Whitleyca is correct. $15,550 is the taxable SS in example 2. James is not the first CFP to get this wrong. Go to the IRS worksheet to follow the math and then double check with an online taxable SS calculator.
Hey James - question for clarity. In example 2: $35k IRA + $24k SS = $47k PI. So far, so good, but you then stated 85% of SS is taxable. I have understood 'SS taxability' to be a progressive, sliding scale: $47k PI -25k 0% SS taxable = $0 taxable -9k 50% SS taxable = $4,500 taxable -13k 85% SS taxable = $11,050 taxable Taxable SS = $15,550 / $24k = ~65% FIT = $35k+$15,550 = $50,550 - std deduct = taxable at ordinary rates If you might, please highlight my error for better understanding? Thanks for your content.
I believe the social security tax is not progressive. Once you cross a threshold the entire amount is subject to the corresponding percentage. That’s why it’s very important to watch your income if you’re near one of those thresholds.
The social security tax is not progressive. Once you cross a threshold the entire amount is subject to the corresponding percentage. That’s why it’s very important to watch your income if you’re near one of those thresholds.
The bottom line is that for most with other substantial income than their SS, they will essentially pay 0.85 of their marginal rate on their SS. The only way to avoid this is by having almost all money post tax, or not having any income. For couples with a standard deduction it means that the max rate on your Social Security is 0.85 times 12%(10.2%). That is up to about $120k of income!. So most of the moderate income couples will have effective tax rates of less than 10%. If Trump gets re-elected, I expect no change in these rates. Even if we end up at 15% rates it will only be an extra $4-5k of taxes. Not a retirement killer. As to Roth money, contribute when at low rates, and convert only in the teen brackets, unless you have quit large pre tax portfolios. (Say over $1.5 million) converting in the 22% brackets or above will likely be a wash otherwise.
For the situation with the tax torpedo, what is the proper strategy? Withdrawal more money from the IRA to lower the effect of the torpedo and convert the extra to Roth ?
This would make a lot more sense if you used a whiteboard or a PowerPoint presentation. Just listening to you throw numbers around is like listening to the grown-ups in a Peanuts special.
Isn't the tax torpedo marginal impact always going to be +50% or +35% of SS of where you'd otherwise be before that extra dollar? IOW, you don't leap from 0% inclusion to 85% for just one dollar, there's a step in between. And as others have pointed out, at some level of income this is just unavoidable. With moderate to high SS amounts, you get to or close to the 85% threshold even without any other income.
No. Single person with $90,000 of SS income without any other income converts to only $13,850 taxable SS. That amount is below the age 65 standard deduction. So, no tax owed. The maximum SS benefit is reportedly only $60,000 (well short of my $90,000 example). It is the income from other sources that fires the torpedo.
Oops, calculation error in the video as other commenters have said For a person filing single with PI > 34 000, the amount of SS that is added to AGI is the lessor of 85% of the benefit or 4500 + (PI-34000)*.85 Or the calculation can be described as: 50% of the amount over 25k PLUS 35% of the amount over 34k = If(PI>32000,0.5*(PI-32000)) + If(PI>44000,0.35*(PI-44000))
Given that the SSA provisional income brackets are not adjusted for inflation, but SSA payments have COLAs, how soon before there are many folks paying tax on their SSA despite having no other income?
Unlikely for many years under current law or the law prior to the Tax Cuts and Jobs Act. In each case the standard deduction plus personal exemptions (prior to TCJA) are indexed for inflation. The problem is that many will have other income from pretax IRA/401k, pension, or passive investment income. Those other sources of income cause the taxation of SS. In essence, the taxation of SS is a form of means testing.
SS by itself is non taxable You could have $80,000 in SS as a couple or $40,000 as a single filer and have no other income your tax would would be $0 Federal tax
Thanks for the info. When you say you need to be careful with the SS tax torpedo, do you mean trying to avoid it (which may not be possible) or are you suggesting to increase the provisional income to surpass the level when all 85% of your SS is already taxed and therefore any additional dollar goes back to being taxed at your regular marginal rate?
James: Your last video shows a JP Morgan historical performance chart. Based on that chart an 80% stock / 20% cash (T-Bills and/or money market) would have a $100,000 greater return than the 60/40 portfolio. My gut feeling is that it’s even less risky. Could you please do a video comparing these 2 portfolios: 80/20 & 60/40. Thanks
We will pay our taxes in retirement from tax-deferred retirement accounts, by running an income tax scenario using personal income tax software to cover income taxes due on provisional income.
