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Hi, everyone,

I really like purchasing stocks for my Roth. However, my income level no longer allows Roth contributions (I guess I could have worse problems). Aside from HSAs, which I am looking into, is there another option that would allow me to enjoy both investing and keeping as much of the growth? Is my only other option to invest directly in the stock market and bear the gouging taxes? (I've already explored the back door Roth; I can't do that either.)

Thank you very much!

DW
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No. of Recommendations: 4
Berkshire Hathaway works very well for the wealthy. It doesn't pay a dividend, so you get no unwanted taxable income. If you do decide to sell off a few shares to meet current expenses, it's a qualified capital gain on any increase in value.

Of course, most wealthy folks just borrow against their stock holdings for current income. Then leave the stock to their heirs with the "stepped up basis" so that no tax is due. Then have the heirs pay off the loan with the now completely untaxed shares they own.

It's the American way and you should feel very patriotic while doing it. I do.

intercst
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No. of Recommendations: 14
If you are concerned about taxes buy and hold stocks which pay no or lower dividends.I.E. Berkshire-Hathaway (no dividend) or Brookfield asset management(low-ish dividend).The best advice is to buy the best returns and do not worry about the taxes. High taxes mean you won Capitalism!
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No. of Recommendations: 6
Why do you consider the taxes to be gouging?
Do you not think you should pay any?
Taxes on capital gains are lower than income taxes for people at your level of earnings. Do you think they should be free?
I've ended up with way too much in my IRAs. Roths are fine - tax free other than the original taxes.
I would rather have regular broker accounts with capital gains tax than my IRAs where I have to pay income tax rates.
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Why not consider a back door Roth? Non-deductible Trad IRA contributions converted to Roth. There are rules to follow.

5
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Why do you consider the taxes to be gouging?
Do you not think you should pay any?

</snip>


Taxes are for the little people.

https://en.wikipedia.org/wiki/Leona_Helmsley

intercst
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Thank you so much for your suggestions. I'm gonna have to do a little more reading!
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I'm feeling much better after reading all of these. Thank you so much for your comment.
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Excellent reminders. As I said above, I'm feeling a lot better about my brokerage accounts.
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Yes, looked into a back-door Roth (see original comment). Unfortunately, the Pro Rata rule prevents me from using it. Thank you, 5imple5!
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Yes, looked into a back-door Roth (see original comment). Unfortunately, the Pro Rata rule prevents me from using it.

If you have an employer plan (401(k), 403(b), etc.) that has reasonable investment choices and expenses, and also accepts rollovers from IRAs, you can roll your Traditional IRAs into the 401(k) plan and then do the backdoor Roth contribution.

I would also suggest that if your employer plan allows Roth contributions, there are no income limits for those contributions, and you can contribute significantly more than to an IRA.

AJ
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you can roll your Traditional IRAs into the 401(k) plan

Doesn't this have to be only an IRA that was rolled over from a 401K?
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I've always looked at having to pay taxes on my investments as a blessing. It means I have contributed to all the retirement accounts for which I am eligible and still have cash left over to invest through a retail brokerage account. That is an accomplishment. That means I am doing well. That means I am blessed.

Fuskie
Who is reminded that it is lucky to have to choose through what vehicle he should invest than having to decide whether he can afford to invest through any vehicle...

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No. of Recommendations: 11
FWIW, the main difference in return between Traditional and Roth IRA's or Traditional/ Roth 401k's is the income tax bracket when the taxes are paid.

Secondary influences are distributions from Traditional IRAs, RMD or otherwise, count as income which may impact your retirement tax bracket, possible Medicare costs, and other miscellaneous tax impacts, such as raising or lowering income based tax floors and ceilings.

If your marginal income tax rate is the same when the contribution is made and in retirement, the income taxes are the same.

Here's the underlying math:

T = tax rate
C = contribution
R = annual return
Y = years invested

Traditional, taxes paid in retirement

Value = C × ((1+R)^Y) x (1-T)

Roth IRA, taxes paid upfront

Value = C x (1-T) × ((1+R)^Y)

Since multiplication is associative (A×B) = (B×A), the order of (1-T) x ((1+R)^Y) can be switched to ((1+R)^Y) x (1-T) which makes the equations identical.

Traditional, Value = C × ((1+R)^Y) x (1-T)
Roth IRA, Value = C × ((1+R)^Y) x (1-T)

The equations are identical, thus so are the returns. The only variable between the two equations is the tax rate now or in retirement.
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Doesn't this have to be only an IRA that was rolled over from a 401K?

