How much $ to retire and how to fund your lifestyle in retirement

[dhanson865]

F

First of all, I LOVE engaging-data. I’ve been sending ppl there for nearly seven years now. MAYBE you saw most posts here, but regardless it’s a GREAT bookmark for ppl to have.

But sadly, 2nd, sadly income like cap gains doesn’t stay in its own silo. Were it only that simple. So, IF one has CAP GAINs up to into the 0% tax bracket, and THEN interest payments (which hopefully, we ALL have now in bulk) AND dividends, possibly income, etc. then sadly the cap gains don’t just remain in their own category and stay totally “untaxed”. I’m going to do a model of this to see how much gets taxed and what amount one can consider a taxable event. When/if there are say 50-100K in additional income flows.

well if that chart is wrong and all the 0% long term cap gain still gets counted as taxable income at the normal rates, pulling SS retirement allows me to pull the same $115,000 a year while selling less TSLA so that still seems like a good deal even if it's taxed.

 

[tivoboy]

well if that chart is wrong and all the 0% long term cap gain still gets counted as taxable income at the normal rates, pulling SS retirement allows me to pull the same $115,000 a year while selling less TSLA so that still seems like a good deal even if it's taxed.

Everything goes into taxable income, and yes if you ONLY have 89K or less in cap gains in that year then you pay nothing. Technically, you could probably have more than that, with a MFJ ~$26K deduction and still pay nothing in taxes, so upgross that number. BUT, IF you have that in cap gains and IF you have other income from interest, divis, w-2, 1099, other, then it all goes into income and then SOME of it will be taxed, but it all doesn’t ALL flow into some type of GROSS income that ALL then gets taxed at some tax rate.

I would suggest, EITHER use a tax program from THIS year and run some scenarios, or use like the online AARP Tax calculator, it’s quite good, only current year but between this year and NEXT year is a rounding error… this year and 2025/26, that COULD be a huge deal but we’ll cross that bridge when we get to it.

As a VERY simple example, TWO MFJ ~ 64 with SS income COMBINED of 62K (which is good for this age bracket) could “only” have 42K in LTCG in the year and still with just the LARGE combined standard deduction pay nearly no taxes.. of course IF one has mortgage, and a couple outliers that could reduce it and allow for MORE CapGains income to not be taxed, but things like medical unless LARGE AND OUTSIZE in the year aren’t going to crest the standard deduction amount at this point. Mortgage, yes, charitable deductions NO, medical expenses or normal size, NO, etc.

 

[SageBrush]

Pulling 401k funds out that are long term capital gains

Nyet. When money is withdrawn from a 401k/IRA, it is taxed as ordinary income. There is no calling some money appreciation and some not. Cap gains does not apply

 

[SageBrush]

if you ONLY have 89K or less in cap gains in that year then you pay nothing.

Just to add emphasis to your post, this is only true if your only taxable income is cap gains. E.g., if you have $90k in 401k + SS taxable income, then all of your first ~ $460k per year of cap gains will be taxed at 15%

People may wish to check out this calculator and description to get a handle on how this works. I get the impression that misunderstandings surrounding Cap gain taxation are really common

 

[dhanson865]

Everything goes into taxable income, and yes if you ONLY have 89K or less in cap gains in that year then you pay nothing. Technically, you could probably have more than that, with a MFJ ~$26K deduction and still pay nothing in taxes, so upgross that number.

Please, lets just keep to this scenario. The screenshot was $117,100 married filing joint

running that through Understanding Tax Brackets: Interactive Income Tax Visualization and Calculator - Engaging Data

Gives us $22.50 in taxes for capital gains

There won't be any SS income in play for a decade or two if it's even a factor.

I'll have a post tax trading account (a regular retail broker account). I'll have some 401K accounts. And I'll have some Roth.

If I pull 100% of my yearly funds from each of those 3 types of accounts it gives us 3 different scenarios.

If I sell TSLA from my retail trading account and stay under 117,100 net I can sell my retail stock for it's basis + 117,100 (the basis wouldn't be counted as income but I get to pull it out). Do I have that right?

If I sell TSLA from my 401k @SageBrush corrects me to say this is not capital gains so it will be taxed like regular income and I guess in this case the basis is taxed as even the basis was never taxed previously.

