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The 15% tax retirement plan

12 Responses to “The 15% tax retirement plan”

1. Aleta Says:
   August 6th, 2008 at 02:18 pm
   I would think that you are talking about people only receiving these amounts without social security right? Because if someone is retired, isn't that added to the buckets?

2. joetaxpayer Says:
   August 6th, 2008 at 02:33 pm
   Hey jIM, I'm back. Didn't realize you blogged, you never mentioned it at MIFP. You're very close to my thinking above. Typo - 15% ends at $65,100. for MFJ. BUT - you missed the STD deduction ($10,900) and two exemptions ($3,500 ea) so it takes $83,000 in 2008 to top off that 15% bracket. This is $2,075,000 gross, using a 4% withdrawal rate. Each year the numbers all rise, the STD deduction, exemption, and the bracket cutoffs. So, likely in 5 years, the number would jump to $2.2M give or take.
   
   You and I are in agreement. I don't understand the flip side of this approach. Do others really believe the majority are on a path to having $2M in retirement accounts? When did everyone start to save 10%?
   
   Joe

3. jIM_Ohio Says:
   August 6th, 2008 at 03:49 pm
   Joe- I haven't seen you post on the forums at savingadvice.com, but if you see the profile of the posters, generally financially conservative and also lots of savers. The forums are linked to the blogs, but not the other way around (I think).

4. joetaxpayer Says:
   August 6th, 2008 at 06:53 pm
   I stumbled upon it through pfblogs.org which list all the savingadvice posts as if there was one blogger named Finabguide. Interesting, now I know. And I appreciate your note, "conservative and also lots of savers". That means the bell curve doesn't apply, just like Barron's readers average 2-3X average income, etc.
   Joe

5. zetta Says:
   August 7th, 2008 at 01:26 pm
   Joe,
   Just because the *majority* of people in this country won't hit the $2M mark doesn't mean the tax concerns aren't worth discussing for those of us who will. As Jim noted, we've got lots of savers here at all income levels, and a reasonable number of high-income earners who will likely have a good chunk of assets in retirement.
   

6. jIM_Ohio Says:
   August 7th, 2008 at 01:54 pm
   Joe-
   
   If you are linked to the blog, here is forum link. Much more active daily than mifp.
   
   http://www.savingadvice.com/forums/index.php

7. jIM_Ohio Says:
   August 7th, 2008 at 02:08 pm
   Zetta- in your case you could do what you are doing and delay the taxes until later.
   
   But the more I have thought about your case, I am about 10 years behind you- in 10 years I expect to have these same issues- not eligible for Roth, in 28% bracket and looking to lower taxes.
   
   My plan would be to use taxable accounts. I would be willing to pay 15% "as I go" for the flexibility and options it provides me later. Even if the capital gains rate changes (when the capital gains rate changes) I will have choices- maybe 72t from the 401k if that is more favorable than selling something at a gain. They key is the choices I am making for myself- 401k withdraws are taxed, Roth withdraws are not, and taxable accounts will have a mix of cash (not taxed), stocks (capital gains taxes) and dividends (dividend tax) plus muni bonds (not taxed as well). I want more buckets to give me more choices. If the bucket is small, the choices will not be as significant.
   
   I would choose funds, like PRPFX, for taxable accounts which hold assets which do not generate income.
   
   In addition I would also use muni bonds as well for taxable accounts.
   
   Having a large tax deffered asset base might force RMDs to be higher than needed spending. One reason to take money and pay off mortgage sooner (or invest in traditional IRA or invest in taxable accounts) is that opens the possibility (for me) to retire sooner.
   
   Once the mortgage payment is removed from the budget, the mortgage payment, plus the extra payments, could be set aside for 3-5 years in a taxable account. More than likely these would be moderate investments, cash, or muni bonds (not full fledged growth funds). This taxable account would then allow me to 72t a smaller amount and probably stay in a relatively low tax bracket. As Joe pointed out a family could withdraw 82k per year from 401k and still be in 15% bracket.
   
   So what I would do is try to have the taxable account supply the income needed, then convert the 82k to a Roth.
   
   Then my RMD 10 or 15 years later is MUCH lower and if I need 60k of income, the other 22k can be converted to a Roth. All done in the 15% bracket.
   
   Even if the bracket changes (15% might increase to 17 or 20% MAYBE), I doubt that second lowest bracket changes much- that would affect close to 75% of the country, yet that might only be 10% of the tax revenue with whatever tweak is made.
   
   You need taxable accounts because at minimum a cash withdraw is not taxed, so you have the income needed while you do other tax manipulation on the 401k and Roth accounts.

8. noppenbd Says:
   August 11th, 2008 at 10:20 am
   My parents are retiring next year with a good pension and SS benefits. Tax-deferred portfolio of $245K, and taxable portfolio of $150K. My father will continue to bring home enough income such that they can probably avoid touching tax-deferred portfolio. Expenses are expected to be about $50K. My advice was to roll over a portion (about 1/7th each year) of tax-deferred each year going up to age 70 into Roth IRA so that they can avoid or reduce RMDs. I think they can do this and stay in 15% bracket. What do you think about this strategy? I advised them to run it by their accountant first in any case.

9. jIM_Ohio Says:
   August 11th, 2008 at 10:23 am
   noppenbd-
   
   the strategy makes sense- make sure they only convert to top of 15% tax bracket each year. If their accountant questions this, they should find a new accountant.

10. joetaxpayer Says:
    August 11th, 2008 at 05:46 pm
    noppenbd - look at the tax table at
    http://www.fairmark.com/refrence/index.htm
    The 15% bracket ends at $65,100 plus the standard deduction ($10,900) plus the two exemptions ($3,500 ea) and this totals $83,000.
    As jIM states, they should watch their income, and plan to top off the 15% bracket. Nothing magic about 70. Even after RMDs start, they can convert to Roth, a bit each year, depending on the size of the pension and other income.
    Joe

11. jIM_Ohio Says:
    August 11th, 2008 at 06:29 pm
    I second the use of fairmark for tax advice. When I have a tax question that is where I ask it. I don't post there regularly, only at tax time, and it's the only financial board where I do not post under "jIM".
    
    The tax tables are quite helpful and I believe I linked to them in some of my blog posts.

12. noppenbd Says:
    August 11th, 2008 at 06:33 pm
    Pension, interest income, and part time income will be about 32.5K. Combined SS benefits are 22100. Figuring 85% of SS will be taxed (giving about 19K taxable). This leaves about 31K of room in 15% bracket. 8 years @ 31K will just about finish off the 401k/IRA.

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