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How Much Taxes Will Retirees Owe on Their Retirement Income?


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2020 Dec 16, 10:55am   1,075 views  27 comments

by Eric Holder   ➕follow (5)   💰tip   ignore  

The brief’s key findings are:

- Households nearing retirement may forget that not all of their retirement resources belong to them, as they will need to pay some portion in taxes.
- The question is just how large the tax burden is for a typical retired household and for those at different income levels.
- Using the Health and Retirement Study, this study estimates the present discounted value of lifetime taxes at retirement to the present value of retirement income.
- While the results show that taxes for most households are negligible, the burden rises to 11 percent for the top quintile, 16 percent for the top 5 percent, and 23 percent for the top 1 percent.
- Because the HRS excludes many of the very wealthy, the reported average 401(k)/IRA holdings for the top 5 percent and 1 percent look quite similar to what many academics hold in their TIAA accounts.



https://crr.bc.edu/briefs/how-much-taxes-will-retirees-owe-on-their-retirement-income-2/

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1   Patrick   2020 Dec 16, 6:03pm  

This is a big concern of mine. Most of my money is in 401k type things that I will owe tax on.

The only strategy I can think of to minimize the taxes in retirement is to move to a state with no income tax. Anything else I can do?
2   EBGuy   2020 Dec 16, 6:06pm  

Patrick says
Anything else I can do?

Stay married. YMMV.
3   HeadSet   2020 Dec 16, 6:10pm  

Patrick says
This is a big concern of mine. Most of my money is in 401k type things that I will owe tax on.

The only strategy I can think of to minimize the taxes in retirement is to move to a state with no income tax. Anything else I can do?


You may have already thought of this, but if you expect to have a high income retirement you may want to convert some of that 401k to Roth IRA.
4   mell   2020 Dec 16, 6:10pm  

Patrick says
This is a big concern of mine. Most of my money is in 401k type things that I will owe tax on.

The only strategy I can think of to minimize the taxes in retirement is to move to a state with no income tax. Anything else I can do?


If you're extra paranoid you can cash out and take the hit or use them to invest in things where you can take a 401k loan from before retirement age. I have less than 40% of my total funds in retirement funds, I cashed out some early when they were still moderate amounts and I was switching jobs, but continued to invest with them. Sure you pay cap gains on distributions and income tax on short term swing gains but after that it's yours. I expect taxes to rise or - the more covert/amenable but equally evil method - retirement age to rise significantly. Also whenever there is a special occasion to take a penalty less distribution such as the Covid loan (and you qualify) - take it close to the max if possible but at least 50% of max allowed amount. Those are good opportunities.
5   mell   2020 Dec 16, 6:12pm  

HeadSet says
Patrick says
This is a big concern of mine. Most of my money is in 401k type things that I will owe tax on.

The only strategy I can think of to minimize the taxes in retirement is to move to a state with no income tax. Anything else I can do?


You may have already thought of this, but if you expect to have a high income retirement you may want to convert some of that 401k to Roth IRA.


The problem with the Roth is that there are zero guarantees that they won't tax it again when they need it, contrary to popular belief there is no clause you can sue for or otherwise take the government to court if they change it. Of course that is only a concern if you believe politicians are mostly self-serving and evil ;) That being said, I have a less significant amount in a Roth IRA, we shall see.
6   porkchopXpress   2020 Dec 16, 6:26pm  

Patrick says
This is a big concern of mine. Most of my money is in 401k type things that I will owe tax on.

The only strategy I can think of to minimize the taxes in retirement is to move to a state with no income tax. Anything else I can do?
I agree this is a concern. This is the way I look at it...I'm going to make a lot more income now (vs retirement), which means I'd pay more in taxes now than in retirement so saving in pre-tax is good. During your earning years if you can pay off your house and have no debt, move to a low/no-tax state, and keep your retirement expenses low, you won't need to draw down as much from your 401k so your tax bracket should be much lower. Am I missing something?
7   ignoreme   2020 Dec 16, 6:29pm  

mell says
I cashed out some early when they were still moderate amounts and I was switching jobs, but continued to invest with them


Why would you cash out and pay a penalty when you could have rolled them to an IRA?

