Can you give examples where tax bracket will be higher in retirement then in 40's age?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Topic Author
andysnp
Posts: 87
Joined: Mon Aug 20, 2018 5:53 pm

Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by andysnp »

Roth 401k/IRA vs Traditional 401K/IRA

The rule of thumb is you want to invest in traditional 401K/IRA if you expect your tax bracket to be lower when you are retired.

Can you give some examples where the tax bracket will be higher at age 72 than in 40's? Let's assume you stop working at 72 but are working in 40's age.

Thanks!
User avatar
TomatoTomahto
Posts: 17158
Joined: Mon Apr 11, 2011 1:48 pm

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by TomatoTomahto »

Some factors:
Deferred compensation
Pension
RMDs
Inheritance
Divorce/death of spouse change tax filing status
Changes in tax code
I get the FI part but not the RE part of FIRE.
brew
Posts: 146
Joined: Mon Feb 06, 2017 7:36 pm

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by brew »

Government pension, plus Social Security (particularly delayed 'til age 70), plus tIRA RMDs, plus becoming a widower/divorcee... could very well eclipse the tax bracket of a married single-income mid-career government employee/servicemember.
N.Y.Cab
Posts: 412
Joined: Wed Feb 07, 2018 7:46 pm

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by N.Y.Cab »

Tax brackets are likely to increase with the expiration of Tax Cuts and Jobs Act (TCJA) at the end of 2025. I didn't have much taxable money back in my 40's but sure will in my 70's by downsizing home, taking social security benefit, Roth conversion and RMD.
Last edited by N.Y.Cab on Sun Jun 04, 2023 4:12 pm, edited 1 time in total.
Blue456
Posts: 2152
Joined: Tue Jun 04, 2019 5:46 am

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by Blue456 »

Become a cop then work for the federal government. You will essentially have two pensions and there is good chance you will be in higher tax bracket then when you were working.
User avatar
retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by retiredjg »

andysnp wrote: Sun Jun 04, 2023 1:49 pm Roth 401k/IRA vs Traditional 401K/IRA

The rule of thumb is you want to invest in traditional 401K/IRA if you expect your tax bracket to be lower when you are retired.

Can you give some examples where the tax bracket will be higher at age 72 than in 40's? Let's assume you stop working at 72 but are working in 40's age.

Thanks!
Here's kind of a surefire example which I've seen several times here.

Couple of academics in a university system, each with a pension. Live below their means. Save in several tax-deferred accounts (457 and 403b both) year after year to get their income lower while working. Love their jobs and work until 72 instead of retiring earlier.

The two pensions, maybe SS, and RMDs on the large tax-deferred accounts are very likely to push them into tax brackets they never saw while working.

Then one dies and the survivor moves up yet one more bracket.


It is not one thing that causes There are a number of things combined that put one into a scenario like this.

Things you might have control over:

-start saving early
-super savers
-save more than 1 tax-deferred account per person
-pension(s)
-working till near RMD age
-don't spend a lot in retirement

Things you may not have any control over:

-changes in tax law
-1 person in a couple dies
User avatar
Artsdoctor
Posts: 6063
Joined: Thu Jun 28, 2012 3:09 pm
Location: Los Angeles, CA

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by Artsdoctor »

andysnp wrote: Sun Jun 04, 2023 1:49 pm Roth 401k/IRA vs Traditional 401K/IRA

The rule of thumb is you want to invest in traditional 401K/IRA if you expect your tax bracket to be lower when you are retired.

Can you give some examples where the tax bracket will be higher at age 72 than in 40's? Let's assume you stop working at 72 but are working in 40's age.

Thanks!
A lot can happen with marginal tax rates between 40s and 70s. There are sunset provisions and others have pointed to pensions, social security, and RMDs. Probably the biggest jolt would be following the death of a spouse when you go from Married Filing Jointly to Individual.
User avatar
quantAndHold
Posts: 10141
Joined: Thu Sep 17, 2015 10:39 pm
Location: West Coast

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by quantAndHold »

Having a sizeable pension or two is the most common case. The other one is where one spouse dies and the other one is filing single in retirement.

One thing to remember is that you’re contributing to your 401k at your marginal tax rate, but withdrawing at your effective tax rate (unless you have the large pension).

Honestly, being in a high tax bracket in retirement isn’t the world’s worst problem.
Ron Ronnerson
Posts: 3563
Joined: Sat Oct 26, 2013 6:53 pm
Location: Bay Area

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by Ron Ronnerson »

I am in my 40s. Here are our numbers from last year:

Federal:
Gross Income: $129k (married filing jointly, I work as a teacher, spouse is a stay-at-home parent)
Above-line deductions (mandatory pension contributions, 403b, 457b, HSA, traditional IRA): $64k
AGI: $65k
Tax Before Credits: $4300
Credits* (Saver's Credit and Child Tax Credit): $2400
Tax: $1900
Federal Tax Bracket: 12%
Effective Tax Rate as a Percentage of Gross Income: 1.5%
*By contributing as much as we do to deferred retirement accounts, our modified adjusted gross income falls to a level where we qualify for subsidized health insurance on the government exchange; we typically receive $15k-20k in premium tax credits per year and currently pay $0 in premiums ourselves

