Taxes in Retirement - 401K withdrawals

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radeon962
Posts: 113
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Taxes in Retirement - 401K withdrawals

Post by radeon962 »

Just trying to get this straight in my head as far as what my tax would be in retirement.

2021 Tax Brackets (MFJ)

10% - Up to $19,900

12% - $19,901 to $81,050

22% - $81,051 to $172,750

Assume that I need $78,000 for the year and am married filing jointly.

Will withdraw $6,500/month or $78,000 from a 401k over the course of the year

No other income and will claim the standard deduction of $25,100 for 2021.

Taxable income is $78,000 - $25,100 = $52,900

The first $19,900 is taxed at 10% or $1,990

The next $33,000 is taxed at 12% or $3,960

For a total 2021 tax of $5,950.

Am I missing something?

Thanks, Bill
livesoft
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Re: Taxes in Retirement - 401K withdrawals

Post by livesoft »

I think you are missing lots of things. See also: How t=o pay ZERO taxes in retirement with 6-figure expenses.

If you do not use tax-prep software, then you will be handicapped in understanding all this.
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Topic Author
radeon962
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Re: Taxes in Retirement - 401K withdrawals

Post by radeon962 »

I use Turbo Tax and the situation is theoretical at this point as I’m just trying to wrap my head around the basics as I get closer to retirement and trying to learn more about the tax end of things.
sailaway
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Re: Taxes in Retirement - 401K withdrawals

Post by sailaway »

You have described the generalities very well.

Is the 401k really your only source of funds?

Will you be subject to state taxes?
L84SUPR
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Re: Taxes in Retirement - 401K withdrawals

Post by L84SUPR »

This is a handy table.

https://www.nerdwallet.com/article/taxe ... x-brackets

My plan is to fill up the 12 percent tax bracket with Roth conversions. Based on the table federal taxes will be $9235.
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wrongfunds
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Re: Taxes in Retirement - 401K withdrawals

Post by wrongfunds »

livesoft wrote: Wed Sep 15, 2021 9:54 am I think you are missing lots of things. See also: How t=o pay ZERO taxes in retirement with 6-figure expenses.

If you do not use tax-prep software, then you will be handicapped in understanding all this.
OP is asking completely theoretical question. His model has NO OTHER INCOME than 401K withdrawal. The computed numbers make sense to me.

Does his model make sense? That is whole different question and that was NOT asked!
Topic Author
radeon962
Posts: 113
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Re: Taxes in Retirement - 401K withdrawals

Post by radeon962 »

I have a 401k, 457, Roth and Cash.

$1.56M +/- total but am not retired yet as I am only 53.

401k - $1.1M

457 - $300,000

Roth - $105,000

Cash - $55,000
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dodecahedron
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Re: Taxes in Retirement - 401K withdrawals

Post by dodecahedron »

radeon962 wrote: Wed Sep 15, 2021 10:02 am I use Turbo Tax and the situation is theoretical at this point as I’m just trying to wrap my head around the basics as I get closer to retirement and trying to learn more about the tax end of things.
I think you have set up a useful baseline hypothetical that does a good job of conceptually capturing the fundamental underlying tax structure for a plain vanilla MFJ couple with no "bells and whistles" on their income taxes.

In actual practice, most retirees have at least one or more of a variety of bells and whistles on their taxes, e.g., they may have SS benefits (only partially taxable), they may itemize their deductions, they may have dependents, they may have Roth distributions, they may have capital gains and/or losses, they may have qualified dividends, they may have municipal bonds, they may be eligible for credits for electric cars or solar panels, they may have side hustle self-employment or part-time earnings (and eligibility to continue to contribute to retirement plans out of that income), they may be eligible for education credits and/or student loan interest deductions, they may be eligible for ACA premium tax credits, etc.

But I think the OP's hypothetical is a useful point of departure for understanding the basic underlying structure of our tax system.
KlangFool
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Re: Taxes in Retirement - 401K withdrawals

Post by KlangFool »

radeon962 wrote: Wed Sep 15, 2021 10:14 am I have a 401k, 457, Roth and Cash.

$1.56M +/- total but am not retired yet as I am only 53.

401k - $1.1M

457 - $300,000

Roth - $105,000

Cash - $55,000
The fundamental mistakes in your thought process are

A) Your annual expense = withdrawal need. That statement is FALSE.

B) You need to withdraw from your 401K/457. This is FALSE too. You can do Roth conversion.

The proper steps in your thinking should be

Separate your annual expense need from actual Roth conversion.

A) For your spending.

1) Spend from CASH -> Zero taxable income

2) Spend your Roth IRA contribution -> Zero taxable income

B) Decide how much taxes that you want to pay.

1) Roth convert your 401K to generate taxable income

2) Withdraw or Roth convert your 457 to generate taxable income.

(A) and (B) can be done separately.

KlangFool
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AnEngineer
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Re: Taxes in Retirement - 401K withdrawals

Post by AnEngineer »

OP, looks correct if you withdraw that much from 401k, but as others point out, that may not be the best option. I think you're looking at the worst-case scenario.
livesoft wrote: Wed Sep 15, 2021 9:54 am
If you do not use tax-prep software, then you will be handicapped in understanding all this.
I don't understand this. Tax software hides all the calculations from you. While tax software may be helpful to some people in knowing how much tax they'd pay in a particular scenario, in order to plan effectively you have to know the rules, which tax software doesn't teach you.
Topic Author
radeon962
Posts: 113
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Re: Taxes in Retirement - 401K withdrawals

Post by radeon962 »

KlangFool wrote: Wed Sep 15, 2021 10:27 am
radeon962 wrote: Wed Sep 15, 2021 10:14 am I have a 401k, 457, Roth and Cash.

$1.56M +/- total but am not retired yet as I am only 53.

401k - $1.1M

457 - $300,000

Roth - $105,000

Cash - $55,000
The fundamental mistakes in your thought process are

A) Your annual expense = withdrawal need. That statement is FALSE.

B) You need to withdraw from your 401K/457. This is FALSE too. You can do Roth conversion.