@Patrick, I would recommend you project the value of your 401K out until retirement age then realize the government is going to be making you take out at least 5% every year. If that 5% number is greater then your income today you probably should cool it a little on the pre tax contributions and start making Roth contributions.

And the argument about future Roth taxes is bogus because if the government ever gets that desperate the taxes on your pre tax contributions are going to be insane.
8   Misc   2020 Dec 16, 6:59pm  

People put way too much faith in their financial statements.

Holding financial assets has never worked out for the masses throughout history. Mathematically, the vast majority of people must loose value on their investments.

An individual can save money, but a society cannot. At the society level it all turns Ponzi.
9   Patrick   2020 Dec 16, 7:42pm  

HeadSet says
convert some of that 401k to Roth IRA


@HeadSet I've heard of that, but didn't really understand why you'd do it. I can see now that it would let me take some of the income from my 401k before retirement without the 10% penalty that withdrawing from a 401k would.
10   BoomAndBustCycle   2020 Dec 16, 9:07pm  

Patrick says
Anything else I can do?


Just don’t withdraw too much in any given year... if you have a paid off house how much do you need to withdraw per year? Most likely less than you grossed in your working years ... so you’d pay pretty low taxes. Follow the 4% rule... never withdraw more than 4% in a year and you won’t touch your principal.
11   mell   2020 Dec 16, 9:35pm  

ignoreme says
mell says
I cashed out some early when they were still moderate amounts and I was switching jobs, but continued to invest with them


Why would you cash out and pay a penalty when you could have rolled them to an IRA?

@Patrick, I would recommend you project the value of your 401K out until retirement age then realize the government is going to be making you take out at least 5% every year. If that 5% number is greater then your income today you probably should cool it a little on the pre tax contributions and start making Roth contributions.

And the argument about future Roth taxes is bogus because if the government ever gets that desperate the taxes on your pre tax contributions are going to be insane.


You cash out because after that the money is yours without any rules and regulations. You may need some of it way before retirement age. The penalty you can make up for with one good trade. People put too much trust into government vehicles. The IRAs and annuities etc. are mainly designed for people who want their money out of reach from themselves so they don't gamble it away or spend it. Of course the more money it is you have in an IRA and the older you get the less likely it is a good decision to cash out. But if you're young and looking at a few grand or even 20 or 30 grand cashing out should be considered. And take advantage of special withdrawal opportunities such as the CARES act and others.
12   clambo   2020 Dec 16, 9:45pm  

Tax avoidance for retirement herewith.
1. Move from high tax state to low or zero tax state.
Wyoming, Nevada, Texas, Florida, New Hampshire, Alaska, Washington are possibilities.
Edit: Tennessee, New Mexico, Arizona, Idaho may have low tax rates.
2. Once you are not working where you had your 401k, it is converted to an IRA.
3. Begin to convert this IRA to a Roth IRA; the amount you convert is considered income that year.
At least you don’t pay state tax on the conversion, you are in another state.
4. Convert to Roth IRA carefully, higher income from the conversion affects other taxes, e.g. capital gains tax varies by income bracket.
I’m moving this month to Florida to avoid taxes; I am not sure how much I will convert to a Roth IRA each year, but I will convert some money each year.
I have a few different kinds of retirement accounts; IRA, Roth IRA, SEP-IRA, Variable Annuity, Health Savings Account (Fidelity) and an inherited IRA.
Incidentally, the Health Savings Account is a great retirement investment, I am not using it for medical expenses, rather like another IRA. You can contribute to it until age 65.
Biden SUCKS, Democrats SUCK, liberals SUCK. They all want to suck our blood by taxing us.
Addendum: You can also convert a portion of your IRA to a fixed income annuity. This is called a 1035 exchange.
This will pay out at a higher rate than the 4% “safe withdrawal rate”, about 6.5% if you are 65.
This will be guaranteed lifetime payments.
I might do this with $100K of my SEP-IRA.
13   FuckTheMainstreamMedia   2020 Dec 17, 12:41pm  

Patrick says
This is a big concern of mine. Most of my money is in 401k type things that I will owe tax on.

The only strategy I can think of to minimize the taxes in retirement is to move to a state with no income tax. Anything else I can do?