California:
AGI: $72k (federal AGI of $65k plus HSA contribution of $7k is added back as HSA is not recognized in California)
Itemized Deductions: (mortgage interest and property taxes): $22k
Taxable Income: $50k
Tax Before Exemptions: $1k
Exemptions for 2 adults and one child: $700
Tax: $300
State Tax Bracket for California: 4%
Effective Tax Rate as a Percentage of Gross Income: 0.2%

Current net worth at age 48 (spouse is the same age): $1.7m

In my 70s, I expect to withdraw from retirement accounts and collect a pension of around $9k/month and spouse should get social security of around $2k per month (figures are in current dollars). The pension has cost-of-living adjustments and 100% survivor benefits.

I doubt that my taxes will be anywhere near as low as they have been in recent years when I'm in my 70s.
Last edited by Ron Ronnerson on Sun Jun 04, 2023 4:40 pm, edited 1 time in total.
User avatar
FiveK
Posts: 15742
Joined: Sun Mar 16, 2014 2:43 pm

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by FiveK »

quantAndHold wrote: Sun Jun 04, 2023 4:02 pmOne thing to remember is that you’re contributing to your 401k at your marginal tax rate, but withdrawing at your effective tax rate (unless you have the large pension).
When choosing whether to contribute to Traditional versus Roth, remember that withdrawals due to current contributions will come on top of withdrawals due to previous contributions. In other words, the withdrawals due to current contributions will be taxed at your marginal rate at that time.
Wwwdotcom
Posts: 558
Joined: Thu Apr 06, 2023 6:35 pm

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by Wwwdotcom »

Super easy to go into a higher tax bracket when someone goes from married to single, especially if there are annuities and pensions for survivors.
TacoLover
Posts: 655
Joined: Wed Feb 01, 2023 9:43 am

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by TacoLover »

1- live in a high tax state. California NY NJ and IL only raise taxes they don’t lower them. So if you’ve saved and invested enough to be in the highest category I would expect those states to continue to raise taxes.

2- move to CA NJ NY or IL.
User avatar
AnnetteLouisan
Posts: 7261
Joined: Sat Sep 18, 2021 10:16 pm
Location: New York, NY

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by AnnetteLouisan »

Selling real property or other long term capital gains situations.
User avatar
JazzTime
Posts: 724
Joined: Mon Oct 25, 2021 8:43 am
Location: MA

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by JazzTime »

If you contribute substantially to t-401k/t-IRA during working years and invest in growth stocks, you will have a huge balance at age 70. RMD's plus Roth conversions plus pension plus SocSec plus any LTCG/Divs in your taxable account will drive your taxable income into high tax brackets.

Hence, I suggest contributing to Roth accounts during working years, at least one-half of your retirement contributions. You will be thankful when you get to 70. I wish Roth accounts had been available when I was younger. My current retirement income is way more than my income when I was working. Granted, a large part of that is self-inflicted pain via Roth conversions.

I have my son and DIL contribute to Roth accounts every year and gift them the funds to do it. That gift will pay off in spades when they retire.
The difficulty with jazz is there are too many notes. (Borrowed from Emperor's critique in Amadeus)
CletusCaddy
Posts: 2678
Joined: Sun Sep 12, 2021 4:23 am

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by CletusCaddy »

JazzTime wrote: Sun Jun 04, 2023 5:51 pm RMD's plus Roth conversions plus pension plus SocSec plus any LTCG/Divs in your taxable account will drive your taxable income into high tax brackets.
But why would you do all of these at once?

If you are in a high tax bracket already why would you covert any traditional to Roth?

If your pension + SS + RMDs covers your spending why would you sell taxable and incur LTCG?
User avatar
Watty
Posts: 28859
Joined: Wed Oct 10, 2007 3:55 pm

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by Watty »

TomatoTomahto wrote: Sun Jun 04, 2023 1:51 pm Some factors:
Deferred compensation
Pension
RMDs
Inheritance
Divorce/death of spouse change tax filing status
Changes in tax code
I would add;

Moving to a state with a higher tax bracket.

Having higher than expected investment returns so your nest egg and RMDs are much larger than expected.

You are in an income range where the taxation of Social Security puts you into a higher than expected tax bracket.
https://www.bogleheads.org/wiki/Taxatio ... s#top-page

andysnp wrote: Sun Jun 04, 2023 1:49 pm Let's assume you stop working at 72 but are working in 40's age.
I think people worry too much about being in a excessively high retirement tax bracket too much.

Everyone's situation is different but when I retired I found that a lot of expenses that I had during my working years ended, for example;
1) My mortgage was paid off at about the same time I retired.
2) My kid launched so I was done with child raising and college costs.
3) I get several state income tax and property tax breaks for seniors.

Keep in mind that an over 65 couple can have over $100K a year and still be in the 12% federal tax bracket. For most people that is a more than adequate requirement budget especially if they have a paid off house.