Explaining the reality of needs of eco systems and time and space and other stories of foot dragging and monetization or leverage… it’s important stuff of pull through and time and management of realities… One of which are deadlines of sorts.
James, thank you for another excellent video. I really enjoy and appreciate your content. Question about Social Security. I plan to retire in about a year at age 60. I don't plan to draw Social Security until age 70. I know the years of zero income from retirement to age 70 will decrease my social security benefit but how do I determine how much the monthly benefit will decrease? Thanks again for all you do!
The average indexed monthly earnings (AIME) calculation uses your top 35 years of indexed earnings. You probably will have 35 years without zeroes…I did at age 55. Now, some of those earlier years may be lower even with the indexing for wage index inflation. Due to the bend points that AIME gets applied to, you may not see much of a decrease from retiring early. Plus, your calculated amount will be subject to COLA from age 62 on and then the delayed earnings credits from age 67 on. I’ve seen several videos showing the calculation. I’m sure you can find some as well. I think you will be relieved when you see the results.
LIS and well beyond layers and reality. Rethinking Plato’s cave, desserts, and stark laws and certificates of need and… community… Health, climate and tools #GPOHIEMSOSTS #LoveEVICTShate #projectsamdtrust
It really helps when you have the examples on the screen (for us visual folks). Please try to always add that. It's so helpful!
You really need a whiteboard to use for breaking down the numbers and examples.
💯
avoiding the 'tax torpedo' becomes impossible when you reach a certain level of income.
tax torpedo is oversold
Bro yoy really need to use illustrations with numbers. blessings
Whitleyca is correct. $15,550 is the taxable SS in example 2. James is not the first CFP to get this wrong. Go to the IRS worksheet to follow the math and then double check with an online taxable SS calculator.
Agree with this. Aren’t the 3 equations in the IRS worksheet and the lowest one is selected for the tax amount ?
Hey James - question for clarity. In example 2: $35k IRA + $24k SS = $47k PI. So far, so good, but you then stated 85% of SS is taxable. I have understood 'SS taxability' to be a progressive, sliding scale:
$47k PI
-25k 0% SS taxable = $0 taxable
-9k 50% SS taxable = $4,500 taxable
-13k 85% SS taxable = $11,050 taxable
Taxable SS = $15,550 / $24k = ~65%
FIT = $35k+$15,550 = $50,550 - std deduct = taxable at ordinary rates
If you might, please highlight my error for better understanding? Thanks for your content.
I believe the social security tax is not progressive. Once you cross a threshold the entire amount is subject to the corresponding percentage. That’s why it’s very important to watch your income if you’re near one of those thresholds.
The social security tax is not progressive. Once you cross a threshold the entire amount is subject to the corresponding percentage. That’s why it’s very important to watch your income if you’re near one of those thresholds.
You are correct. James missed the mark on this one. Dinkytown confirms your math.
Really would help a lot to have these examples written out.
The bottom line is that for most with other substantial income than their SS, they will essentially pay 0.85 of their marginal rate on their SS. The only way to avoid this is by having almost all money post tax, or not having any income. For couples with a standard deduction it means that the max rate on your Social Security is 0.85 times 12%(10.2%). That is up to about $120k of income!. So most of the moderate income couples will have effective tax rates of less than 10%.
If Trump gets re-elected, I expect no change in these rates.
Even if we end up at 15% rates it will only be an extra $4-5k of taxes. Not a retirement killer. As to Roth money, contribute when at low rates, and convert only in the teen brackets, unless you have quit large pre tax portfolios. (Say over $1.5 million) converting in the 22% brackets or above will likely be a wash otherwise.
Completely lost me when you started talking about the tax torpedo. I'll have to research it to try and figure it out
A visual would have really helped here.
For the situation with the tax torpedo, what is the proper strategy? Withdrawal more money from the IRA to lower the effect of the torpedo and convert the extra to Roth ?
This would make a lot more sense if you used a whiteboard or a PowerPoint presentation.
Just listening to you throw numbers around is like listening to the grown-ups in a Peanuts special.