No. The rules changed and all pre-tax IRA money is allowed to be rolled into employer plans, not just accounts that originated from a rollover from another employer plan. On this chart https://www.irs.gov/pub/irs-tege/rollover_chart.pdf you can see that money can be rolled from Traditional IRAs to pre-tax Qualified Plans, which include, for example, profit-sharing, 401(k), money purchase, and defined benefit plans.

If you happen to have some after-tax contributions in your IRA, this is a good way to separate the pre-tax money from the after-tax contributions, so that you can convert the after-tax money to a Roth without being hit by the pro-rata rule.

AJ
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AJ, you said: If you have an employer plan (401(k), 403(b), etc.) that has reasonable investment choices and expenses, and also accepts rollovers from IRAs, you can roll your Traditional IRAs into the 401(k) plan and then do the backdoor Roth contribution.

(How is everyone italicizing the text?) I don't see how this is done.

Thank you for this information! I will look into it!
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(How is everyone italicizing the text?) I don't see how this is done.

See:

https://support.fool.com/hc/en-us/articles/360000244288-How-...

Pete
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FWIW, the main difference in return between Traditional and Roth IRA's or Traditional/ Roth 401k's is the income tax bracket when the taxes are paid.

...

The equations are identical, thus so are the returns. The only variable between the two equations is the tax rate now or in retirement.


Thanks for posting one of the most complete explanations of that. I've never gotten so detailed with I try.

I am actually in the situation where my tax bracket is higher in retirement. Added to that, it is possible that I will leave a large enough IRA when I die that those who inherit, and have 10 years to withdraw it all, will get socked but good with taxes. My brother and his wife have a daughter who is an MD, married to another MD. Their combined incomes mean any inherited IRA is going to be taxed up the wazoo. Nothing quite that extreme for me, but worth thinking about even then.
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(How is everyone italicizing the text?) I don't see how this is done.

Welcome to the 1990s!
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RHinCT writes,

My brother and his wife have a daughter who is an MD, married to another MD. Their combined incomes mean any inherited IRA is going to be taxed up the wazoo.

</snip>


That's really the intent of the IRA/401k system. It's a retirement account meant to provide income during your lifetime, not a tax dodge to transfer wealth to your heirs. Any "excess savings" is going to be penalized.

The safest thing to do is to focus on spending down your IRA during your lifetime.

intercst
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" My brother and his wife have a daughter who is an MD, married to another MD. Their combined incomes mean any inherited IRA is going to be taxed up the wazoo."

******************************************************************************

The primary purpose of government is to ensure no wazoo remains untouched.

Howie52
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FWIW, the main difference in return between Traditional and Roth IRA's or Traditional/ Roth 401k's is the income tax bracket when the taxes are paid....Here's the underlying math...

Jonathan, thank you so much for all of that information. I look forward to working with these calculations! Wow!
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I've always looked at having to pay taxes on my investments as a blessing...

Fuskie, thank you. I often feel that way too. Just wanted to make sure I wasn't also being thoughtless. All of these comments are incredibly helpful.
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most wealthy folks just borrow against their stock holdings for current income

intercst, thank you...sounds risky! But now I'm curious....
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But now I'm curious....

If you're paying a 40%+ tax on a stock sale (as folks in the top bracket are), it might be cheaper to fund current income with a low cost loan. The stock is likely to continue to appreciate over longer holding periods. And 10 or 15 years of a 2% loan should be less than taking a 40% haircut in Year 1. And if you can extend this out to the year of your death, your heirs get the stock with the "stepped-up cost basis" applied, so there's no tax due. You (they) just have to pay off the outstanding loan.

Of course, this only works if you have excellent credit, and can get a long-term loan with a low interest rate.

intercst
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If you're paying a 40%+ tax on a stock sale (as folks in the top bracket are), it might be cheaper to fund current income with a low cost loan. The stock is likely to continue to appreciate over longer holding periods. And 10 or 15 years of a 2% loan should be less than taking a 40% haircut in Year 1. And if you can extend this out to the year of your death, your heirs get the stock with the "stepped-up cost basis" applied, so there's no tax due. You (they) just have to pay off the outstanding loan.

Of course, this only works if you have excellent credit, and can get a long-term loan with a low interest rate.