For many people when they are nearing retirement if it looks like they will have too much money and more income than expected there is a simple solution which is to retire five or ten years earlier. :beer
rich126
Posts: 4475
Joined: Thu Mar 01, 2018 3:56 pm

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by rich126 »

Looking back I'm glad most of my money went into tax deferred accounts rather than Roth accounts. Of course the first 10-15 years I was working there were no Roth options. For most of my life I was a single guy and the tax deferred nature helped me save more since while my job eventually paid a solid salary, starting out as a single guy with a SFH took up a fair amount of money.

Now retired I am married so I think for the first 10-15 years of retirement I will be "ahead". Now once we get in our mid 70s and have social security and RMDs it might be different but I'll worry about that later and I can do a few years now with Roth conversions.

A possible inheritance might also complicate matters but I don't ever include that stuff in my planning since there are no guarantees, especially since in this case it wouldn't be from a parent.

During my working career I think taxes have largely gone down so that also helped me. Hard to say what the next 20-40 years will bring.
----------------------------- | If you think something is important and it doesn't involve the health of someone, think again. Life goes too fast, enjoy it and be nice.
User avatar
dratkinson
Posts: 6116
Joined: Thu Jul 26, 2007 6:23 pm
Location: Centennial CO

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by dratkinson »

Some suggest we should wag our "equilibrium tax rate"---tax rate paid by surviving spouse.

See: https://www.kitces.com/blog/tax-rate-eq ... nversions/

Long story short. We might want to begin Roth conversions now, or advance tax brackets in retirement to do them, to lower the equilibrium tax rate on surviving spouse.
d.r.a., not dr.a. | I'm a novice investor; you are forewarned.
Normchad
Posts: 5648
Joined: Thu Mar 03, 2011 6:20 am

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by Normchad »

CletusCaddy wrote: Sun Jun 04, 2023 5:55 pm
JazzTime wrote: Sun Jun 04, 2023 5:51 pm RMD's plus Roth conversions plus pension plus SocSec plus any LTCG/Divs in your taxable account will drive your taxable income into high tax brackets.
But why would you do all of these at once?

If you are in a high tax bracket already why would you covert any traditional to Roth?

If your pension + SS + RMDs covers your spending why would you sell taxable and incur LTCG?
For sure. This is why tax planning is a thing.

I’m mid 50s, just getting W2 income, but paying a lot if taxes. I plan to retire very soon, and I think I’ll pay pretty close to zero federal income tax for at least the first 15 years. (Until I start taking SS at 70). And I’ll probably get very generous ACA subsidies as well….

It’s just taxes. Plan for it

But yeah, if I kept working until 65, my retirement balances would be huge, RMDs would be unavoidable, etc etc. AND I think at worst, I’d be in the same bracket I’m in now.

The majority of people don’t have to worry about this. But you might be one of the ones that does.

Here is a link to a classic bogleheads thread on paying six figure expenses with zero taxes in retirement: viewtopic.php?t=87471
User avatar
Wiggums
Posts: 7051
Joined: Thu Jan 31, 2019 7:02 am

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by Wiggums »

retiredjg wrote: Sun Jun 04, 2023 3:51 pm
andysnp wrote: Sun Jun 04, 2023 1:49 pm Roth 401k/IRA vs Traditional 401K/IRA

The rule of thumb is you want to invest in traditional 401K/IRA if you expect your tax bracket to be lower when you are retired.

Can you give some examples where the tax bracket will be higher at age 72 than in 40's? Let's assume you stop working at 72 but are working in 40's age.

Thanks!
Here's kind of a surefire example which I've seen several times here.

Couple of academics in a university system, each with a pension. Live below their means. Save in several tax-deferred accounts (457 and 403b both) year after year to get their income lower while working. Love their jobs and work until 72 instead of retiring earlier.

The two pensions, maybe SS, and RMDs on the large tax-deferred accounts are very likely to push them into tax brackets they never saw while working.

Then one dies and the survivor moves up yet one more bracket.


It is not one thing that causes There are a number of things combined that put one into a scenario like this.

Things you might have control over:

-start saving early
-super savers
-save more than 1 tax-deferred account per person
-pension(s)
-working till near RMD age
-don't spend a lot in retirement

Things you may not have any control over:

-changes in tax law
-1 person in a couple dies
Great examples Retiredjg

My DW grew up poor. We automated our investments and never questioned if we had enough until we were eligible for retirement. My SIL lost her job at age 52. Now she’s eligible for a reduced pension at age 65. Sometimes it’s difficult to know when you have enough. My DW grew up poor and is always questioning if we have enough.
"I started with nothing and I still have most of it left."
toddthebod
Posts: 5737
Joined: Wed May 18, 2022 12:42 pm

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by toddthebod »

If you and your spouse max out your 401(k) every year for 40 years and invest aggressively, your RMDs will be very, very large.
User avatar
yatesd
Posts: 1040
Joined: Sun Nov 03, 2013 7:19 am
Location: MD

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by yatesd »

Yes, if the government spends more than the revenue they receive, the deficit increases, and taxes eventually need to increase across the board to make up for the shortfall. Also, I read an article in the WSJ, we have not been reproducing babies at the replacement rate for many years, so there is a real risk of not having a sufficient labor/tax base.

