The Retirement Gamble

[Libertarian666]

How do you figure there would be no taxes due on $75K of income as a retiree?

Because all that income is not wages but capital gains taxed at 0% if you're under the 25% bracket, which for a married couple is about 75k. It's actually even better than that, since their standard deduction adds another 11k of tax-free capital gains income.

Of course, your state can tax this capital gains income however they want.

Again, this assumes you have all your assets in taxable accounts, that all your gains are capital gains, and that the tax rules haven't changed.

I think the likelihood of all those conditions holding is pretty low. 

[Pointedstick]

I thought capital gains were taxed at 0% if you were under the 15% bracket?  Or did I read that wrong somewhere else?

Federally, it's the 10 and 15% brackets! See https://en.wikipedia.org/wiki/Capital_g ... strategies

Again, this assumes you have all your assets in taxable accounts, that all your gains are capital gains, and that the tax rules haven't changed.

I think the likelihood of all those conditions holding is pretty low. 

Actually, dividends are taxed at 0% in these brackets, too. But yes, interest from bonds would still be taxable at income tax rates (10 or 15% here), and of course this assumes the current rules remain the future rules, that's true.

[Tyler]

Again, this assumes you have all your assets in taxable accounts, that all your gains are capital gains, and that the tax rules haven't changed.

I think the likelihood of all those conditions holding is pretty low. 

I agree that you must think about taxes when planning for retirement, and you can't assume that they will never go up.  However, you also shouldn't ignore the actual present-day tax rules out of fear!  The tax code favors those with low-income (which is popular politically so will be slower to change), and many people who have worked hard and saved diligently don't realize that will apply to them once they leave their high-paying jobs.

Long-term capital gains and dividends are tax-free if your income as a couple is less than $70-75k, which is perfectly reasonable for an early retiree with no significant side income.  Bond interest is taxed as ordinary income, but if it's less than your deductions and exemptions it doesn't affect you.  Gold is a little trickier, but smart tax-loss harvesting in years when you do need to sell gold can minimize the capital gains impact. So once you cut off the regular job income, taxes can be effectively zero for many early retirees. 

Once SS and IRA distributions kick in, taxes most likely will start to take a bit of a bite and one should absolutely account for them in their calculations.

Of course, YMMV.  For the iEnabled people out there, download the free app TaxCaster (made by TurboTax). You can quickly run a few numbers to assess your own personal situation. 

[MachineGhost]

Just a point, but Australia just instituted a 15% tax on their version of the IRA on amounts above $100K.  It's not enough that it was taxed going in, it's now taxed coming out.  Thank you, Cyprus!

[Pointedstick]

Long-term capital gains and dividends are tax-free if your income as a couple is less than $70-75k, which is perfectly reasonable for an early retiree with no significant side income.  Bond interest is taxed as ordinary income, but if it's less than your deductions and exemptions it doesn't affect you.  So once you cut off the regular job income, taxes can be effectively zero for many early retirees. 

That's a great point about using your standard deduction to deduct bond income. Living in a no-capital-gains-tax state, making under 11k in bond income and under 70k in dividend and capital gains income would indeed make for a truly tax-free retirement… today. I think Tyler is right about taking advantage of the situation today if you can. No use fretting about an uncertain future.

[Libertarian666]

Just a point, but Australia just instituted a 15% tax on their version of the IRA on amounts above $100K.  It's not enough that it was taxed going in, it's now taxed coming out.  Thank you, Cyprus!

This is just going to get worse. I hope no one is counting on Roth IRA gains to remain tax-free.

[rocketdog]

Just a point, but Australia just instituted a 15% tax on their version of the IRA on amounts above $100K.  It's not enough that it was taxed going in, it's now taxed coming out.  Thank you, Cyprus!

This is just going to get worse. I hope no one is counting on Roth IRA gains to remain tax-free.

Don't give them any ideas!!!  

[Libertarian666]

Just a point, but Australia just instituted a 15% tax on their version of the IRA on amounts above $100K.  It's not enough that it was taxed going in, it's now taxed coming out.  Thank you, Cyprus!