What I don't see is where the money comes from to pay off the loan. All I can see is an endless succession of loans on top of loans.
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What I don't see is where the money comes from to pay off the loan. All I can see is an endless succession of loans on top of loans.

</snip>


The loan is a debt settled by the estate at the time of death. The odds are very good that a 2% loan plus 10 or 20 years of stock appreciation is going to be a much better deal than taking a 40% haircut in Year One by selling shares to meet living expenses.

Essentially you are choosing to pay interest to a banker instead of Federal taxes as long as the bank is cheaper.

The heirs get a stepped up basis on the stock transferred to them, rinse and repeat.

intercst
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What I don't see is where the money comes from to pay off the loan. All I can see is an endless succession of loans on top of loans.

</snip>

The loan is a debt settled by the estate at the time of death. The odds are very good that a 2% loan plus 10 or 20 years of stock appreciation is going to be a much better deal than taking a 40% haircut in Year One by selling shares to meet living expenses.


So you make no payments against the loan??? (Not the sort of loan I've ever heard of, but then I've never been that kind of rich.) It just accumulates interest, compounding, year by year, until death? When the basis for the underlying shares gets reset and then enough sold to cover the loan.
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my income level no longer allows Roth contributions (I guess I could have worse problems). Aside from HSAs, which I am looking into, is there another option that would allow me to enjoy both investing and keeping as much of the growth?

Besides the backdoor Roth, you could also convert some of your current IRA money to a Roth. Of course, you have to pay the taxes on it now, the same as you do with a new Roth IRA contribution you make. But, you can convert money to stay in the 22% (or 24%) bracket to avoid higher brackets later (and possibly reduce the taxes on your your Social Security payments once you start collecting them).

If you don't have any IRA money, you might be able to do an "in service withdrawal" of your current 401k (trustee-to-trustee transfer to an IRA), or roll over a 401k from a former employer to an IRA, then convert.
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What if you have a 30 million dollar portfol io at Interactive Brokers and borrow 1 million a year on margin.No payments are due,the debt just accrues.After year one,you owe $1,008,600. and your stock is worth 32 million.Lather rinse repeat. As long as the first few years don't suffer a truly catastrophic drop in portfolio value or a significant rise in rates this can work for a long time.

Until it does'nt

Leverage cuts both ways.
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d can get a long-term loan with a low interest rate.

A long-term _non-callable_ loan at (preferably) a _fixed_ interest rate.

How prevalent are those?

Offhand, for most of us people, about the only such loan is a 30 year fixed rate mortgage. One thing I do know is that I am far ahead by having taken a FRM on my house instead of selling enough stocks to have paid for it in cash.
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If your marginal income tax rate is the same when the contribution is made and in retirement, the income taxes are the same.

My contributions are made at my marginal rate. My withdrawals will be made at my effective rate.

PSU
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If you're paying a 40%+ tax on a stock sale (as folks in the top bracket are), it might be cheaper to fund current income with a low cost loan.

You're exaggerating, unless you think all those folks in the top bracket are short term traders. If it's a long term sale, at most, they are paying 23.8% Federal. Even adding in a top CA bracket of 13.3%, you still only get to 37.3% - which is less than 40% For those living in states without income taxes, like Musk (TX) and Bezos (WA), they max out at 23.8% on sales of long term stock.

AJ
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My contributions are made at my marginal rate. My withdrawals will be made at my effective rate.

No, withdrawals are made at the marginal rate.

You keep saying this, but it is wrong. If you withdraw an additional $100, you pay 12%/22%/24% additional tax, even if your effective rate is 7%.

All you need to do is google it. "The marginal tax rate is the tax rate paid on the next dollar of income."
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You're exaggerating, unless you think all those folks in the top bracket are short term traders.

</snip>


Biden wants to make the LT capital gains rate for the top tax bracket same as earned income.

intercst
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My contributions are made at my marginal rate. My withdrawals will be made at my effective rate.

No, withdrawals are made at the marginal rate.

</snip>


It depends on what percent of your annual income is provided by the IRA withdrawal. If it's 90%, the average tax on the withdrawal is going to be a lot closer to your effective rate than the marginal rate.

If the IRA withdrawal is only 10% of your income, and you consider it to be "the last dollar taxed", then it's at the marginal rate.

intercst
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Biden wants to make the LT capital gains rate for the top tax bracket same as earned income.

Yeah, and there is many a slip twixt the cup and the lip.

