Your math checks, but you can get less than 85% of your Social Security taxed if your income is lower.
Once you’re in RMD territory you can donate some or all of your RMD and it never hits your AGI which can reduce the portion of your Social Security that is taxable.
I think we’re saying the same thing. You have to make the decision on the margin. If you are starting your career and have $0 in your retirement accounts, then your decision today is to either pay the marginal rate today (Roth contributions) or the marginal rate in retirement (Traditional), which is probably 0%. Traditional wins.
But, in the example you provided, if you already have $500k in a Traditional account, then your marginal rate in retirement is no longer 0%. You’d have to project that balance out, see how much you could fill the various tax brackets up over time, and compare to those marginal rates.
It does get a bit philosophical, I think, to determine what your Traditional account will look like at retirement, regardless of your Traditional vs Roth decision. (this is your starting point for thinking on the margin). I would argue you need to include all future employee matching amounts, as these will go into Traditional accounts whether you like it or not. So even when you do begin your career at $0 in Traditional balance, if you plan to max-out future contributions (whether Roth or Traditional) you might already have a $1m future projected Traditional portfolio (I realize this is slightly outdated with recent legislation, though I don’t know the exact rules on whether ERs will adopt Roth matching).
But that’s all to say … I still do think it’s fair to think about Roth as marginal rates and Traditional as effective rates. Regardless of what you think your marginal tax rate will be in retirement, at some point you want to make sure you’re taking advantage of the 0%/10%/12%/etc. zones in retirement. You just have to make sure you’re making that decision on the margin.
Also, another thing I want to point out with the Bogleheads article linked, in the misconceptions section it says “the goal should be to have as much money left over after taxes as possible”. And while that’s probably a fine way of putting it to the general population, I’d amend that for this crowd and say the goal should be to minimize the actuarial present value of taxes. In my situation I prefer Traditional contributions, which do actually end up with a larger tax liability than I would under Roth, but a far lower APV. I’m not really concerned about a $1m projected tax bill when I’m 102.
That’s quite an assumption that is almost certainly false for actuaries. Especially after taking inflation and the insane way that Social Security is taxed into account. Anyone under the age of about 70 who made actuary money for any appreciable portion of their careers will at some point have taxable Social Security (even with no other income at all), meaning that their taxable retirement distributions would have to be well under the Standard Deduction to leave room for the fact that a portion of the Social Security is taxable no matter what plus every additional dollar of retirement distribution also means that more of their Social Security is taxed.
To keep your traditional IRA distributions low enough to have a marginal tax rate of $0 means you’re barely pulling anything at all and are pretty close to just living off Social Security. Most of us aspire to a higher standard of living than that.
I’ll add that it’s a common myth that if Social Security is the only income you have, it’s not taxable. That’s currently pretty close to true but since Social Security benefits will keep growing in magnitude and the taxation cutoffs do not (they have not increased one penny since they were established in 1983, effective with the 1984 tax year) you will see more and more people with no income other than Social Security whose Social Security is taxable. Now the Standard Deduction (and exemptions if/when they come back) will keep dropping their tax to $0 for a while longer still.
But taxable Social Security keeps growing. Especially for married folks. Single folks have it slightly better.
This is still allowing the tail to wag the dog. Taxes are a drag on income, but income/investments should be the focus, not taxes, which is their point.
With massive RMDs, the IRS is coming for you well before age 102.
Most actuaries will have this because even if you are contributing 100% to Roth and have been your entire career, the employer match you’ve been getting all along is traditional. And those will get hit by RMDs. So basically assume that no actuary has $0 of traditional money. The only way that’s possible in any sort of normal employment scenario is if you leave you job and convert the 401k to a Roth IRA and pay the tax at that time.
That’s a good idea (for at least a portion of your traditional money) if you happen to have an unusually low tax year for some reason (maternity/parental leave, disability, time off between jobs, etc.) But one that rarely results in someone retiring with all Roth money and no traditional.
One thing that I hadn’t given much thought to until more recently is that it is not unlikely that I will outlive my husband, which means that for some period of time I would be filing as Single, not MFJ. It hasn’t changed my plans, per se, since I already plan to do Roth conversions later on, but it’s definitely something to keep in the back of your mind as you think through current/future tax brackets and marginal rates.
Single doesn’t get hit as hard on taxable Social Security and under current law you get the same SALT deduction as MFJ, so you’re much more likely to itemize if you’re single.
Those are the two biggest impacts, tax-wise, for seniors.
I will add that if you donate to charity you can use your RMDs to make your charitable contributions (have the fiduciary transfer the money directly to the charity in a QCD) and then the income doesn’t hit your front page / doesn’t hit the taxable Social Security calculation. But you can’t do it until your RMD age. Not the year you hit RMD age… you have to actually be RMD age.
My father’s birthday is in late June so he was griping about this incessantly. After subtracting out weekends & holidays he had like 4 calendar days in which he could get his QCD taken care of the year he turned 70.5… as he had to wait until he actually was 70.5 in late December to make the QCD, but it also had to be made by the end of the year. And it’s not like they give you a break on the size of the RMD your first year… they just make it difficult to make the QCD.
Yes, I’m more worried about the MFJ → S hit for RMDs than taxable SS.
Well certainly whatever charitable giving you were going to do anyway should be from either appreciated stock (at any age) or QCDs once you’re 72.5 (they raised the RMD age recently). It makes no difference to the charity and it makes a big difference to your taxes!
But, quite understandably, not everyone wants to blow their entire RMD on charitable contributions.
But the first year you can delay it til April 1 the following year so he could have just pushed it to next year.
Yep. I would like to retire early and at that point income will be coming from investments and Roth conversions. I would hate to target too low of a MFJ tax bracket in the years preceding RMDs and then get a nasty surprise at the end.
I believe there is also a limit of 100,000 per year on QCDs, likely another limit affecting very few in practice.
I was unaware of that limit; I’m sure you’re correct that it affects very few people!
Yeah, I mean 12% is a pretty low tax rate. I think you certainly want to soak that up. Don’t put money in traditional accounts when you’re only paying 12% (or less).
22% is still kind of low, but now it’s going to depend a lot more on a lot of different circumstances that affect each of us differently. That’s a less immediately obvious answer.
The QCD? I was unaware of an April 1 exception for the first year. Is that new?
The quote that you snipped of me saying that the marginal rate in retirement would be ~0% was in the context of your first ever retirement account contributions. Assume for the sake of argument that there is no ER matching (I addressed that later), then when you’re contributing $1,000 to an account that currently has a $0 balance in it, yes I would contend that the eventual taxation on that specific $1,000 is probably 0%. Being an actuary doesn’t have anything to do with that first contribution, though the marginal decision might change as your balance grows.
Though, I don’t know the Social Security aspects like you do, so I can’t opine on those aspects.
How so? The decision on whether to make Roth/Traditional contributions does not affect your income or investments in any way. The only difference is the taxes (which then affects the dollar amounts you have available to invest outside of retirement accounts).
It was obviously a specific anecdote within a broader framework. My point was the total lifetime taxes paid under each scenario needs to be weighted for time value of money + probability of living that long. Even if you want to pick nits on the RMDs at 74, you still should discount that back.