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Author: bighairymike Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76398  
Subject: Re: Investing after retirement Date: 3/23/2006 7:02 PM
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Well, lets start with the tax rates. There is no specific rate you are taxed when you retire. Your income is taxed just like any other taxpayer. The sources of your income may be different but the tax rates are the same. Taxes are progressive. So the more you make the higher percentage you pay. 2006 rates are thus:

10% on the first $7,550, plus
15% on any amount over $7,550 but less than $30,650, then
25% on any amount over $30,650 but less than $74,200

And they go up from there...

Aside from this, the personal exemption is $3,300 and the standard deduction is $5,150 for single.

So putting it all together:

15% bracket max is $30,650, plus $3,300 personal exemption, plus %5,150 standard deduction = $39,100.

You mention you are just retired but don't give your age. Under 65 the IRS assesses a 10% penalty on TIRA distributions, but your conversion to a Roth is not considered a distribution so no penalty. Just pay the regular tax which is 15% in this illustration. Money converted to the Roth can earn and grow and when eventually withdrawn from the Roth, there is no tax at all. Capital gains and dividends in a Roth is about the only area I know where you can actually produce some tax free earnings.

Putting it another way, if your adjusted gross income is 39,100 you would have a taxable income of $30,650 after subtracting personal exemption and standard deduction.

And $30,650 is the max amount that gets the 15% rate. If you had another $1,000 of income, you would pay $250 tax on it because that $1,000 would be into the 25% bracket.

So lets say you have $20,000 of other income (interest, dividends, W-2 incime from a part time job). Then you could covert $19,100 from your TIRA to your Roth and would only have to pay 15% tax on that conversion. $20,000 of other plus $19,100 converted = the $39,100 max shown above.
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