If Biden gets his wish, top bracket payers may be forced to pay more than 40% on LTCG (if they don't find another loophole). But that hasn't happened yet. And if that's what you were basing your statement on, you should have stated so.

As it is, stating that top bracket payers pay more than 40% in LTCG is exaggerating based on current law.

AJ
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No, withdrawals are made at the marginal rate.

You keep saying this, but it is wrong. If you withdraw an additional $100, you pay 12%/22%/24% additional tax, even if your effective rate is 7%.

All you need to do is google it. "The marginal tax rate is the tax rate paid on the next dollar of income."


intercst correctly provided a good summary. Also you put into your own reply the exact situation.

My contributions are made at my marginal rate. By that, I mean my decision to invest through 401k/Roth 401k are on my last dollars earned. Either I use the 401k as a pre-tax contributions or make after-tax Roth 401k contributions. Since my marginal rate is 32%, I'm making 401k contributions.

Let's assume the tax rates don't change even though they have a sunset date. Also assume intercst is correct in that most of my retirement income will be 401k withdrawals. My 401k withdrawal will first have to fill the 12%/22%/24% marginal brackets before my first dollar is taxed at 32%. For joint returns in 2021, our income will need to exceed $329k before it starts getting taxed at 32%.

For your situation to be correct (withdrawals are made at the marginal rate), then I'll need to have other income of $329k before I make a 401k withdrawal.

PSU
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For joint returns in 2021, our income will need to exceed $329k before it starts getting taxed at 32%.

As morbid as it seems, keep in the back of your mind when making such calculations that at some point in retirement one of you won't be filing joint any longer. Income may not drop significantly, but the tax bracket break points are smaller by half.
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My contributions are made at my marginal rate. My withdrawals will be made at my effective rate.

When folks have consistent income streams I can understand the concept of assigning tax rate to income/deductions at the marginal or effective tax rate. However, when income/ deductions are spiky, 30-50% happening in a couple of months, such as commissions, capital gains, or business profits. Thus I've always used the effective tax rate as the tax rate for all income/ deduction streams.

How does one appropriately assign tax rates to the various spiky income/deduction streams?
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buy and hold. harvest losses that may come.

Explore options like MLPs and autoreinvest if you don't mind a k-1. Key is to find ones you think you can hold on to till death. Give your heirs a stepped up basis and you don't have to mess with the cap gains hit from the ever decreasing basis from the regular payouts..

MMP and EPD are my two.
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My contributions are made at my marginal rate. My withdrawals will be made at my effective rate.

That's not correct. Adding an IRA withdrawal to your income will increase your effective rate. This higher rate applies to all of your income, not just the IRA withdrawal. Here are some examples to demonstrate the fallacy of your belief. Under no circumstances is the tax on the IRA withdrawal anything close to your effective rate.

Assume a single taxpayer with $110K in income, standard deduction, with(out)$20K in IRA distributions.

Example 1: All income taxed at regular rates:

w/o IRA w/ IRA change tax rate
on change

Taxable income 95,950 115,950 20,000
Tax 17,114 21,908 4,794 23.97%

Marginal rate 24.00% 24.00%
Effective rate 17.84% 18.89%

Example 2: All income taxed at CG rates:

Taxable income 95,950 115,950 20,000
Tax 8,393 11,991 3,598 17.99% (10%/22% blended)

Marginal rate 24.00% 24.00%
Effective rate 8.75% 10.34%

Example 3: $60K of ordinary income, $50K of capital gains/qualified dividends

Taxable income 95,950 115,950 20,000
Tax 13,405 17,805 4,400 22.00%

Marginal rate 24.00% 24.00%
Effective rate 13.97% 15.36%



Ira
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How does one appropriately assign tax rates to the various spiky income/deduction streams?

Simple. The IRS has a form that gives you that information. It's the "Tax Computation Worksheet for Form 1040". Very specific instructions, too. You enter your Taxable Income (Line 15), perform the math (multiply by 22%, 24%, 32%, etc.) subtract the "Subtraction Amount", and voila: there's the tax owed. If Taxable Income is below $100,000, you just look it up in the Tax Table.

Note that the Taxable Income is just the total of the income you had in the year, it doesn't matter if it was spiky or steady. Whether you withdraw $50,000 from your IRA on January 2 or on December 30, the tax is the same.