That said, no one knows the future...I've got a mix of ROTH (20%) and non ROTH IRA's (80%).
donaldfair71
Posts: 1241
Joined: Wed Mar 06, 2013 3:15 pm

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by donaldfair71 »

If my wife and I were to both take the pensions we’ll have available, we’ll almost certainly be in the same marginal tax bracket at retirement.

Combined with RMDs, good chance a higher marginal bracket than our working years is where we’ll wind up.

But we plan on taking survivor option on each pension. One reason is to have a little more tax bracket flexibility while both alive, with the understanding that the survivor is going to be a major asset to Uncle Sam when one of us passes.
tibbitts
Posts: 23716
Joined: Tue Feb 27, 2007 5:50 pm

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by tibbitts »

andysnp wrote: Sun Jun 04, 2023 1:49 pm Roth 401k/IRA vs Traditional 401K/IRA

The rule of thumb is you want to invest in traditional 401K/IRA if you expect your tax bracket to be lower when you are retired.

Can you give some examples where the tax bracket will be higher at age 72 than in 40's? Let's assume you stop working at 72 but are working in 40's age.

Thanks!
My guess is that the probabilities are about the same of marginal rates being lower or higher, so if I had to do it over again, I'd try to have more of a balance between deferred and Roth vs. over-contributing to deferred.
Topic Author
andysnp
Posts: 87
Joined: Mon Aug 20, 2018 5:53 pm

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by andysnp »

AnnetteLouisan wrote: Sun Jun 04, 2023 5:42 pm Selling real property or other long term capital gains situations.
Does long term capital gains affect your tax rate when you do RMD's?

I thought qualified dividends and long term capital gains don't affect RMD's?

For example, let's say you are 72 and single.

You have $1 million in 401K.
You withdraw $35,000 for RMD.

You get $50,000 in qualified dividends.
You sell a house and have $200,000 for long term capital gains.

Does the $250,000 from qualified dividends and long term capital gains affect the tax rate of the $35,000 you did for RMD?
Last edited by andysnp on Sun Jun 04, 2023 8:43 pm, edited 2 times in total.
Makefile
Posts: 2657
Joined: Fri Apr 22, 2016 11:03 pm

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by Makefile »

Sometimes this issue induces passionate debate but do you care about your tax bracket according to the tax tables, or how much more you will owe in taxes given $100 or $1000 in extra income (sometimes called a "marginal tax rate").

Remember that instead of tweaking the tax tables the trend in recent decades is to introduce tax credits that you lose somewhere in the $70,000-$150,000 income range. One of the rounds of COVID stimulus was a dramatic, if exceptional, example of this.
User avatar
calmaniac
Posts: 1325
Joined: Fri Jan 30, 2015 2:32 pm

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by calmaniac »

andysnp wrote: Sun Jun 04, 2023 1:49 pm Can you give some examples where the tax bracket will be higher at age 72 than in 40's? Let's assume you stop working at 72 but are working in 40's age.

Thanks!
Military

For active duty military a big chunk of their pay is not taxed, which often will put them in a lower tax bracket relative to their total compensation. Fast forward to age 72 and they are receiving both pension and Social Security and have RMDs, all of which combine to put them into a higher tax bracket.
"Pretired", working 20 h/wk. AA 75/25: 30% TSM, 19% value (VFVA/AVUV), 18% Int'l LC, 8% emerging, 25% GFund/VBTLX. Military pension ≈60% of expenses. Pension+SS@age 70 ≈100% of expenses.
User avatar
calmaniac
Posts: 1325
Joined: Fri Jan 30, 2015 2:32 pm

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by calmaniac »

Mistaken duplicate deleted
"Pretired", working 20 h/wk. AA 75/25: 30% TSM, 19% value (VFVA/AVUV), 18% Int'l LC, 8% emerging, 25% GFund/VBTLX. Military pension ≈60% of expenses. Pension+SS@age 70 ≈100% of expenses.
User avatar
tetractys
Posts: 6249
Joined: Sat Mar 17, 2007 3:30 pm
Location: Along the Salish Sea

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by tetractys »

Lottery winner.
TLB
Posts: 97
Joined: Wed Nov 30, 2016 4:04 pm

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by TLB »

All my rental real estate was leveraged at 40, now at 68 all mortgages are paid off. Few write offs and will be staying in the highest tax bracket for a long time.
smitcat
Posts: 13300
Joined: Mon Nov 07, 2016 9:51 am

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by smitcat »

TomatoTomahto wrote: Sun Jun 04, 2023 1:51 pm Some factors:
Deferred compensation
Pension
RMDs
Inheritance
Divorce/death of spouse change tax filing status
Changes in tax code
Good list, maybe add these...
sale of small business
real estate appreciation
aristotelian
Posts: 12277
Joined: Wed Jan 11, 2017 7:05 pm

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by aristotelian »

JazzTime wrote: Sun Jun 04, 2023 5:51 pm If you contribute substantially to t-401k/t-IRA during working years and invest in growth stocks, you will have a huge balance at age 70. RMD's plus Roth conversions plus pension plus SocSec plus any LTCG/Divs in your taxable account will drive your taxable income into high tax brackets.