Lets ignore the Roth for now, it's not a significant portion I need to worry about and I think I'm solid on what I can do with it later.

 

[dhanson865]

Just to add emphasis to your post, this is only true if your only taxable income is cap gains. E.g., if you have $90k in 401k + SS taxable income, then all of your first ~ $460k per year of cap gains will be taxed at 15%

People may wish to check out this calculator and description to get a handle on how this works. I get the impression that misunderstandings surrounding Cap gain taxation are really common

2022-2023 Capital Gains Tax Rates and Calculator - NerdWallet seems to say that the standard deduction doesn't apply to capital gains.

Understanding Tax Brackets: Interactive Income Tax Visualization and Calculator - Engaging Data suggests it does. I'm guessing this is an error where they just assumed a married couple would never have less than 27,700 in non capital gains income.

I'm specifically considering living some number of years off of nothing but capital gains and some number of years off of nothing but 401k and some number of years combining those two if advantageous.

And I see that I'd have to cap at $117,100 on the 401k years and $89,250* on the retail cap gains years if I'm trying to minimize taxes. I could use the cap gains years for times when I need to take less out.

So if I mix ~27,700 (actual) of 401k and ~89,200 (net, not including basis( or is is better if I say basis on top of that)) from the retail that is the optimal blend of the two accounts to pull the most out with the least taxes?

 

[dhanson865]

So if I mix ~27,700 (actual) of 401k and ~89,200 (net, not including basis( or is is better if I say basis on top of that)) from the retail that is the optimal blend of the two accounts to pull the most out with the least taxes?

If that concept is sound I'd need something like 3 shares 401k for 1 share retail. Most of my shares are 401k so I'd run out of retail / capital gains shares and have to go all 401k at some point.

 

[SageBrush]

2022-2023 Capital Gains Tax Rates and Calculator - NerdWallet seems to say that the standard deduction doesn't apply to capital gains.

I wondered about that too, but the table of Cap gains tax brackets is based on taxable income. 'Taxable income' is a clearly defined term to the IRS and shows up on line 15 of the 1040, after itemized/standard deduction.

So my understanding of a tax year that has incomes from SS, 401k/IRA withdrawals, and capital gain accounts based on 2023 is this:

About 85% of SS income is subject to ordinary tax brackets. I estimate $5k of benefit not taxable for one person, and about $7.5k if the spousal benefit is included.
$27k SD. $27k + $5k = $32k is non-taxable income

....
Since the 12% Fed income tax bracket for MFJ and the 0% CG tax bracket are both $90k, I think it is true that you can take in aggregate $122k incomes and expect to pay total taxes of ~ 12% on the (SS + 401k) streams *. In years without SS, figure $117k total income streams. This works out to about $10.4k taxes a year on aggregate incomes of $117k a year when SS is not in play, or $122k a year when SS is also collected by one person.

---
Hope that helps. I'm reasonably sure the above is correct but I am not a CPA or any approximation thereof. I would also caution you that this is all predicated on 2023 taxation rules. In case you are interested, here is my homebrew calculator of SS benefit federal taxation. I tried to add in enough exposed information to make it clear what is going on. It should also make it pretty clear why @tivoboy and I guesstimate that 85% of the SS benefit will be taxed as ordinary income.

* Those who want more exact figures will note that a 10% tax bracket exists for the first $22k of taxable income. That is a $440 savings compared to a 12% tax rate

 

[CHGolferJim]

Approx 85, I really don’t think it’s that high. Most “breakeven“ models I’ve looked out in the past couples years seem to indicate something closer to 77, or MAYBE 80 is a breakeven age level before it’s detrimental to claim LATE. Do you have some data or a calculator that would indicate where the breakeven intersection is? And is that assuming some invested amount of return on the SS income (net of taxes or not) of what, 8%, 10%?

If one thinks they aren’t going to live too long, past 75 say (USA males life expectancy is 77, skewed from so many covid deaths and covid period deaths) then taking things early is probably best… but if you have family and expectations as such to live to 80, 85, 90, then the monies from waiting 5 years, getting 32% more in pay for those years going forward mathematically seems to be beneficial.