Here's the nut of the Tax Table, in picture and in text:
https://specials-images.forbesimg.com/imageserve/5dc2fdd4f04...

MFJ
Taxable income Tax owed
$0 to $19,750 10% of taxable income
$19,751 to $80,250 $1,975 plus 12% of the amount over $19,750
$80,251 to $171,050 $9,235 plus 22% of the amount over $80,250
$171,051 to $326,600 $29,211 plus 24% of the amount over $171,050
$326,601 to $414,700 $66,543 plus 32% of the amount over $326,600
$414,701 to $622,050 $94,735 plus 35% of the amount over $414,700
$622,051 or more $167,307.50 plus 37% of the amount over $622,050


This is not hard, and I don't understand the confusion.


However, when income/ deductions are spiky, 30-50% happening in a couple of months, such as commissions, capital gains, or business profits. Thus I've always used the effective tax rate as the tax rate for all income/ deduction streams.

This doesn't make sense. Your tax is computed as above. $X plus YY% of the amount over $zz,zzz. Whatever the YY% is (from the tax table) that's the tax rate for the next dollar of your income. You can't know your effective rate until you know your tax. And your tax depends largely on how far you are above the base of your tax bracket.

If in December your taxable income so far is $100,000, and you decide to withdraw another $1000 from your IRA, your tax on that $1000 is $220. Not the $71 that your effective tax rate of 7.1% would predict.

And, really, that's the issue that us financially independent retirees always face. "If I want $5000 to buy this thing, how much do I need to make the IRA withdrawal for?" That answer is always given by your marginal rate, not by your effective rate.

"Q: What is the difference between tax rate and effective tax rate?
A: The marginal tax rate is the rate of tax charged on a taxpayer's last dollar of income. ... The effective tax rate is the actual percentage of taxes you pay on all your taxable income."
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How does one appropriately assign tax rates to the various spiky income/deduction streams?

That's a question for someone else. My wife's and my income is all W2 except for some dividends and interest. It's pretty smooth. Income in retirement will be as smooth or spiky as I want it to be until I need to start taking RMDs.

PSU
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As morbid as it seems, keep in the back of your mind when making such calculations that at some point in retirement one of you won't be filing joint any longer. Income may not drop significantly, but the tax bracket break points are smaller by half.

If I was single and retired in 2020, I would still need to exceed $163k before hitting the 32% marginal rate.

PSU
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That's not correct. Adding an IRA withdrawal to your income will increase your effective rate. This higher rate applies to all of your income, not just the IRA withdrawal. Here are some examples to demonstrate the fallacy of your belief. Under no circumstances is the tax on the IRA withdrawal anything close to your effective rate.

Assume a single taxpayer with $110K in income, standard deduction, with(out)$20K in IRA distributions.


I understand your argument. You're just off-base. Let's start with the "assume a single taxpayer with $110k in income". No, let's "assume a single retired taxpayer with $110k in income". You are making the same mistake as Rayvt in that there is a lot of income before there are any IRA/401k withdrawals. Sure, if you are a person selling a lot of appreciated stock or have rental income. There is no W2 income. Now if I put all my after-tax in tax efficient stock like BRK and not be collecting SS, then as intercst correctly analyzed, it could be 90% of my taxable income in a given year is my 401k/IRA withdrawals.

PSU
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Assume a single taxpayer with $110K in income, standard deduction, with(out)$20K in IRA distributions.

I understand your argument. You're just off-base. Let's start with the "assume a single taxpayer with $110k in income". No, let's "assume a single retired taxpayer with $110k in income".

No, I'm not. I didn't specify what the other income was. It could be interest, it could be rental income, whatever. There's nothing special about being retired other than a somewhat larger standard deduction once you're 65 or older. I admit I didn't use the "age 65" standard deduction. Doing so wouldn't change the conclusion, only the numbers would be a bit smaller. If you want to include social security income, you can include 85% of the gross benefit as part of the income taxed at regular rates.

If your argument is that as a retiree there is no income subject to tax at full regular rates, look at example 2 where all the income is LTCG or qualified dividends.

Ira
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The second paragraph of the previous response should have been italicized to indicate that it was a quote from PSU's post.

Ira
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My contributions are made at my marginal rate. By that, I mean my decision to invest through 401k/Roth 401k are on my last dollars earned. Either I use the 401k as a pre-tax contributions or make after-tax Roth 401k contributions. Since my marginal rate is 32%, I'm making 401k contributions.