The proper steps in your thinking should be

Separate your annual expense need from actual Roth conversion.

A) For your spending.

1) Spend from CASH -> Zero taxable income

2) Spend your Roth IRA contribution -> Zero taxable income

B) Decide how much taxes that you want to pay.

1) Roth convert your 401K to generate taxable income

2) Withdraw or Roth convert your 457 to generate taxable income.

(A) and (B) can be done separately.

KlangFool
Thank you. Gives me some more to take a look at.
Topic Author
radeon962
Posts: 113
Joined: Wed Dec 30, 2009 8:20 pm

Re: Taxes in Retirement - 401K withdrawals

Post by radeon962 »

KlangFool wrote: Wed Sep 15, 2021 10:27 am
radeon962 wrote: Wed Sep 15, 2021 10:14 am I have a 401k, 457, Roth and Cash.

$1.56M +/- total but am not retired yet as I am only 53.

401k - $1.1M

457 - $300,000

Roth - $105,000

Cash - $55,000
The fundamental mistakes in your thought process are

A) Your annual expense = withdrawal need. That statement is FALSE.

B) You need to withdraw from your 401K/457. This is FALSE too. You can do Roth conversion.

The proper steps in your thinking should be

Separate your annual expense need from actual Roth conversion.

A) For your spending.

1) Spend from CASH -> Zero taxable income

2) Spend your Roth IRA contribution -> Zero taxable income

B) Decide how much taxes that you want to pay.

1) Roth convert your 401K to generate taxable income

2) Withdraw or Roth convert your 457 to generate taxable income.

(A) and (B) can be done separately.

KlangFool
Upon further review…

How does one replenish cash without withdrawing from 401k? Doesn’t seem to make sense to Roth convert at the same time that you need to have cash?

If I need $78,000/year but have only $55,000 in cash, I’m short $23,000 for the year.

The next year I’ll need another $78,000 in cash plus whatever for inflation.

What are the mechanics that Bogleheads are using?

Have a stockpile of cash for 2-3 years so that you can then Roth convert within the 10% & 12% tax bracket?

My mortgage will be paid off in 5 years or less (have $100,000 at 2.75% remaining) at which point my expenses go down by about $20,000 and will give me more flexibility.
delamer
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Re: Taxes in Retirement - 401K withdrawals

Post by delamer »

At a real basic level, remember under your scenario that you’ll also need to withdraw about $6,000 additional to cover federal taxes.

Or a total of $84,000.

Which will slightly increase your taxes due.
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KlangFool
Posts: 31530
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Re: Taxes in Retirement - 401K withdrawals

Post by KlangFool »

radeon962 wrote: Wed Sep 15, 2021 12:16 pm
KlangFool wrote: Wed Sep 15, 2021 10:27 am
radeon962 wrote: Wed Sep 15, 2021 10:14 am I have a 401k, 457, Roth and Cash.

$1.56M +/- total but am not retired yet as I am only 53.

401k - $1.1M

457 - $300,000

Roth - $105,000

Cash - $55,000
The fundamental mistakes in your thought process are

A) Your annual expense = withdrawal need. That statement is FALSE.

B) You need to withdraw from your 401K/457. This is FALSE too. You can do Roth conversion.

The proper steps in your thinking should be

Separate your annual expense need from actual Roth conversion.

A) For your spending.

1) Spend from CASH -> Zero taxable income

2) Spend your Roth IRA contribution -> Zero taxable income

B) Decide how much taxes that you want to pay.

1) Roth convert your 401K to generate taxable income

2) Withdraw or Roth convert your 457 to generate taxable income.

(A) and (B) can be done separately.

KlangFool
Upon further review…

How does one replenish cash without withdrawing from 401k? Doesn’t seem to make sense to Roth convert at the same time that you need to have cash?

If I need $78,000/year but have only $55,000 in cash, I’m short $23,000 for the year.

The next year I’ll need another $78,000 in cash plus whatever for inflation.

What are the mechanics that Bogleheads are using?

Have a stockpile of cash for 2-3 years so that you can then Roth convert within the 10% & 12% tax bracket?

My mortgage will be paid off in 5 years or less (have $100,000 at 2.75% remaining) at which point my expenses go down by about $20,000 and will give me more flexibility.
radeon962

<<How does one replenish cash without withdrawing from 401k?>>

You can spend down your Roth IRA contribution.

<<If I need $78,000/year but have only $55,000 in cash, I’m short $23,000 for the year. >>

And, you can spend 23K of your Roth IRA contribution.

As to how much you choose to Roth convert, it could be more or less than 23K for this year. It has NOTHING to do with your actual 23K need.

<<The next year I’ll need another $78,000 in cash plus whatever for inflation.>>

And, you could Roth convert this year for next year's need if it is advantageous to you.

<<Have a stockpile of cash for 2-3 years so that you can then Roth convert within the 10% & 12% tax bracket?>>

I have that too. And, it makes life a lot easier.

<<My mortgage will be paid off in 5 years or less (have $100,000 at 2.75% remaining) at which point my expenses go down by about $20,000 and will give me more flexibility.>>

Or, that could be a bad idea. Some folks took a HELOC in one year to address the short fall this year and Roth convert. Tax savings is a lot bigger than 2.75% interest.

LIQUIDITY/CASH gives you flexibility in tax management.

In summary, before you retire, you should start accumulating one to two years of expense in CASH.

KlangFool
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Topic Author
radeon962
Posts: 113
Joined: Wed Dec 30, 2009 8:20 pm

Re: Taxes in Retirement - 401K withdrawals

Post by radeon962 »

:dollar
KlangFool wrote: Wed Sep 15, 2021 12:26 pm
radeon962 wrote: Wed Sep 15, 2021 12:16 pm
KlangFool wrote: Wed Sep 15, 2021 10:27 am
radeon962 wrote: Wed Sep 15, 2021 10:14 am I have a 401k, 457, Roth and Cash.

$1.56M +/- total but am not retired yet as I am only 53.

