated on my specific situation.
Our tax code is f@#$*ng nuts...
Great video but let’s face it, if you want have a nice retirement you are going to get hit by the SS tax torpedo and then spent past it. Just accept the tax and move on. Don’t sweat it. Enjoy your retirement.
Completely lost.
Retirement risk factors for millennials and younger will likely include additional federal tax traps, or similar, not present today and need to be at least considered by a fiduciary. Not exhaustive…SS benefits fully taxable, a percentage of Roth distributions being taxable at some level, RMD withdrawal tables being less favorable, increased Medicare B cost deducted from SS, and so on. And this doesn’t even begin the discussion around how various expected benefits in retirement will be reduced directly or thru increased costs. SS and Medicare major reforms wont’t be ‘free’, unless you are a boomer and maybe Gen X.
I get that 1000 income can create 1850 taxable income, as he provides an example of someone with a PI of 31k, but how does one ever go from 10% to 15/18.5% as he illustrates in his chart? Being in a 10% bracket implies that their income is no higher than 11k and if so, how would SS ever be taxed if the first 25k is free? Sorry, brain is missing something here???
Answer: while the 10% bracket implies income from normal taxable sources (wages, IRA distributions, capital gains, etc), the chart implies that an individual’s PI triggers above the 34,000 threshold for which 85% of SS taxed. Hence, every additional $1,000 creates $1,850 of taxable income and therefore 10% becomes an actual 18.5% marginal tax rate
I am retiring April 2024 and will be 63 years old. I have been planning not to take SS until I'm 67, but have started to rethink that strategy based on a number of things. Let's say I take $80K per year from my Traditional IRA. I pay Federal and State taxes on it. If I start SS before 67, I take less out of my IRA which means I owe less taxes, the Federal government taxes me on only part of my SS and my state (Oregon) doesn't tax my SS at all. I leave more money in my IRA to grow and eventually give to my children or charities (remember - you can't leave SS to your heirs!). Am I overlooking something?
Maybe. There’s an inconvenient tax consequence for the heirs of your IRA.
I figure whatever they get is more than they have now. Taxes are inevitable.
Yes, you will have forced Huge Taxes ahead of you due to RMDs at age 75 from your Traditional IRA. You should reach out to an advisor Eric in Video Description and he would help you to get a Plan right for your family situation. Your kids might also be inheriting 40% Tax on your Traditional IRA, but reaching out to Advisor Eric in this Video would help you annually to get to minimizing your Total Tax Bill, not just a few years until Taxes and IRMAA are going to hit you hard.
ah because of roth conversions, we have NO RMD's. retired this yr with rule of 55. Pay taxes next yr and not again until we take SS. live off military retirement and disability and taxable account🤘
As a single person, I'm tired of getting screwed by the tax code just because I'm not married.
Find someone that will marry you last week of December and then divorce in January. Your tax status is what you are at the end of the year. Rinse and repeat. Your tax savings pays for your trip to Vegas every year
Stay single. It's not worth the savings.
This right here.
Could be worse at least your not screwed by a x wife in divorce court. Pay the tax and be happy.
Trust us on this, it's not much different when married. In fact, when the TCJA ends it will be even worse for married filers. So even if you get married you'll be screwed one way or another if you know what I mean.😅
You totally lost me. Even if you consider 100% of SS income taxable, the 22% bracket, is the 22% bracket. Not sure where you are getting 40% and higher. I am planning on being in the 85% SS benefits taxable situation and am doing all of my planning based on it all being straight income, 100% taxable. This way, the 15% that isn't taxed will be a "bonus".
The part you are missing is that 1000 in income creates 1850 in taxable income. That's how the tax bracket jumps up beyond the bracket it seems like. Probably worth rewatching and focusing on that part to really understand the issue.
But it is still only taxed at the tax bracket, and never higher. Still not taxed at the 40% and higher rates the graph shows.@@chris_harvey
It's a little bit sensationalized... Yes when you go from a 22% marginal rate to a 24% marginal tax rate it is close to a 10% increase in marginal tax rate, but that first dollar only resulted in a $.02 total increase on your total tax bill. Which is a rounding error on $15k tax bill, and you need to focus on the overall impact on your total tax bill as a percentage, not how it impacts your marginal tax rate. If you are already looking at SS being 85% taxable most of this discussion doesn't matter.
@@jerrylabat550"If you are already looking at SS being 85% taxable most of this discussion doesn't matter." agreed. This video only applied to those who can convert more to Roth before social security or make large withdrawals every other year from traditional accounts to save taxes every other year (assuming you aren't in the 24% tax bracket no matter what
He's talking about the marginal tax rate of the 1000 dollars add-on and coming up with a rate based on the taxes on that 1000 dollars plus adding in the taxes of the 850 dollars of SS that is now being taxed. To me it makes more sense and is more understandable to just say you pay 12 percent on the additional 1000 dollars and now you also owe 12 percent on 850 of SS that previously you were paying 0 tax on. I also don't think this is double taxation as is implied. You're just having to pay taxes on a bigger piece of your SS plus taxes on the additional 1000 dollars of income. The use of the marginal rate seems to somehow imply there is something underhanded or unfair going on here when it's just playing with the numbers in a way that makes you feel like you're being ripped off. The SS issue above is the same thing that happens with longer term capital gains where one goes from 0 to 15 percent at 89,251 of taxable income so this gets added on to the marginal rate again and gets you into to higher marginal rates he was talking about. If you keep your taxable income below the above level the long-term capital gain rate would be 0 and therefore marginal rates also lower.
How to avoid these tax torpedos? Don't make any taxable income. Seriously.
All of these situations occur if you are collecting social security and make any taxable income. The entire system is setup so that you pay taxes on your social security benefits as soon as you start making a little income and the amount that gets taxed increases as your income increases. The standard deduction will help, but ony a little.
Its a very annoying system because having a little passive income in retirement will cause you to pay taxes on your social security benefits. If all your income is from roth accounts then great. If its from a 401K or similar tax deferred account, then you'll most likely pay taxes on sime of your social security benefits.
If you can live entirely on social security benefits and dom't habe any other income, then you can avoid the taxes until RMDs kick in. If you can delay collecting social security and convert everything to roth before collecting it, then great, plus your social security benefit will be bigger due to the delay.
No matter what strategy you use, you just want to reduce your taxable income low enough so that none or only a little of your social security benefits get taxed.
Another marriage penalty.
Hope they actually pass the "You Earned it, You Keep It" proposed law so all this becomes mute.