Let's assume the tax rates don't change even though they have a sunset date. Also assume intercst is correct in that most of my retirement income will be 401k withdrawals. My 401k withdrawal will first have to fill the 12%/22%/24% marginal brackets before my first dollar is taxed at 32%. For joint returns in 2021, our income will need to exceed $329k before it starts getting taxed at 32%.


I know that I'd weighed in on a similar conversation a while back. I Finally found it.
Looks like PSUengineer and intercst (and others) were involved in that discussion also.


https://boards.fool.com/15-signs-that-a-wonderful-retirement...

My take-away: Not as simple as marginal tax rate or effective tax rate for the withdrawals. In our case, it is likely our IRA withdrawals will be a mix of at least 2 tax brackets. For others, you might be able to approximate it with marginal tax rate, depending on your other income (SS, pension, etc...).
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My take-away: Not as simple as marginal tax rate or effective tax rate for the withdrawals. In our case, it is likely our IRA withdrawals will be a mix of at least 2 tax brackets. For others, you might be able to approximate it with marginal tax rate, depending on your other income (SS, pension, etc...).

The most accurate approximation is that the additional income will be taxed at the marginal rate that applies to the amount of income taxed at ordinary tax rates. That is, take your taxable income, remove the amount taxed at capital gains rates, and determine the marginal rate for what's left over. Then consider if you will cross any brackets.

Ira
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https://support.fool.com/hc/en-us/articles/360000244288-How-...

For some reason they leave on of the (few) formatting tricks out.

They go through <i>italics, like this </i>

And also <b>Bold, as you can see here </b>

And finally <pre
> preserve format, which uses monospace font 
and preserves lines breaks
So you can format columns
If you want to </pre
>

But for reasons beyond understanding they leave out the <tt>command, which I find useful for quoting from magazines or newspapers, and it does the automatic line wrap to adjust to the users’ browsers. Using the “preserve format” command you run them risk of writing off the right hand side of the page, since the automatic line breaks don’t exist. </tt>

<i><b>And, of course you can combine any of the basic effects </I> </b> in any permutation and combination. But syke put it best: Welcome to Netscape 1.0.
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But for reasons beyond understanding they leave out the command,...

Heh.
*followed by text formatted text*

What they have left out is underscore and strikethough.
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Hi Rayvt,

Sorry for being unclear. Unless I misunderstood your answer, and thank you for answering, I wasn't asking how to calculate taxes due. I was asking how to assign a tax bracket to specific income streams (other than capital gains which is 0% or 20%). For example:

2019 income: Jan $50k from royalties, Feb $100k from commission, Dec $75k annual business profit. Assuming the tax brackets are 10%: $0-75k, 20% 76k-200k 30% 201k+ which rates are assigned to the royalty, commission, and business incomes?

2020 income: Jan $100k from commission, Feb $75k from business, Dec $50k commission. Assuming the tax brackets are unchanged, which tax rates are assigned to the royalty, commission, and business incomes?

More importantly, why was the division made that way?
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2019 income: Jan $50k from royalties, Feb $100k from commission, Dec $75k annual business profit. Assuming the tax brackets are 10%: $0-75k, 20% 76k-200k 30% 201k+ which rates are assigned to the royalty, commission, and business incomes?

2020 income: Jan $100k from commission, Feb $75k from business, Dec $50k commission. Assuming the tax brackets are unchanged, which tax rates are assigned to the royalty, commission, and business incomes?

More importantly, why was the division made that way?


They are all taxed at the "same" regular tax rate. It doesn't matter which order you get the income. You add all of the income together. Using the tax brackets you referenced, the first $75K of taxable income is taxed at 10%. The next 125K is taxed at 20%. Everything else is taxed at 30%.

So for 2019, your January income is taxed at 10%. 25K of your Feb income is taxed at 10% and 75K at 20%. 50K of your Dec income is taxed at 20% and 25K at 30%.

For 2020, 75K of your Jan income is taxed at 10% and 25K at 20%. All of your Feb income is taxed at 20%. 25K of your Dec income is taxed at 20% and 25K at 30%.

Ira
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But for reasons beyond understanding they leave out the < tt >command, which I find useful for quoting from magazines or newspapers, and it does the automatic line wrap to adjust to the users’ browsers. Using the “preserve format” command you run them risk of writing off the right hand side of the page, since the automatic line breaks don’t exist. < /tt >

Might be because < tt > is almost unreadable on some devices.