This is just going to get worse. I hope no one is counting on Roth IRA gains to remain tax-free.

Don't give them any ideas!!!  

Believe me, they don't need me to give them that idea, or any other ideas for robbing us. Sort of like the moochers in the Twentieth Century Motor Factory, that's the only talent they seem to have.

[AgAuMoney]

I'm very well acquainted with [the HBPP]. In fact, I wrote a program to track it many years ago (before the availability of general-purpose spreadsheet programs) which, IIRC Harry mentioned in his newsletter.

You wrote a program to track the HB PP before 1980?  Or at least before 1982?  VisiCalc came out in 1979 and there were multiple spreadsheets available by 1982 on Apple, TRS-80, and CP/M.  An MS-DOS spreadsheet came out with or immediately after the PC in 1981 or 1982.  Those early spreadsheets were pretty easy to write, once Dan Bricklin gave everyone the idea.

[AgAuMoney]

While they might directly tax the Roth, I expect they'll be a bit more indirect.  Such as thru a national sales tax, VAT or similar.

If they ever eliminate the income tax (a very big if) I would expect them to essentially force a conversion of every tax deferred account to post tax before or at the sunset of the income tax.  That way they'll get every dollar they feel entitled to get.

[Libertarian666]

I'm very well acquainted with [the HBPP]. In fact, I wrote a program to track it many years ago (before the availability of general-purpose spreadsheet programs) which, IIRC Harry mentioned in his newsletter.

You wrote a program to track the HB PP before 1980?  Or at least before 1982?  VisiCalc came out in 1979 and there were multiple spreadsheets available by 1982 on Apple, TRS-80, and CP/M.  An MS-DOS spreadsheet came out with or immediately after the PC in 1981 or 1982.  Those early spreadsheets were pretty easy to write, once Dan Bricklin gave everyone the idea.

IIRC, it was around 1980, and I'm pretty sure it was for the TRS-80. I may still have a copy of the newsletter where he announced it, but I'll have to look for it this weekend if anyone is interested.

[rocketdog]

While they might directly tax the Roth, I expect they'll be a bit more indirect.  Such as thru a national sales tax, VAT or similar.

If they ever eliminate the income tax (a very big if) I would expect them to essentially force a conversion of every tax deferred account to post tax before or at the sunset of the income tax.  That way they'll get every dollar they feel entitled to get.

Retirement money is a bit of a sacred cow, like Social Security (aka "The 3rd Rail").  I can see them tinkering with it, as in changing the contribution limits, or changing the withdrawal requirements.  But the more I think about it the more I suspect that making wholesale changes overnight to the Roth program will be political suicide. 

[Pointedstick]

Retirement money is a bit of a sacred cow, like Social Security (aka "The 3rd Rail").  I can see them tinkering with it, as in changing the contribution limits, or changing the withdrawal requirements.  But the more I think about it the more I suspect that making wholesale changes overnight to the Roth program will be political suicide.

I would like to imagine this too, but I think we're hurt by just how few people have Roth IRAs. Lots of people have 401ks but Roth IRAs are rare. If they really wanted to blow up the Roth IRA, they'd just start with a PR campaign to demonize them as an unfair tax loophole used by the wealthy, and the 99.9% of people who don't have a Roth IRA and have never heard of one will nod in agreement or fail to care enough to oppose it. They already started laying the groundwork in the public consciousness by talking about Mitt Romney's clever use of IRAs (non-Roth, to be fair) during the last presidential campaign.

[Pointedstick]

There are income limits for eligibility to make Roth contributions. These are anything but an investment vehicle for high earners.

I agree with you, but I'm just trying to flesh out the propaganda they'll use. It doesn't matter that it's wrong; people will want to believe it if you can get them mad at rich people and equate paying taxes with patriotism. Besides, there are what some might describe as actual loopholes, such as Roth IRA LLCs and no-income-limit rollovers from 401ks and other types of IRA (traditional, SEP, etc).

[rocketdog]

Retirement money is a bit of a sacred cow, like Social Security (aka "The 3rd Rail").  I can see them tinkering with it, as in changing the contribution limits, or changing the withdrawal requirements.  But the more I think about it the more I suspect that making wholesale changes overnight to the Roth program will be political suicide.