Hence, I suggest contributing to Roth accounts during working years, at least one-half of your retirement contributions. You will be thankful when you get to 70. I wish Roth accounts had been available when I was younger. My current retirement income is way more than my income when I was working. Granted, a large part of that is self-inflicted pain via Roth conversions.

I have my son and DIL contribute to Roth accounts every year and gift them the funds to do it. That gift will pay off in spades when they retire.
Qualified dividends and capital gains do not affect your marginal bracket for ordinary income, although they are included in AGI. I think a good standard recommendation is to max your traditional 401k and Roth IRA, unless for some reason you expect higher ordinary income in retirement.

I would highly recommend this thread before anyone decides to go all in on Roth.
viewtopic.php?t=87471

Regarding current retirement income, keep in mind the tax brackets adjust for inflation. Your nominal income doesn't matter, only your marginal tax bracket. I would be surprised if it is higher than when you were working. If it is, you have a unique case that could contribute to the discussion with additional details.
Old Guy
Posts: 662
Joined: Mon Mar 19, 2012 7:20 am
Location: On the beach in SC. Hilton Head Island.

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by Old Guy »

We make more in retirement then we did while working retiring and then working again for a combined 17 years. Wife and I both have federal pensions based on a combined GS-29 and 48 years service, state government pensions, and social security. The wife has full SS while mine is reduced. Plus we have RMDs and state government pre-tax investments. Obviously FIRE was of no interest to us.
Sagefemme
Posts: 352
Joined: Mon Mar 12, 2018 9:31 pm

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by Sagefemme »

retiredjg wrote: Sun Jun 04, 2023 3:51 pm
andysnp wrote: Sun Jun 04, 2023 1:49 pm Roth 401k/IRA vs Traditional 401K/IRA

The rule of thumb is you want to invest in traditional 401K/IRA if you expect your tax bracket to be lower when you are retired.

Can you give some examples where the tax bracket will be higher at age 72 than in 40's? Let's assume you stop working at 72 but are working in 40's age.

Thanks!
Here's kind of a surefire example which I've seen several times here.

Couple of academics in a university system, each with a pension. Live below their means. Save in several tax-deferred accounts (457 and 403b both) year after year to get their income lower while working. Love their jobs and work until 72 instead of retiring earlier.

The two pensions, maybe SS, and RMDs on the large tax-deferred accounts are very likely to push them into tax brackets they never saw while working.

Then one dies and the survivor moves up yet one more bracket.


It is not one thing that causes There are a number of things combined that put one into a scenario like this.

Things you might have control over:

-start saving early
-super savers
-save more than 1 tax-deferred account per person
-pension(s)
-working till near RMD age
-don't spend a lot in retirement

Things you may not have any control over:

-changes in tax law
-1 person in a couple dies
Curious about the highlighted part above. Why academic pensions in particular? They are better in some way I think, but not sure exactly how.
Escapevelocity
Posts: 1145
Joined: Mon Feb 18, 2019 7:32 am

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by Escapevelocity »

Watty wrote: Sun Jun 04, 2023 6:03 pm
I think people worry too much about being in a excessively high retirement tax bracket too much.

Everyone's situation is different but when I retired I found that a lot of expenses that I had during my working years ended, for example;
1) My mortgage was paid off at about the same time I retired.
2) My kid launched so I was done with child raising and college costs.
3) I get several state income tax and property tax breaks for seniors.

Keep in mind that an over 65 couple can have over $100K a year and still be in the 12% federal tax bracket. For most people that is a more than adequate requirement budget especially if they have a paid off house.

For many people when they are nearing retirement if it looks like they will have too much money and more income than expected there is a simple solution which is to retire five or ten years earlier. :beer
Excellent post. This is exactly what I did. Retired in 2022 at age 55. I expect to be able to withdraw nearly all of my T-IRA and 401k balances over time at a 12% federal rate or thereabouts (actually less than that effectively due to standard deduction). It "helps" that my pension is below $10k a year and that I'll be living off my investments and SS.
Last edited by Escapevelocity on Mon Jun 05, 2023 9:23 am, edited 1 time in total.
smitcat
Posts: 13300
Joined: Mon Nov 07, 2016 9:51 am

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by smitcat »

Sagefemme wrote: Mon Jun 05, 2023 9:18 am
retiredjg wrote: Sun Jun 04, 2023 3:51 pm
andysnp wrote: Sun Jun 04, 2023 1:49 pm Roth 401k/IRA vs Traditional 401K/IRA

The rule of thumb is you want to invest in traditional 401K/IRA if you expect your tax bracket to be lower when you are retired.