401k - $1.1M

457 - $300,000

Roth - $105,000

Cash - $55,000
The fundamental mistakes in your thought process are

A) Your annual expense = withdrawal need. That statement is FALSE.

B) You need to withdraw from your 401K/457. This is FALSE too. You can do Roth conversion.

The proper steps in your thinking should be

Separate your annual expense need from actual Roth conversion.

A) For your spending.

1) Spend from CASH -> Zero taxable income

2) Spend your Roth IRA contribution -> Zero taxable income

B) Decide how much taxes that you want to pay.

1) Roth convert your 401K to generate taxable income

2) Withdraw or Roth convert your 457 to generate taxable income.

(A) and (B) can be done separately.

KlangFool
Upon further review…

How does one replenish cash without withdrawing from 401k? Doesn’t seem to make sense to Roth convert at the same time that you need to have cash?

If I need $78,000/year but have only $55,000 in cash, I’m short $23,000 for the year.

The next year I’ll need another $78,000 in cash plus whatever for inflation.

What are the mechanics that Bogleheads are using?

Have a stockpile of cash for 2-3 years so that you can then Roth convert within the 10% & 12% tax bracket?

My mortgage will be paid off in 5 years or less (have $100,000 at 2.75% remaining) at which point my expenses go down by about $20,000 and will give me more flexibility.
radeon962

<<How does one replenish cash without withdrawing from 401k?>>

You can spend down your Roth IRA contribution.

<<If I need $78,000/year but have only $55,000 in cash, I’m short $23,000 for the year. >>

And, you can spend 23K of your Roth IRA contribution.

As to how much you choose to Roth convert, it could be more or less than 23K for this year. It has NOTHING to do with your actual 23K need.

<<The next year I’ll need another $78,000 in cash plus whatever for inflation.>>

And, you could Roth convert this year for next year's need if it is advantageous to you.

<<Have a stockpile of cash for 2-3 years so that you can then Roth convert within the 10% & 12% tax bracket?>>

I have that too. And, it makes life a lot easier.

<<My mortgage will be paid off in 5 years or less (have $100,000 at 2.75% remaining) at which point my expenses go down by about $20,000 and will give me more flexibility.>>

Or, that could be a bad idea. Some folks took a HELOC in one year to address the short fall this year and Roth convert. Tax savings is a lot bigger than 2.75% interest.

LIQUIDITY/CASH gives you flexibility in tax management.

In summary, before you retire, you should start accumulating one to two years of expense in CASH.

KlangFool
I like targets or goals.

2 years cash is attainable and I can see where it gives flexibility.
livesoft
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Re: Taxes in Retirement - 401K withdrawals

Post by livesoft »

wrongfunds wrote: Wed Sep 15, 2021 10:10 am OP is asking completely theoretical question. ....
I guess I read what the OP wrote literally. The OP did not ask if their calculation was correct or not.
Am I missing something?
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HomerJ
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Re: Taxes in Retirement - 401K withdrawals

Post by HomerJ »

radeon962 wrote: Wed Sep 15, 2021 9:37 am Just trying to get this straight in my head as far as what my tax would be in retirement.

2021 Tax Brackets (MFJ)

10% - Up to $19,900

12% - $19,901 to $81,050

22% - $81,051 to $172,750

Assume that I need $78,000 for the year and am married filing jointly.

Will withdraw $6,500/month or $78,000 from a 401k over the course of the year

No other income and will claim the standard deduction of $25,100 for 2021.

Taxable income is $78,000 - $25,100 = $52,900

The first $19,900 is taxed at 10% or $1,990

The next $33,000 is taxed at 12% or $3,960

For a total 2021 tax of $5,950.

Am I missing something?

Thanks, Bill
You have it correct. If you pull 100% from the 401k, you will pay $5950 taxes on your $78,000 withdrawals for a effective tax rate of 7.6%

One can lower their taxes by mixing and matching cash withdrawals and ROTH withdrawals with 401k withdrawals.

But if you stay under 81,050 (at 12% marginal tax rate), I don't think it matters too much. You could save a little by pulling $10,000 a year each year from your ROTH.

Then you would be pulling $68,000 from 401k plus $10,000 from ROTH, but only paying taxes on the $68,000. So you could still be pulling $78,000 total but paying even less in taxes.

Where is becomes important, in my mind, is when you jump to the 22% bracket.

If you were pulling $115,100 a year from your savings (after standard deduction, $90,000), I'd definitely want to only pull $81,050 from the 401k, and make up the rest using the ROTH and cash for as many years as you could, to avoid paying 22% on that last $8,950.

Edit: Ugh, I completely misstated everything here. I mean to say:

Say you spend $115,100 a year. You would pull 106,150 from your 401k. That would be your "income" for the year. After standard deduction of $25,100, you would pay taxes on $81,050 (top marginal rate of 12%)

The last $8,950, I would pull from the bank and pay zero taxes on it instead of $1,969...


This is how you'd avoid paying anything in the 22% bracket

I wouldn't work as hard to avoid paying in the 12% bracket... but 12 --> 22% is a pretty big jump, so it might be worth playing the above game if you are straddling that cutoff.
Last edited by HomerJ on Wed Sep 15, 2021 2:57 pm, edited 3 times in total.
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WhiteMaxima
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Re: Taxes in Retirement - 401K withdrawals

Post by WhiteMaxima »

I will target 12% tax bracket. So I will have $81000+$24000 (standard decuction)=$105000.
MathWizard
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Re: Taxes in Retirement - 401K withdrawals

Post by MathWizard »

radeon962 wrote: Wed Sep 15, 2021 9:37 am Just trying to get this straight in my head as far as what my tax would be in retirement.

2021 Tax Brackets (MFJ)

10% - Up to $19,900

12% - $19,901 to $81,050

22% - $81,051 to $172,750

Assume that I need $78,000 for the year and am married filing jointly.

Will withdraw $6,500/month or $78,000 from a 401k over the course of the year

No other income and will claim the standard deduction of $25,100 for 2021.