Isn't the tax torpedo marginal impact always going to be +50% or +35% of SS of where you'd otherwise be before that extra dollar? IOW, you don't leap from 0% inclusion to 85% for just one dollar, there's a step in between.
And as others have pointed out, at some level of income this is just unavoidable. With moderate to high SS amounts, you get to or close to the 85% threshold even without any other income.
No. Single person with $90,000 of SS income without any other income converts to only $13,850 taxable SS. That amount is below the age 65 standard deduction. So, no tax owed. The maximum SS benefit is reportedly only $60,000 (well short of my $90,000 example). It is the income from other sources that fires the torpedo.
Thanks James for another very informative video that was very helpful!
Oops, calculation error in the video as other commenters have said
For a person filing single with PI > 34 000, the amount of SS that is added to AGI is the lessor of 85% of the benefit or
4500 + (PI-34000)*.85
Or the calculation can be described as:
50% of the amount over 25k PLUS
35% of the amount over 34k
= If(PI>32000,0.5*(PI-32000)) + If(PI>44000,0.35*(PI-44000))
Do you deduct the standard deduction before figuring out the provisional income?
No after you do the calculations
No
Given that the SSA provisional income brackets are not adjusted for inflation, but SSA payments have COLAs, how soon before there are many folks paying tax on their SSA despite having no other income?
Unlikely for many years under current law or the law prior to the Tax Cuts and Jobs Act. In each case the standard deduction plus personal exemptions (prior to TCJA) are indexed for inflation. The problem is that many will have other income from pretax IRA/401k, pension, or passive investment income. Those other sources of income cause the taxation of SS. In essence, the taxation of SS is a form of means testing.
If your only retirement benefits are Social Security benefits, you won't be taxed since you wouldn't have any provisional income.
Most to all of the extra taxable income is absorbed by the inflating tax brackets
SS by itself is non taxable You could have $80,000 in SS as a couple or $40,000 as a single filer and have no other income your tax would would be $0 Federal tax
Thanks for the info. When you say you need to be careful with the SS tax torpedo, do you mean trying to avoid it (which may not be possible) or are you suggesting to increase the provisional income to surpass the level when all 85% of your SS is already taxed and therefore any additional dollar goes back to being taxed at your regular marginal rate?
Due to the amount of forced income we have in retirement, we are unable to avoid the tax torpedo.
James: Your last video shows a JP Morgan historical performance chart. Based on that chart an 80% stock / 20% cash (T-Bills and/or money market) would have a $100,000 greater return than the 60/40 portfolio. My gut feeling is that it’s even less risky. Could you please do a video comparing these 2 portfolios: 80/20 & 60/40. Thanks
We will pay our taxes in retirement from tax-deferred retirement accounts, by running an income tax scenario using personal income tax software to cover income taxes due on provisional income.
Social security is taxed in Minnesota if your income is high enough
Correct $78,000 single filer $100,000 joint.
Explaining the reality of needs of eco systems and time and space and other stories of foot dragging and monetization or leverage… it’s important stuff of pull through and time and management of realities…
One of which are deadlines of sorts.
What?
Can you explain further?.... I don't quite understand you.
I need pictures
James, thank you for another excellent video. I really enjoy and appreciate your content. Question about Social Security. I plan to retire in about a year at age 60. I don't plan to draw Social Security until age 70. I know the years of zero income from retirement to age 70 will decrease my social security benefit but how do I determine how much the monthly benefit will decrease? Thanks again for all you do!
The average indexed monthly earnings (AIME) calculation uses your top 35 years of indexed earnings. You probably will have 35 years without zeroes…I did at age 55. Now, some of those earlier years may be lower even with the indexing for wage index inflation. Due to the bend points that AIME gets applied to, you may not see much of a decrease from retiring early. Plus, your calculated amount will be subject to COLA from age 62 on and then the delayed earnings credits from age 67 on. I’ve seen several videos showing the calculation. I’m sure you can find some as well. I think you will be relieved when you see the results.
I presume you mean *increase*
Look up your FRA benefit on SSA.gov. Every month you delay past FRA, your benefit increases 0.66%
Create your own account with the SSA you will see what you will get Since your FRA is 67 I would draw starting at 65,66
LIS and well beyond layers and reality. Rethinking Plato’s cave, desserts, and stark laws and certificates of need and… community…
Health, climate and tools #GPOHIEMSOSTS #LoveEVICTShate #projectsamdtrust