Can you give some examples where the tax bracket will be higher at age 72 than in 40's? Let's assume you stop working at 72 but are working in 40's age.

Thanks!
Here's kind of a surefire example which I've seen several times here.

Couple of academics in a university system, each with a pension. Live below their means. Save in several tax-deferred accounts (457 and 403b both) year after year to get their income lower while working. Love their jobs and work until 72 instead of retiring earlier.

The two pensions, maybe SS, and RMDs on the large tax-deferred accounts are very likely to push them into tax brackets they never saw while working.

Then one dies and the survivor moves up yet one more bracket.


It is not one thing that causes There are a number of things combined that put one into a scenario like this.

Things you might have control over:

-start saving early
-super savers
-save more than 1 tax-deferred account per person
-pension(s)
-working till near RMD age
-don't spend a lot in retirement

Things you may not have any control over:

-changes in tax law
-1 person in a couple dies
Curious about the highlighted part above. Why academic pensions in particular? They are better in some way I think, but not sure exactly how.
It is only an example - change it to say Federal workers or State Workers, or LEO's any of which could have access to pensions/430/457/SS all at the same time.
Anyone or any couple who have access to multiple pensions/SS/403/457 along the way.
User avatar
ruralavalon
Posts: 26351
Joined: Sat Feb 02, 2008 9:29 am
Location: Illinois

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by ruralavalon »

andysnp wrote: Sun Jun 04, 2023 1:49 pm Roth 401k/IRA vs Traditional 401K/IRA

The rule of thumb is you want to invest in traditional 401K/IRA if you expect your tax bracket to be lower when you are retired.

Can you give some examples where the tax bracket will be higher at age 72 than in 40's? Let's assume you stop working at 72 but are working in 40's age.

Thanks!
If eligible for both a substantial pension and Social Security benefits.

Having very large balances in traditional tax-deferred accounts, so that you have large Required Minimum Distributions (RMDs).

Anything that changes your tax filing status from married filing jointly to single.
Last edited by ruralavalon on Mon Jun 05, 2023 9:34 am, edited 1 time in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
Normchad
Posts: 5648
Joined: Thu Mar 03, 2011 6:20 am

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by Normchad »

smitcat wrote: Mon Jun 05, 2023 9:23 am
Sagefemme wrote: Mon Jun 05, 2023 9:18 am
retiredjg wrote: Sun Jun 04, 2023 3:51 pm
andysnp wrote: Sun Jun 04, 2023 1:49 pm Roth 401k/IRA vs Traditional 401K/IRA

The rule of thumb is you want to invest in traditional 401K/IRA if you expect your tax bracket to be lower when you are retired.

Can you give some examples where the tax bracket will be higher at age 72 than in 40's? Let's assume you stop working at 72 but are working in 40's age.

Thanks!
Here's kind of a surefire example which I've seen several times here.

Couple of academics in a university system, each with a pension. Live below their means. Save in several tax-deferred accounts (457 and 403b both) year after year to get their income lower while working. Love their jobs and work until 72 instead of retiring earlier.

The two pensions, maybe SS, and RMDs on the large tax-deferred accounts are very likely to push them into tax brackets they never saw while working.

Then one dies and the survivor moves up yet one more bracket.


It is not one thing that causes There are a number of things combined that put one into a scenario like this.

Things you might have control over:

-start saving early
-super savers
-save more than 1 tax-deferred account per person
-pension(s)
-working till near RMD age
-don't spend a lot in retirement

Things you may not have any control over:

-changes in tax law
-1 person in a couple dies
Curious about the highlighted part above. Why academic pensions in particular? They are better in some way I think, but not sure exactly how.
It is only an example - change it to say Federal workers or State Workers, or LEO's any of which could have access to pensions/430/457/SS all at the same time.
Anyone or any couple who have access to multiple pensions/SS/403/457 along the way.
One big benefit is that you can contribute to both a 403B and a 457 simultaneously while working. So you can defer a lot more than you can with just a 401K.
User avatar
TheTimeLord
Posts: 12130
Joined: Fri Jul 26, 2013 2:05 pm

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by TheTimeLord »

I would guess a lot of dual income couples who lived below, to well below their means while investing and delay SS to 70 have the potential for more income than they did while they were working. Especially if they continue working into their 60s. Now how that will translate into their upper tax bracket will depend on a host of factors. The power of OMY.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
User avatar
ruralavalon
Posts: 26351
Joined: Sat Feb 02, 2008 9:29 am
Location: Illinois

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by ruralavalon »

"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
User avatar
quantAndHold
Posts: 10141
Joined: Thu Sep 17, 2015 10:39 pm
Location: West Coast

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by quantAndHold »

TacoLover wrote: Sun Jun 04, 2023 5:39 pm 1- live in a high tax state. California NY NJ and IL only raise taxes they don’t lower them. So if you’ve saved and invested enough to be in the highest category I would expect those states to continue to raise taxes.

2- move to CA NJ NY or IL.
I love it when people who have no idea what they’re talking about bash California just because. California is considered one of the more tax friendly states for retirees.