If I'm on my iPad I can't read anything in < tt >.
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I was asking how to assign a tax bracket to specific income streams (other than capital gains which is 0% or 20%).

You don't. That whole concept doesn't make sense. Other than capital gains, all your ordinary income for the year is added together and taxed as an aggregate.

You don't pay tax on each individual income stream. You pay tax on the TOTAL.

The IRS tax computation table makes that pretty clear.
"If the total is between $X and $Y, multiply by Z%, then subtract $Z. This is the tax owed."

This is on page 78 of the 2020 1040 Instructions. https://www.irs.gov/pub/irs-pdf/i1040gi.pdf

Example (MFJ): If line 15 (Taxable Income) is between $100,000 and $171,050, multiply by 22%, then subtract $8,420.

Line 15 is the sum of "Wages, salaries, tips, etc." + interest + dividends + IRA distributions + Pension benefits + SS benefits - deductions.
Your breakdown of "royalty, commission, and business incomes" doesn't come into play--you just add them all up and enter the total on Line 1. For tax purposes, any division you make is just in your mind...the IRS doesn't care. Doesn't even ask.

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2020 income: Jan $100k from commission, Feb $75k from business, Dec $50k commission. Assuming the tax brackets are unchanged, which tax rates are assigned to the royalty, commission, and business incomes?

None. You cannot assign as tax rate to each individual piece of income.


More importantly, why was the division made that way?

The division was just made up. For income tax purposes it has no basis in reality. The IRS does not tax income that way, the IRS taxes the income based on the TOTAL.
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So for 2019, your January income is taxed at 10%. 25K of your Feb income is taxed at 10% and 75K at 20%. 50K of your Dec income is taxed at 20% and 25K at 30%.

For 2020, 75K of your Jan income is taxed at 10% and 25K at 20%. All of your Feb income is taxed at 20%. 25K of your Dec income is taxed at 20% and 25K at 30%.


You could think of it this way, but it still is just mental accounting. The IRS doesn't care about the month or in what order your income came in. The IRS only cares about the total for the entire year.
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The division was just made up. For income tax purposes it has no basis in reality. The IRS does not tax income that way, the IRS taxes the income based on the TOTAL.

One rate to rule them all, which is the conclusion I came to. Which is why I asked about the post saying deductions are at the effective rate and withdrawals at the marginal rate. There's one rate across all streams (positive or negative) except for capital gains.

Of course we could get picky and include the impact of specific taxes like NIIT, QBI, and the 15% discount on Social Security. However, doing so leads us down a long hole of what to include or not which I'd rather stay out of.
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One rate to rule them all, which is the conclusion I came to. Which is why I asked about the post saying deductions are at the effective rate and withdrawals at the marginal rate. There's one rate across all streams (positive or negative) except for capital gains.

You have the "rates" from the other post reversed. The claim was that contributions are made at the marginal rate but distributions taxed at the effective rate. My post with actual numbers should have debunked that theory. Not only are the withdrawals taxed at the new effective rate, but also all of the other income which had been taxed at the old, lower effective rate. This results in a total change in tax which closely approximates applying the marginal rate to the withdrawal. (The variance is due to some imprecision in the tax tax tables and crossing tax bracket boundaries.)

Ira
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My post with actual numbers should have debunked that theory. Not only are the withdrawals taxed at the new effective rate, but also all of the other income which had been taxed at the old, lower effective rate.

I believe we're violently agreeing.
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Rayvt writes,

The IRS doesn't care about the month or in what order your income came in. The IRS only cares about the total for the entire year.

</snip>


Actually the IRS does worry about how your income is split quarter to quarter.

Early in my 72(t) SEPP program, I got a letter from the IRS saying I owed a late penalty on my quarterly estimated tax payments. I was doing the IRA withdrawal in 4Q and only had a trivial amount of dividend income in Q1, Q2, and Q3 which left me below the threshold to owe any taxes. The IRS said I can't just make the whole payment in 4Q, it had to be even over the course of the year. When I explained to the IRS agent what I was doing, he said, "Oh, that's fine, you just need to file Form 2210 to explain the uneven income."

Of course, that was about 20 years ago when the IRS had people you could talk to on the phone.

intercst
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In our case, it is likely our IRA withdrawals will be a mix of at least 2 tax brackets.