Taxable income is $78,000 - $25,100 = $52,900

The first $19,900 is taxed at 10% or $1,990

The next $33,000 is taxed at 12% or $3,960

For a total 2021 tax of $5,950.

Am I missing something?

Thanks, Bill
This is only federal.

You may have state income taxes as well

You are also missing that the taxes brackets and rates may not be the same in retirement.

Under current law, brackets and rates will revert back to 2017 levels and the 12% bracket will be 15% and with a different maximum.

I am estimating use 15% not 12% after 2025.

Also, the standard deduction is currently $1300 higher per person after age 65. Not sure if that changes after 2025.

Under the assumption with the brackets/rates as you have them, I would do Roth conversions up to the top of the 12% bracket, at least for some of the 401k money, and draw from Roth later. 12% is a pretty low tax rate.
wrongfunds
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Re: Taxes in Retirement - 401K withdrawals

Post by wrongfunds »

If you were pulling $115,100 a year from your savings (after standard deduction, $90,000), I'd definitely want to only pull $81,050 from the 401k, and make up the rest using the ROTH and cash for as many years as you could, to avoid paying 22% on that last $8,950.
That will cost you extra $895 in taxes that year. That is less than 1% of your total spending. Would that be hardship?
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HomerJ
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Re: Taxes in Retirement - 401K withdrawals

Post by HomerJ »

wrongfunds wrote: Wed Sep 15, 2021 2:03 pm
If you were pulling $115,100 a year from your savings (after standard deduction, $90,000), I'd definitely want to only pull $81,050 from the 401k, and make up the rest using the ROTH and cash for as many years as you could, to avoid paying 22% on that last $8,950.
That will cost you extra $895 in taxes that year. That is less than 1% of your total spending. Would that be hardship?
$1,969 (22% of 8,950)

You pull the last $8,950 out of the checking account, it doesn't count as income and doesn't get taxed at all.

2000 bucks is 2000 bucks. There's a lot of fun I could have with that.

Under the current tax code, in retirement, I will work it right up to the top of the 12% bracket, and try not to make that big jump into the 22% bracket. I have plenty in taxable that I can use.

(I'll actually be keeping my "income" even lower than that for ACA subsidies)

Edit: Ugh, I completely misstated everything in the original post, which is probably why you were confused. My fault.

If you were pulling $115,100 a year from your savings (after standard deduction, $90,000), I'd definitely want to only pull $81,050 from the 401k, and make up the rest using the ROTH and cash for as many years as you could, to avoid paying 22% on that last $8,950.

Say you spend $115,100 a year. You would pull 106,150 from your 401k. That would be your "income" for the year. After standard deduction of $25,100, you would pay taxes on $81,050 (top marginal rate of 12%)

The last $8,950, I would pull from the bank and pay zero taxes on it instead of $1,969...


The point is to avoid that big jump from 12% to 22%. If you are right on the edge, it's probably worth playing the game a bit with taxable.

Others point out if you are below $115,100 spending, you could pull MORE than you need from the 401k and do ROTH conversions at the 12% rate.

Say you only need $80,000 a year in retirement... Pull out $115,100 from 401k, pay taxes on $81,050 (after standard deduction). Spend $80,000 of the $115,100, and convert $35,100 to ROTH at the 12% tax rate.
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wrongfunds
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Re: Taxes in Retirement - 401K withdrawals

Post by wrongfunds »

HomerJ wrote: Wed Sep 15, 2021 2:48 pm
wrongfunds wrote: Wed Sep 15, 2021 2:03 pm
If you were pulling $115,100 a year from your savings (after standard deduction, $90,000), I'd definitely want to only pull $81,050 from the 401k, and make up the rest using the ROTH and cash for as many years as you could, to avoid paying 22% on that last $8,950.
That will cost you extra $895 in taxes that year. That is less than 1% of your total spending. Would that be hardship?
$1,969 (22% of 8,950)

You pull the last $8,950 out of the checking account, it doesn't count as income and doesn't get taxed at all.

2000 bucks is 2000 bucks. There's a lot of fun I could have with that.

Under the current tax code, in retirement, I will work it right up to the top of the 12% bracket, and try not to make that big jump into the 22% bracket. I have plenty in taxable that I can use.

(I'll actually be keeping my "income" even lower than that for ACA subsidies)

Edit: Ugh, I completely misstated everything in the original post, which is probably why you were confused. My fault.

If you were pulling $115,100 a year from your savings (after standard deduction, $90,000), I'd definitely want to only pull $81,050 from the 401k, and make up the rest using the ROTH and cash for as many years as you could, to avoid paying 22% on that last $8,950.

Say you spend $115,100 a year. You would pull 106,150 from your 401k. That would be your "income" for the year. After standard deduction of $25,100, you would pay taxes on $81,050 (top marginal rate of 12%)

The last $8,950, I would pull from the bank and pay zero taxes on it instead of $1,969...


The point is to avoid that big jump from 12% to 22%. If you are right on the edge, it's probably worth playing the game a bit with taxable.

Others point out if you are below $115,100 spending, you could pull MORE than you need from the 401k and do ROTH conversions at the 12% rate.

Say you only need $80,000 a year in retirement... Pull out $115,100 from 401k, pay taxes on $81,050 (after standard deduction). Spend $80,000 of the $115,100, and convert $35,100 to ROTH at the 12% tax rate.
I thought we were comparing 12% vs 22% which means 10% extra? Or did it jump from 0% to 22%?

Just to play your game, let us assume that one has 4 back accounts each with $250K :-)

The point being assuming "unaccounted for" cash is not a fair way to compare the numbers.
Last edited by wrongfunds on Wed Sep 15, 2021 4:43 pm, edited 1 time in total.
smitcat
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Re: Taxes in Retirement - 401K withdrawals

Post by smitcat »

radeon962 wrote: Wed Sep 15, 2021 10:14 am I have a 401k, 457, Roth and Cash.

$1.56M +/- total but am not retired yet as I am only 53.