CA doesn’t tax Social Security, has a progressive tax rate, so low and moderate income retirees don’t pay much if anything, and people who’ve owned homes for awhile have property taxes that are lower than they would pay practically anywhere else.

For 2022, my wife and I paid -$700 in income tax, when you consider the tax refund that everyone got. And we paid $4700 in property tax for a house worth almost $2m.

We live off of a combination of investments, SS, and RMDs. We pay *a lot* less in income tax, both at the federal and state levels, than we did when we were working, despite our lifestyle and spending being about the same, or a little higher because we have more time for travel and other activities.
User avatar
snackdog
Posts: 3102
Joined: Wed Nov 12, 2014 3:57 am
Location: PNW

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by snackdog »

TomatoTomahto wrote: Sun Jun 04, 2023 1:51 pm Some factors:
Deferred compensation
Pension
RMDs
Inheritance
Divorce/death of spouse change tax filing status
Changes in tax code
I ran into most of those plus seven figure gains on property sales.
BH Consumer FAQ: | Car? Used Toyota, Lexus or Miata. | House? 20% down and 3x salary. | Vacation house? No. | Umbrella? $1 million. | Goods? Costco.
LittleMaggieMae
Posts: 2569
Joined: Mon Aug 12, 2019 9:06 pm

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by LittleMaggieMae »

TacoLover wrote: Sun Jun 04, 2023 5:39 pm 1- live in a high tax state. California NY NJ and IL only raise taxes they don’t lower them. So if you’ve saved and invested enough to be in the highest category I would expect those states to continue to raise taxes.

2- move to CA NJ NY or IL.
I think the thread is about Federal taxes....

Or do people add in the sales taxes and state income taxes to their Federal taxes to determine the Tax Bracket they are in??
I've been wrong about other things so perhaps I don't understand what we're talking about here...
Leesbro63
Posts: 10638
Joined: Mon Nov 08, 2010 3:36 pm

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by Leesbro63 »

Related to this, don't forget that Medicare's IRMAA surcharges are basically additional taxes. And might create a true tax bracket higher than when someone was younger.
User avatar
retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by retiredjg »

Sagefemme wrote: Mon Jun 05, 2023 9:18 am Curious about the highlighted part above. Why academic pensions in particular? They are better in some way I think, but not sure exactly how.
I don't wish to paint all academics with the same brush. But my observation is there are some "tendencies" such as....

-larger pension than others
-frequently are savers who live below their means
-able to save/fill 4 tax deferred accounts instead of 1 or 2
-often love their jobs and are not interested in early retirement (which could by itself eliminate the RMD "problem")


But like I said earlier, there is no one thing that leads to the RMD "problem". It is a combination of things on the list and probably some things I didn't list.
User avatar
TomatoTomahto
Posts: 17158
Joined: Mon Apr 11, 2011 1:48 pm

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by TomatoTomahto »

LittleMaggieMae wrote: Mon Jun 05, 2023 9:39 am
TacoLover wrote: Sun Jun 04, 2023 5:39 pm 1- live in a high tax state. California NY NJ and IL only raise taxes they don’t lower them. So if you’ve saved and invested enough to be in the highest category I would expect those states to continue to raise taxes.

2- move to CA NJ NY or IL.
I think the thread is about Federal taxes....

Or do people add in the sales taxes and state income taxes to their Federal taxes to determine the Tax Bracket they are in??
I've been wrong about other things so perhaps I don't understand what we're talking about here...
My assumption was that it was the marginal income tax rates, so Federal and State Income Tax. Sales, property, excise, etc are imo excluded. I think the thread leads to decision about picking Roth or traditional, but I might be mistaken.
I get the FI part but not the RE part of FIRE.
User avatar
ruralavalon
Posts: 26351
Joined: Sat Feb 02, 2008 9:29 am
Location: Illinois

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by ruralavalon »

quantAndHold wrote: Mon Jun 05, 2023 9:38 am
TacoLover wrote: Sun Jun 04, 2023 5:39 pm 1- live in a high tax state. California NY NJ and IL only raise taxes they don’t lower them. So if you’ve saved and invested enough to be in the highest category I would expect those states to continue to raise taxes.

2- move to CA NJ NY or IL.
I love it when people who have no idea what they’re talking about bash California just because. California is considered one of the more tax friendly states for retirees.

CA doesn’t tax Social Security, has a progressive tax rate, so low and moderate income retirees don’t pay much if anything, and people who’ve owned homes for awhile have property taxes that are lower than they would pay practically anywhere else.

For 2022, my wife and I paid -$700 in income tax, when you consider the tax refund that everyone got. And we paid $4700 in property tax for a house worth almost $2m.

We live off of a combination of investments, SS, and RMDs. We pay *a lot* less in income tax, both at the federal and state levels, than we did when we were working, despite our lifestyle and spending being about the same, or a little higher because we have more time for travel and other activities.
Likewise Illinois does not tax Social Security benefits, pension payments, or distributions from retirement accounts.