If I choose to do conversions to a Roth IRA, in my case it could be a mix of at least 3 tax brackets (12%, 22%, 24%).

PSU
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Which is why I asked about the post saying deductions are at the effective rate and withdrawals at the marginal rate. There's one rate across all streams (positive or negative) except for capital gains.

There are decisions that you can make that affects the rate applied to buckets on income. As I mentioned earlier for my 401k/Roth 401k post, I have no choice on my W2 income unless I quit my job. So that income fills the lower tax brackets of my total income. Therefore, I consider my 401k/Roth 401k contribution decision to be based on my highest marginal rate since I have a choice to either be taxed today or defer taxes to a future date. When it comes to withdrawals, I have multiple choices I can make. Until I reach age 70 (delay SS), I can choose to live on almost 100% income from 401k withdrawals. That is where withdraw at effective rate comes from. Or I could choose to not take any 401k withdrawals and live on almost 100% capital gains. Or I can mix it up with different percentages.

PSU
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You have the "rates" from the other post reversed. The claim was that contributions are made at the marginal rate but distributions taxed at the effective rate. My post with actual numbers should have debunked that theory. Not only are the withdrawals taxed at the new effective rate, but also all of the other income which had been taxed at the old, lower effective rate. This results in a total change in tax which closely approximates applying the marginal rate to the withdrawal. (The variance is due to some imprecision in the tax tax tables and crossing tax bracket boundaries.)

You didn't debunk anything.

intercst wrote: It depends on what percent of your annual income is provided by the IRA withdrawal. If it's 90%, the average tax on the withdrawal is going to be a lot closer to your effective rate than the marginal rate.

If the IRA withdrawal is only 10% of your income, and you consider it to be "the last dollar taxed", then it's at the marginal rate.

I agreed with intercst. Your debunking example was the difference between 110k in income without and with $20k IRA withdrawals. In other words, the $20k IRA withdrawal represents 18% of the total taxable income. You debunked something I was not disagreeing with. Congratulation for providing a non-representative example.

Why don't you go back and run it with $90k in IRA withdrawals. That's a lot closer to the 90% that intercst mentioned. What is the average tax on that withdrawal? Is it closer to the marginal rate or the effective rate?

Then I suggest you go back and reread my first post where I used the word "my" contributions and "my" withdrawals. I can post a link to the definition of "my" if needed. I don't recall ever sharing with you my income streams I will have in retirement. Yet you decide to post examples that are not representative of my situation.

PSU
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There's nothing special about being retired other than a somewhat larger standard deduction once you're 65 or older.


W2 income is probably 98% of my total current income. In retirement, I expect to need replace about 30% of my current income. So what is special in retirement is that however I decide to replace that income (SS, 401k, IRA, capital gains), all of it will be taxed at a much lower rate than today.

PSU
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"So what is special in retirement is that however I decide to replace that income (SS, 401k, IRA, capital gains), all of it will be taxed at a much lower rate than today."

Provided you keep your living expenses lower than what you need with your W2 income.
IRA, 401K will be taxed at ordinary income rates, 85% of SS will also be taxed that way. So if you need the same amount of living expenses as before, there won't be much change.
Capital gains will be taxed in the same way it is now.

You will have some choice about managing it, at least until RMD kicks in. And any change from MFJ to Single will cause your likely rates to rise.

And of course, there's always the potential for tax 'reform'.

Nothing is ever permanently better one way than the other.
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Provided you keep your living expenses lower than what you need with your W2 income.

Sure if you are making a general statement.

Now if you are specifically replying to me, I don't know why you chose to not paste this part of my reply.

"In retirement, I expect to need replace about 30% of my current income."

PSU
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I have no choice on my W2 income unless I quit my job. So that income fills the lower tax brackets of my total income.

In a simple situation where there are a few, regular, known or controllable income streams, assigning tax rates may appear reasonable. Once the situation becomes complex, assigning tax rates starts to give misleading data. As shown in a prior post, depending upon arbitrary behaviors, such as the calendar order of events, tax rate assignment fails.
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In a simple situation where there are a few, regular, known or controllable income streams, assigning tax rates may appear reasonable. Once the situation becomes complex, assigning tax rates starts to give misleading data. As shown in a prior post, depending upon arbitrary behaviors, such as the calendar order of events, tax rate assignment fails.

I don't disagree. My first post was on my situation. Then several people had to jump in to tell me how wrong I am of my situation.

PSU
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