401k - $1.1M

457 - $300,000

Roth - $105,000

Cash - $55,000
Figuring taxes out for one year does not typically make a great plan.
When do you intend to retire?
What will your accounts estimated totals be at that time?
What age(s) do you intend to elect SS? What will you and your spouses SS benifits be at those age(s)?
Will you have any pensions, inherited accounts, or other assetts?
wrongfunds
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Re: Taxes in Retirement - 401K withdrawals

Post by wrongfunds »

Planning for inherited accounts in in bad taste. Rest of the stuff I completely agree with you.
smitcat
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Re: Taxes in Retirement - 401K withdrawals

Post by smitcat »

wrongfunds wrote: Wed Sep 15, 2021 4:44 pm Planning for inherited accounts in in bad taste. Rest of the stuff I completely agree with you.
Good practice is never bad taste. He/she may already have an inherited IRA or another account and/or know of one which is likely to occurr.
Or maybe not.
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HomerJ
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Re: Taxes in Retirement - 401K withdrawals

Post by HomerJ »

wrongfunds wrote: Wed Sep 15, 2021 4:31 pm I thought we were comparing 12% vs 22% which means 10% extra? Or did it jump from 0% to 22%?

Just to play your game, let us assume that one has 4 back accounts each with $250K :-)

The point being assuming "unaccounted for" cash is not a fair way to compare the numbers.
Money in the bank and taxable accounts absolutely does change the calculations.

There are all kinds of way to game what your "income" is.

If you want to spend $90,000 a year, but only want to be taxed for $80,000, you can pull $80,000 from your 401k, and spend $10,000 from your bank account.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
LittleMaggieMae
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Re: Taxes in Retirement - 401K withdrawals

Post by LittleMaggieMae »

This thread has been very helpful - as a single person about to FIre. My standard deduction is lower as are the tax brackets - but my alas some of my expenses (housing) are just as much as "Married Filing Joint". Which means I may have almost as much in expenses as a married retired couple but without all the tax benefits. Which means it's gonna be a little tougher to stay in the 12% bracket of income for me. I will need a slightly different strategy than my fellow marrieds.

This thread (and the exercise of doing a "basic tax" calculation) makes it very obvious that Roth and/or cash accounts can be very helpful.

I'm also feeling less bad about "all that money" I have sitting in low interest accounts in preparation for FIre - it looks and feels like it might be saving me from having to pay 22% "income" tax on it - IF I had to pull that money from my 401K/IRA in the near-ish future.
Last edited by LittleMaggieMae on Wed Sep 15, 2021 5:03 pm, edited 1 time in total.
Topic Author
radeon962
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Re: Taxes in Retirement - 401K withdrawals

Post by radeon962 »

smitcat wrote: Wed Sep 15, 2021 4:36 pm
radeon962 wrote: Wed Sep 15, 2021 10:14 am I have a 401k, 457, Roth and Cash.

$1.56M +/- total but am not retired yet as I am only 53.

401k - $1.1M

457 - $300,000

Roth - $105,000

Cash - $55,000
Figuring taxes out for one year does not typically make a great plan.
When do you intend to retire?
What will your accounts estimated totals be at that time?
What age(s) do you intend to elect SS? What will you and your spouses SS benifits be at those age(s)?
Will you have any pensions, inherited accounts, or other assetts?
I plan to “retire” from my current position January of 2023 (year in which I turn 55 so I can withdraw funds if necessary) but don’t plan on it currently as I plan on continuing working until I am 60 at another position.

Just holding on for another year as them I qualify for full retiree medical. No pension as we switched to 401k back in 1997.

$1.8M or so in January 2023 as I contribute about $50k per year between a 401, 457 and Roth and using 10% between now and then.

$2.4M in 2028 (6%/year with no additional contributions )

PIA - $3,291 -> @ 70 - $4,091

PIA - $982 -> @ 62 - $657

Based on Open Social Security - 70 for me and wife at 62 & 1 month and then she can file spousal benefits at 66 & 9 months. +/- $8k for 2033-2037 and then $60k in 2038 and $65k 2042 & beyond (assuming it is not cut) but ran the 25% reduction scenario and it cuts it back to around $48k.

I don’t include any inheritance in my calculations as if they come they come but if not then I would have rather not included them.

House will be paid off in less than 5 years and recent comp’s in our sub have sold in a few days for over $400k

Mortgage payoff reduces expenses $1,600/mo or just under $20k/year so overall expenses drop from $78k to $58k.

If SS is there in 15 years I have more than enough and my kids will have what’s left.

If no SS then most all of the scenarios I have run, we still have enough.
Last edited by radeon962 on Wed Sep 15, 2021 5:06 pm, edited 1 time in total.
wrongfunds
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Re: Taxes in Retirement - 401K withdrawals

Post by wrongfunds »

HomerJ wrote: Wed Sep 15, 2021 4:57 pm
wrongfunds wrote: Wed Sep 15, 2021 4:31 pm I thought we were comparing 12% vs 22% which means 10% extra? Or did it jump from 0% to 22%?

Just to play your game, let us assume that one has 4 back accounts each with $250K :-)

The point being assuming "unaccounted for" cash is not a fair way to compare the numbers.
Money in the bank and taxable accounts absolutely does change the calculations.

There are all kinds of way to game what your "income" is.

If you want to spend $90,000 a year, but only want to be taxed for $80,000, you can pull $80,000 from your 401k, and spend $10,000 from your bank account.
You did not answer the 12% to 22% jump? Was I right??

On your second point, why stop at $80K or 12%? We can do LiveSoft method and pay zero taxes by taking more money out from the bank account but keeping the spend number same.

We can also assume that we have taxable account of $1M with the cost basis of $1M or some combination thereof. Come to think of it, one does not really NEED that assumption if you can selectively sell the assets which have very high cost basis. Heck, you could even have saved capital losses over the years to make use of!

I have already lost what we are arguing here :-)
KlangFool
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Re: Taxes in Retirement - 401K withdrawals

Post by KlangFool »

radeon962 wrote: Wed Sep 15, 2021 5:03 pm
smitcat wrote: Wed Sep 15, 2021 4:36 pm
radeon962 wrote: Wed Sep 15, 2021 10:14 am I have a 401k, 457, Roth and Cash.