I would like to imagine this too, but I think we're hurt by just how few people have Roth IRAs. Lots of people have 401ks but Roth IRAs are rare.

Don't forget that over the past 2 years huge numbers of people converted all or part of their IRA savings to a Roth in order to take advantage of the lifting of the income limit restrictions.  So there is a whole new army of investors who were willing to cough up income taxes on a big chunk of their retirement money to get themselves a brand-spanking-new Roth account (or else super-fund their existing account).  Are you suggesting that this was all a carefully planned set-up? 

[Pointedstick]

Don't forget that over the past 2 years huge numbers of people converted all or part of their IRA savings to a Roth in order to take advantage of the lifting of the income limit restrictions.  So there is a whole new army of investors who were willing to cough up income taxes on a big chunk of their retirement money to get themselves a brand-spanking-new Roth account (or else super-fund their existing account).  Are you suggesting that this was all a carefully planned set-up?

No, I think it was a poorly-planned grab for some more income tax revenue in the short term. But you're right, a lot of people did do that. I wonder how many people do actually have Roth IRAs. Anyone have numbers for that?

[moda0306]

Retirement money is a bit of a sacred cow, like Social Security (aka "The 3rd Rail").  I can see them tinkering with it, as in changing the contribution limits, or changing the withdrawal requirements.  But the more I think about it the more I suspect that making wholesale changes overnight to the Roth program will be political suicide.

I would like to imagine this too, but I think we're hurt by just how few people have Roth IRAs. Lots of people have 401ks but Roth IRAs are rare. If they really wanted to blow up the Roth IRA, they'd just start with a PR campaign to demonize them as an unfair tax loophole used by the wealthy, and the 99.9% of people who don't have a Roth IRA and have never heard of one will nod in agreement or fail to care enough to oppose it. They already started laying the groundwork in the public consciousness by talking about Mitt Romney's clever use of IRAs (non-Roth, to be fair) during the last presidential campaign.

PS,

I don't know about the hippies around you in California (jk, I love Cali... but I knew you'd appreciate this more than be offended), but young (and relatively liberal) professionals I know in the Twin Cities LOVE the Roth IRA.  That's not to say they have masses of wealth inside of them, but they use them.  And more and more people are being encouraged to use their Roth 401(k), which has many of the same advantages.

The way I see it, at the very least you have the likely opportunity to pull out all or some of your basis without even recognizing a taxable event, much less blasting you up into unheard of tax brackets, in the year that the wolves appear to be voting on what to have for dinner. 

The real risk, to me, is if they found a way to essentially retro-actively charge us for distributions of basis in that year.  This would be a true feat. I can't imagine things coming to that!

And the need would be due to some populist rage against the Mitt Romneys of the world having tens of millions of dollars in these accounts (which I kind of agree with), not because the feds need more tax revenue.  The gov't has no qualms drawing lines to make sure they don't piss off too many of us underlings while sticking it to the uber-wealthy machine-o-tax-trickery.  But in the end, this is why I use a mix of pre-tax and post-tax retirement accounts, HSA, i-bonds, have the option to keep tax-efficient assets in taxable accounts, and have plenty of convertible term insurance just in case I have to resort to less-than-ideal tax avoidance mechanisms with my money.  Physical gold would probably be largely untracable in a real confiscatory environment and therefore essentially a "fraudsters" Roth.  I'm not suggesting for people to commit tax fraud, but I think we'd all admit that there's a point at which we'd be willing to resort to it if the risks were low enough.  Some already have crossed that threshhold .

It's all about back doors.

[notsheigetz]

And the need would be due to some populist rage against the Mitt Romneys of the world having tens of millions of dollars in these accounts (which I kind of agree with), not because the feds need more tax revenue.

If Mitt Romney has tens of millions of dollars in tax-deferred accounts why does that bother you? Assuming he doesn't figure out some way of avoiding MRD's, he's going to be paying a lot of $ into the public coffers on the crop of money from wise investments - probably a lot more than if he'd paid the tax on the seed money and let the government spend it on the usual piffle.