This is what the wife and I are planning.

Highest home purchase in retirement will be what we currently pay in rent. The homes we’ve looked at are amazing. A modest home...say 1600 sq ft, 3bd, 2ba, modern remodel with pool would have a mortgage that’s about half what we currently pay in rent.

We are looking at Nevada, Texas, and Tennesse...specifically Las Vegas, San Antonio suburbs, Dallas suburbs, and Nashville...though Nashville is expensive and Tennesse does have some income tax. The Texas homes are luxury, large, and very inexpensive even factoring in Texas property tax.

Moving out of California seems to only way to not only keep my current standard of living, but increase it in retirement is to move out of state and then avoid some of the humidity and/or hot weather by spending a month each year in Hawaii once the summer season ends in mid August and flights and room prices drop.
14   stfu   2020 Dec 17, 2:45pm  

Can you still do a ROTH conversion if you exceed income limits for contributing to a ROTH IRA for the calendar year of the conversion?

Also don't forget that GOVCO will start forcing you to liquidate your IRA's/ 401K's/ ROTH401(k)'s at 70.5 year's of age. Google RMD "required minimum distribution".
15   REpro   2020 Dec 17, 3:53pm  

You can live in CA and pay "0" income tax
16   Patrick   2020 Dec 17, 3:55pm  

REpro says
You can live in CA and pay "0" income tax


Tell us how.

(Paying that money in mortgage interest instead is not an improvement, if that's what you're getting at. The money is still gone.)
17   EBGuy   2020 Dec 17, 4:16pm  

No joke about staying married. Long term capital gains rate is 0% if you can keep income under $80k ($40k if single). It's hard to hit the $40k if drawing on Social Security plus RMD from taxed IRAs (if sizable).
18   clambo   2020 Dec 17, 4:31pm  

Roth IRA =no RMD
IRA=RMD starts age 72
IRA inherited before this year: calculated RMD based on life expectancy, recipient age 59.
Variable Annuity=no RMD, although when you buy the contract you generally pick an age to take out money.
19   Ceffer   2020 Dec 17, 4:52pm  

I think current legislation is gearing toward changing the RMD age to 75 (since they are anticipating people being fucked over by Covid and working until they rot).
20   REpro   2020 Dec 17, 4:55pm  

Patrick says
REpro says
You can live in CA and pay "0" income tax


Tell us how.

(Paying that money in mortgage interest instead is not an improvement, if that's what you're getting at. The money is still gone.)


The answer is: Depreciable business asset.
21   Patrick   2020 Dec 17, 5:33pm  

REpro says
The answer is: Depreciable business asset.



Thanks @REpro

What kind of business asset would have a depreciation that would offset a normal income around here?
22   Ceffer   2020 Dec 17, 5:36pm  

If you sell an asset at anything above it's depreciated value. you have to pay taxes on 'recapture', so depreciation at one end, but you pay for speculation at the other. Unless your strategy is just delay, they can get you in the end. They can also re-write tax law to plug up loopholes, which they often do.

There are a lot of crafty tax shelters that are 'sold' by tax lawyers. In the end, you are the one left holding the bag if the tax authorities decide your brainstorm isn't to their liking. You can wind up with litigation costs, as well as back taxes, penalties and interest.
23   Patrick   2020 Dec 17, 5:42pm  

Ceffer says
they can get you in the end


Well said.
24   REpro   2020 Dec 17, 6:46pm  

they can get you in the end.

In the END you are DEAD MEAT.
25   FortwayeAsFuckJoeBiden   2020 Dec 17, 7:34pm  

Patrick says
This is a big concern of mine. Most of my money is in 401k type things that I will owe tax on.

The only strategy I can think of to minimize the taxes in retirement is to move to a state with no income tax. Anything else I can do?


You can still roll over into Roth penalty free.
26   Patrick   2020 Dec 17, 7:41pm  

REpro says
In the END you are DEAD MEAT.



True, but hopefully there is a lot to do between now and then, and those years will require money.
27   Eric Holder   2020 Dec 18, 2:27pm  

TrumpingTits says
The best you can do is get the tax bennies while you can


Amen.

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