$1.56M +/- total but am not retired yet as I am only 53.

401k - $1.1M

457 - $300,000

Roth - $105,000

Cash - $55,000
Figuring taxes out for one year does not typically make a great plan.
When do you intend to retire?
What will your accounts estimated totals be at that time?
What age(s) do you intend to elect SS? What will you and your spouses SS benifits be at those age(s)?
Will you have any pensions, inherited accounts, or other assetts?
I plan to “retire” from my current position January of 2023 (year in which I turn 55 so I can withdraw funds if necessary) but don’t plan on it currently as I plan on continuing working until I am 60 at another position.

Just holding on for another year as them I qualify for full retiree medical. No pension as we switched to 401k back in 1997.

$1.8M or so in January 2023 as I contribute about $50k per year between a 401, 457 and Roth and using 10% between now and then.

$2.4M in 2028 (6%/year with no additional contributions )

PIA - $3,291 -> @ 70 - $4,091

PIA - $982 -> @ 62 - $657

Based on Open Social Security - 70 for me and wife at 62 & 1 month and then she can file spousal benefits at 66 & 9 months. +/- $8k for 2033-2037 and then $60k in 2038 and $65k 2042 & beyond (assuming it is not cut) but ran the 25% reduction scenario and it cuts it back to around $48k.

I don’t include any inheritance in my calculations as if they come they come but if not then I would have rather not included them.

House will be paid off in less than 5 years and recent comp’s in our sub have sold in a few days for over $400k

Mortgage payoff reduces expenses $1,600/mo or just under $20k/year so overall expenses drop from $78k to $58k.

If SS is there in 15 years I have more than enough and my kids will have what’s left.

If no SS then most all of the scenarios I have run, we still have enough.
radeon962,

FYI, there is no early withdrawal penalty for 457.

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HomerJ
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Re: Taxes in Retirement - 401K withdrawals

Post by HomerJ »

wrongfunds wrote: Wed Sep 15, 2021 5:04 pm
HomerJ wrote: Wed Sep 15, 2021 4:57 pm
wrongfunds wrote: Wed Sep 15, 2021 4:31 pm I thought we were comparing 12% vs 22% which means 10% extra? Or did it jump from 0% to 22%?

Just to play your game, let us assume that one has 4 back accounts each with $250K :-)

The point being assuming "unaccounted for" cash is not a fair way to compare the numbers.
Money in the bank and taxable accounts absolutely does change the calculations.

There are all kinds of way to game what your "income" is.

If you want to spend $90,000 a year, but only want to be taxed for $80,000, you can pull $80,000 from your 401k, and spend $10,000 from your bank account.
You did not answer the 12% to 22% jump? Was I right??

On your second point, why stop at $80K or 12%? We can do LiveSoft method and pay zero taxes by taking more money out from the bank account but keeping the spend number same.

We can also assume that we have taxable account of $1M with the cost basis of $1M or some combination thereof. Come to think of it, one does not really NEED that assumption if you can selectively sell the assets which have very high cost basis. Heck, you could even have saved capital losses over the years to make use of!

I have already lost what we are arguing here :-)
My idea was to just pay the 12% tax up to 81,050 income. Which, with the $25,100 deduction, is actually equal to pulling $106,150 from your 401k.

But if you want to spend more than $106,150 a year, I suggest spending it from a checking or taxable stock account.

Pulling it from checking is 0% tax. Saves you the full 22%.

Pulling it from a taxable account, you'll pay capital gain taxes, but only at 15% and only on the part of the money that is capital gains (you don't pay tax again on the original money you invested into the taxable account, only on the gains).

Yes, it's complicated.

But if you have a good chunk of money in money-market taxable accounts and/or bank accounts, you can easily use that money to game your "income" and save on taxes or qualify for ACA subsidies.

Spending from your savings account is NOT considered income.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
wrongfunds
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Re: Taxes in Retirement - 401K withdrawals

Post by wrongfunds »

I understand all that but as another poster astutely pointed out the cash did NOT fall from the sky! If somebody has been holding the cash, they probably had a specific reason for that. Let us face it, having few million dollars in cash/fixed income (TomatoTomato) would make gaming the income pretty interesting but few of us are able to do that. Besides, what taxes were paid on that million dollars before it was put there in the first place? Saying use the money from the bank is little bit disingenuous.

To be completely fair, I do behave similarly e.g. for the kid's wedding, I am spending the cash and emotionally it does not bother me. On the contrary, I just tell myself, it is "free money". If I had to liquidate funds or assets, I would most likely feel differently.
smitcat
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Re: Taxes in Retirement - 401K withdrawals

Post by smitcat »

radeon962 wrote: Wed Sep 15, 2021 5:03 pm
smitcat wrote: Wed Sep 15, 2021 4:36 pm
radeon962 wrote: Wed Sep 15, 2021 10:14 am I have a 401k, 457, Roth and Cash.

$1.56M +/- total but am not retired yet as I am only 53.

401k - $1.1M

457 - $300,000

Roth - $105,000

Cash - $55,000
Figuring taxes out for one year does not typically make a great plan.
When do you intend to retire?
What will your accounts estimated totals be at that time?
What age(s) do you intend to elect SS? What will you and your spouses SS benifits be at those age(s)?
Will you have any pensions, inherited accounts, or other assetts?
I plan to “retire” from my current position January of 2023 (year in which I turn 55 so I can withdraw funds if necessary) but don’t plan on it currently as I plan on continuing working until I am 60 at another position.

Just holding on for another year as them I qualify for full retiree medical. No pension as we switched to 401k back in 1997.

$1.8M or so in January 2023 as I contribute about $50k per year between a 401, 457 and Roth and using 10% between now and then.

$2.4M in 2028 (6%/year with no additional contributions )

PIA - $3,291 -> @ 70 - $4,091

PIA - $982 -> @ 62 - $657

Based on Open Social Security - 70 for me and wife at 62 & 1 month and then she can file spousal benefits at 66 & 9 months. +/- $8k for 2033-2037 and then $60k in 2038 and $65k 2042 & beyond (assuming it is not cut) but ran the 25% reduction scenario and it cuts it back to around $48k.