Live on Social Security benefits and Required Minimum Distributions (RMDs). Still just jumped to a higher tax bracket because of change in tax filing status when my wife died.
Last edited by ruralavalon on Mon Jun 05, 2023 10:09 am, edited 1 time in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
User avatar
Clever_Username
Posts: 1915
Joined: Sun Jul 15, 2012 12:24 am
Location: Southern California

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by Clever_Username »

I guess I haven't given this as much thought but this thread is making me do so. I teach at a public school (with access to a good 403(b), a good 457, a good 401(a), and a MBR). That having been said, I won't have a pension when I retire, unless I change to a school that offers one, and getting a pension isn't a goal of mine. I am in my early 40s, low seven figures total investments, not including equity in my house.

I contribute the maximum each year to the 403(b) and 457. The 401(a) is required contributions, which are matched, for those not in the pension system. I try to max out the MBR, which I can do many years but not all -- depends on summer income at this point to be able to do this, since it has to come from a paycheck. I buy the full allotment of Series I Bonds, and have since my early 30s.

Now I wonder if I should be doing Roth conversions. I don't think the 403(b) or 457 here have Roth contribution options. I could convert money from my old workplace plan from a former employer into my Roth IRA I think (there are a few hundred thousand dollars in that one, in an Institutional Index, one of two reasons I didn't want to convert it to a Rollover IRA).

I think the major factors that would cause me to be in a higher bracket in retirement would be RMDs or changes to the tax code, unless I am missing something with "Deferred compensation" that I've seen elsewhere (I suppose the 457 is a form of that). I'm unmarried, so there isn't a spouse to leave me in some form that would cause a change my tax filing status.

I think in retirement, if I stay in California, I'd be in a lower bracket (unless the RMDs cause a very high bracket, which doesn't sound like the worst problem to have). Although, again, changes to the tax code are possible, as, I suppose, are changes to my lifestyle.
"What was true then is true now. Have a plan. Stick to it." -- XXXX, _Layer Cake_ | | I survived my first downturn and all I got was this signature line.
toddthebod
Posts: 5737
Joined: Wed May 18, 2022 12:42 pm

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by toddthebod »

Sagefemme wrote: Mon Jun 05, 2023 9:18 am
retiredjg wrote: Sun Jun 04, 2023 3:51 pm
andysnp wrote: Sun Jun 04, 2023 1:49 pm Roth 401k/IRA vs Traditional 401K/IRA

The rule of thumb is you want to invest in traditional 401K/IRA if you expect your tax bracket to be lower when you are retired.

Can you give some examples where the tax bracket will be higher at age 72 than in 40's? Let's assume you stop working at 72 but are working in 40's age.

Thanks!
Here's kind of a surefire example which I've seen several times here.

Couple of academics in a university system, each with a pension. Live below their means. Save in several tax-deferred accounts (457 and 403b both) year after year to get their income lower while working. Love their jobs and work until 72 instead of retiring earlier.

The two pensions, maybe SS, and RMDs on the large tax-deferred accounts are very likely to push them into tax brackets they never saw while working.

Then one dies and the survivor moves up yet one more bracket.


It is not one thing that causes There are a number of things combined that put one into a scenario like this.

Things you might have control over:

-start saving early
-super savers
-save more than 1 tax-deferred account per person
-pension(s)
-working till near RMD age
-don't spend a lot in retirement

Things you may not have any control over:

-changes in tax law
-1 person in a couple dies
Curious about the highlighted part above. Why academic pensions in particular? They are better in some way I think, but not sure exactly how.
Unlike state employees or law enforcement, they are much more likely to continue working past normal retirement age and defer collecting their pension and social security.
MathWizard
Posts: 6560
Joined: Tue Jul 26, 2011 1:35 pm

Re: Can you give examples where tax bracket will be higher in retirement then in 40's age?

Post by MathWizard »

It's not the tax bracket that is important, it is how much an extra dollar increases taxes or other costs.

My tax bracket at the height of my earning power is 12% . It will go up when the current 12% bracket reverts to 15%

85% of my SS benefits will be taxable between age 70 and 78 in my plan, which is better than if I do not do Roth conversions to the top of the 12 and 25% tax brackets.

My wife would be dumped into the presumably 25% bracket when I die (or me if she dies) because of RMDs , and 85% of her SS survivor's benefits would also be taxed, except for the case that I will be doing Roth conversions for most of the rest of my life. (I am planning to live to 85, 3 years longer that actuarial tables would suggest. I'd better get to the gym)

If I did not do all these Roth conversions, my single sons would be required inheriting over half a million dollars of tax deferred mone, which they would need to withdraw over the next 10 years, adding at least $50K to their income, which would almost assuredly increase their tax bracket. As it is in my plan, they will inherit less than a tenth that in tax deferred, the rest in Roth or taxable, which has a step up in basis, so unless they are already maxing tax deferred,they can just withdraw from the inherited IRA for living expenses and put more into their own tax deferred accounts effectively transferring the tax deferred amount to them.
Post Reply