I don’t include any inheritance in my calculations as if they come they come but if not then I would have rather not included them.

House will be paid off in less than 5 years and recent comp’s in our sub have sold in a few days for over $400k

Mortgage payoff reduces expenses $1,600/mo or just under $20k/year so overall expenses drop from $78k to $58k.

If SS is there in 15 years I have more than enough and my kids will have what’s left.

If no SS then most all of the scenarios I have run, we still have enough.
Sounds like you will have a much higher income and tax situation when you claim full SS in 2038 based on your plan. I would try to balance the large pretax drawdown starting in 2023 to ensure that taxes are not unusually higher at any point in the future. Otherwise said - I would not strive for the lowest possible taxes within the next few years at the expense of moving to higher tax brackets with the future income sources.
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HomerJ
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Re: Taxes in Retirement - 401K withdrawals

Post by HomerJ »

wrongfunds wrote: Wed Sep 15, 2021 6:25 pm I understand all that but as another poster astutely pointed out the cash did NOT fall from the sky! If somebody has been holding the cash, they probably had a specific reason for that. Let us face it, having few million dollars in cash/fixed income (TomatoTomato) would make gaming the income pretty interesting but few of us are able to do that. Besides, what taxes were paid on that million dollars before it was put there in the first place? Saying use the money from the bank is little bit disingenuous.

To be completely fair, I do behave similarly e.g. for the kid's wedding, I am spending the cash and emotionally it does not bother me. On the contrary, I just tell myself, it is "free money". If I had to liquidate funds or assets, I would most likely feel differently.
Well, what about taxable accounts?

I have quite a bit of money in Total Stock Market in a taxable account. If I was approaching the 22% cutoff for money being pulled from the 401k, wouldn't it make sense to to sell some of the Total Stock Market account and pay long-term capital gains instead? I think it's 0% if your income (married) is under $80,000 a year.

Even if 15%, it's still cheaper than pulling more money from 401k at 22%

There are things you can do if you have money in the bank and/or taxable accounts.

I hope to keep my "income" at a low point where I can get 0% capital gains, and ACA subsidies.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
KlangFool
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Re: Taxes in Retirement - 401K withdrawals

Post by KlangFool »

wrongfunds wrote: Wed Sep 15, 2021 6:25 pm
I understand all that but as another poster astutely pointed out the cash did NOT fall from the sky!
wrongfunds,

OP had answered that. He can accumulate more CASH before retirement.

<<2 years cash is attainable and I can see where it gives flexibility.>>

CASH do not fall from the sky but if someone understand the utility of the CASH, he/she can accumulate more CASH before retirement.

KlangFool
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gobel
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Re: Taxes in Retirement - 401K withdrawals

Post by gobel »

radeon962 wrote: Wed Sep 15, 2021 9:37 am Assume that I need $78,000 for the year and am married filing jointly.
Most of this thread seems to be a distraction. The OP cannot do the "Livesoft method" since that method relies on having unlimited carryover losses and child/education tax credits to get to "ZERO" (and apparently a completely separate college fund that he doesn't count to pay for the expenses that generate the credit).

Anyway, almost all of OP's retirement funds are in tax-deferred accounts. Only a very little is available in Roth + taxable, so I think your analysis is correct. The good news is you will stay in the 12% bracket which is what everyone around here is shooting for anyway. One "what am I missing" thing is whether you will rely on obamacare. For that you will want to keep under the cliff (when it comes back) which is right around 70k for 2 people I think. To have more flexibility around AGI, you could beef up the Roth for the next couple of years.

Also, you are close to a 5% withdrawal rate. That is too high to retire today. Sounds like a few more years of saving would be safer, but see how SS might factor into this.
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Re: Taxes in Retirement - 401K withdrawals

Post by KlangFool »

gobel wrote: Thu Sep 16, 2021 12:49 pm
radeon962 wrote: Wed Sep 15, 2021 9:37 am Assume that I need $78,000 for the year and am married filing jointly.
Most of this thread seems to be a distraction.
gobel,

I disagreed.

After the discussion on the thread, OP planned to accumulate 2 years of expense in CASH. Spending CASH generates ZERO taxable income. From that, everything is possible.

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wrongfunds
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Re: Taxes in Retirement - 401K withdrawals

Post by wrongfunds »

Correct but not realizing that the cash already went through the wringer of his current/previous marginal tax rate which we are conveniently ignoring it. It is like unlimited supply of Roth money, aka already taxed (except it does NOT grow :-) Just like Roth money, cash has *more* value because the tax has been already paid on it aka those dollars have a cost. Where is that cost taken in to consideration when retirement taxes are calculated?
KlangFool
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Re: Taxes in Retirement - 401K withdrawals

Post by KlangFool »

wrongfunds wrote: Thu Sep 16, 2021 12:55 pm Correct but not realizing that the cash already went through the wringer of his current/previous marginal tax rate which we are conveniently ignoring it. It is like unlimited supply of Roth money, aka already taxed (except it does NOT grow :-) Just like Roth money, cash has *more* value because the tax has been already paid on it aka those dollars have a cost. Where is that cost taken in to consideration when retirement taxes are calculated?
wrongfunds,

But, in some cases, it is unavoidable cost. For example, dividend/distribution from the taxable account. Taxes would have to be paid whether I choose to reinvest or keep it in CASH.

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wrongfunds
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Re: Taxes in Retirement - 401K withdrawals

Post by wrongfunds »

KlangFool wrote: Thu Sep 16, 2021 12:58 pm
wrongfunds wrote: Thu Sep 16, 2021 12:55 pm Correct but not realizing that the cash already went through the wringer of his current/previous marginal tax rate which we are conveniently ignoring it. It is like unlimited supply of Roth money, aka already taxed (except it does NOT grow :-) Just like Roth money, cash has *more* value because the tax has been already paid on it aka those dollars have a cost. Where is that cost taken in to consideration when retirement taxes are calculated?
wrongfunds,

But, in some cases, it is unavoidable cost. For example, dividend/distribution from the taxable account. Taxes would have to be paid whether I choose to reinvest or keep it in CASH.

KlangFool
Let me take this one step further. Suppose I managed to live in such a way that I tax defer every available vehicle (for couple) I don't have the exact number but it would be over $150K for the couple, including MBR etc. And then push the rest in to taxable. Aka I keep zero cash in my bank. You will say that is "NOT reasonable". I will always have cash for emergency etc.

So, is this an emergency? If not, then you are not doing the valid accounting by ignoring the cost of the cash.
Topic Author
radeon962
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Re: Taxes in Retirement - 401K withdrawals

Post by radeon962 »

This thread has gone sufficiently sideways.

Mods you can lock it up as my original questions was answered.

Thanks KlangFool.

Bill
Escapevelocity
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Re: Taxes in Retirement - 401K withdrawals

Post by Escapevelocity »

LittleMaggieMae wrote: Wed Sep 15, 2021 5:03 pm This thread has been very helpful - as a single person about to FIre. My standard deduction is lower as are the tax brackets - but my alas some of my expenses (housing) are just as much as "Married Filing Joint". Which means I may have almost as much in expenses as a married retired couple but without all the tax benefits. Which means it's gonna be a little tougher to stay in the 12% bracket of income for me. I will need a slightly different strategy than my fellow marrieds.

This thread (and the exercise of doing a "basic tax" calculation) makes it very obvious that Roth and/or cash accounts can be very helpful.

I'm also feeling less bad about "all that money" I have sitting in low interest accounts in preparation for FIre - it looks and feels like it might be saving me from having to pay 22% "income" tax on it - IF I had to pull that money from my 401K/IRA in the near-ish future.
Well said. This doesn't get written about as much as it should be IMO. Also, you might want to consider getting married lol.
wrongfunds
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Re: Taxes in Retirement - 401K withdrawals

Post by wrongfunds »

Escapevelocity wrote: Thu Sep 16, 2021 1:14 pm
LittleMaggieMae wrote: Wed Sep 15, 2021 5:03 pm This thread has been very helpful - as a single person about to FIre. My standard deduction is lower as are the tax brackets - but my alas some of my expenses (housing) are just as much as "Married Filing Joint". Which means I may have almost as much in expenses as a married retired couple but without all the tax benefits. Which means it's gonna be a little tougher to stay in the 12% bracket of income for me. I will need a slightly different strategy than my fellow marrieds.

This thread (and the exercise of doing a "basic tax" calculation) makes it very obvious that Roth and/or cash accounts can be very helpful.

I'm also feeling less bad about "all that money" I have sitting in low interest accounts in preparation for FIre - it looks and feels like it might be saving me from having to pay 22% "income" tax on it - IF I had to pull that money from my 401K/IRA in the near-ish future.
Well said. This doesn't get written about as much as it should be IMO. Also, you might want to consider getting married lol.
Best tax savings tip, huh?
Count of Notre Dame
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Re: Taxes in Retirement - 401K withdrawals

Post by Count of Notre Dame »

I wonder sometimes why 401k plans don't track basis. All of your original contributions are fully taxed at ordinary income rates, unlike a taxable brokerage account. For a buy and hold investor in a taxable brokerage account, you can tap margin for spending and let your investments ride (not selling any shares) and when you die your account will pass to your heirs tax-free (if under the estate tax limits). Other than some dividends to pay tax on this almost seems more tax efficient than a 401k plan.

401k plans don't seem as tax efficient as one would think?
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skipper
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Re: Taxes in Retirement - 401K withdrawals

Post by skipper »

Count of Notre Dame wrote: Sat Dec 30, 2023 6:11 pm I wonder sometimes why 401k plans don't track basis. All of your original contributions are fully taxed at ordinary income rates, unlike a taxable brokerage account. For a buy and hold investor in a taxable brokerage account, you can tap margin for spending and let your investments ride (not selling any shares) and when you die your account will pass to your heirs tax-free (if under the estate tax limits). Other than some dividends to pay tax on this almost seems more tax efficient than a 401k plan.

401k plans don't seem as tax efficient as one would think?
But contributions are pre-tax so it reduces your MAGI in the accumulation stage when your tax bracket might be higher, growth is not taxed at all, and only withdraws are taxed at the prevailing rate later when tax bracket might be lower. I don't know if those benes make it more tax efficient or not; maybe it's a matter of timing - when a plan is tax efficient.
by Hyperchicken » Tue Feb 13, 2024 2:28 pm | | ... Dang. That rat and pellet thing is pretty depressing. | Guess I better get back to work.
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Re: Taxes in Retirement - 401K withdrawals

Post by placeholder »

L84SUPR wrote: Wed Sep 15, 2021 10:09 am My plan is to fill up the 12 percent tax bracket with Roth conversions. Based on the table federal taxes will be $9235.
People in this situation need to be careful if they have substantial taxable holdings with qualified dividends that are taxed at 0% because adding to ordinary income might bump some qdivs out into the 15% bracket for a net 27% tax.
erishera
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Re: Taxes in Retirement - 401K withdrawals

Post by erishera »

AnEngineer wrote: Wed Sep 15, 2021 10:53 am OP, looks correct if you withdraw that much from 401k, but as others point out, that may not be the best option. I think you're looking at the worst-case scenario.
livesoft wrote: Wed Sep 15, 2021 9:54 am
If you do not use tax-prep software, then you will be handicapped in understanding all this.
I don't understand this. Tax software hides all the calculations from you. While tax software may be helpful to some people in knowing how much tax they'd pay in a particular scenario, in order to plan effectively you have to know the rules, which tax software doesn't teach you.
I find this tool excellent if you want to understand all the what ifs and whys: https://docs.google.com/spreadsheets/d/ ... sp=sharing it is under bogleheads personal finance tool box. TFB has excellent posts on how to navigate it if you don’t want to read all the instructions.
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