It is ~85 in my case — in a simple calculation comparing actual future payment streams, and assuming immediately spent, without including NPV/interest rate discounting. So conceivably it could be 5 years less when that is included, I haven’t calculated since it doesn’t drive the decision. As you say, the payments bump up significantly in the delay scenario, but there are x years of no payments in the beginning. It’s probably a matter of needed cash flow for most people.

 

[dhanson865]

Everything goes into taxable income, and yes if you ONLY have 89K or less in cap gains in that year then you pay nothing. Technically, you could probably have more than that, with a MFJ ~$26K deduction and still pay nothing in taxes, so upgross that number. BUT, IF you have that in cap gains and IF you have other income from interest, divis, w-2, 1099, other, then it all goes into income and then SOME of it will be taxed, but it all doesn’t ALL flow into some type of GROSS income that ALL then gets taxed at some tax rate.

I would suggest, EITHER use a tax program from THIS year and run some scenarios, or use like the online AARP Tax calculator, it’s quite good, only current year but between this year and NEXT year is a rounding error… this year and 2025/26, that COULD be a huge deal but we’ll cross that bridge when we get to it.

As a VERY simple example, TWO MFJ ~ 64 with SS income COMBINED of 62K (which is good for this age bracket) could “only” have 42K in LTCG in the year and still with just the LARGE combined standard deduction pay nearly no taxes.. of course IF one has mortgage, and a couple outliers that could reduce it and allow for MORE CapGains income to not be taxed, but things like medical unless LARGE AND OUTSIZE in the year aren’t going to crest the standard deduction amount at this point. Mortgage, yes, charitable deductions NO, medical expenses or normal size, NO, etc.

I just ran it through 1040 Calculator Estimates Your Federal Taxes and I put 27,000 on the line for IRA taxable distributions (assuming that's right for pulling from my 401k) and $80,000 capital gains and the tax is $0.

So it does not look like "everything goes into taxable income".

 

[SageBrush]

I just ran it through 1040 Calculator Estimates Your Federal Taxes and I put 27,000 on the line for IRA taxable distributions (assuming that's right for pulling from my 401k) and $80,000 capital gains and the tax is $0.

So it does not look like "everything goes into taxable income".

It is difficult to put into words how this taxation works. The total tax is zero in this case, and is calculated as follows:

Non CapGains income: $27k - $27k SD = 0 taxable -> zero tax

Total income = $117k
SD = $27k
Total_income - SD = $90k. Your Total-income falls into the 0% CG tax bracket

 

[tivoboy]

is only true if your only taxable income is cap gains. E.g., if you have $90k in 401k + SS taxable income, then all of your first ~ $460k per year of cap gains will be taxed at 15%

Check out this calculator and description to get a handle on how this works. I get the impression that misunderstandings surrounding Cap gain tax

I just ran it through 1040 Calculator Estimates Your Federal Taxes and I put 27,000 on the line for IRA taxable distributions (assuming that's right for pulling from my 401k) and $80,000 capital gains and the tax is $0.

So it does not look like "everything goes into taxable income".

It does, but with a MFJ, you’re getting a 27K deduction, so you’re not breaking the cap on the 80K CG, plus the 27K additional income. Try putting 35K in the IRA withdrawal, and I think you’re going to see the income tax.

 

[dhanson865]

It does, but with a MFJ, you’re getting a 27K deduction, so you’re not breaking the cap on the 80K CG, plus the 27K additional income. Try putting 35K in the IRA withdrawal, and I think you’re going to see the income tax.

Sure I see the tax if I increase the amount of taxable income, but you saying "everything goes into taxable income" makes it sound like the 80K CG would be taxed.

I'm just clarifying so anyone that comes and reads this later realizes that not everything is taxed.

 

[tivoboy]

Sure I see the tax if I increase the amount of taxable income, but you saying "everything goes into taxable income" makes it sound like the 80K CG would be taxed.

I'm just clarifying so anyone that comes and reads this later realizes that not everything is taxed.

Same is true for qualified dividends.. an MFJ can have ~ 83,000 in QD and pay 0% in tax. But one cannot say have 83K in QD, AND 89K in CG and pay no tax, tax would be on the combined income, minus the SD, etc. etc. I’ll have to dig into the actual TurboTax calculator to see where it’s assessing the tax.

 

[dhanson865]

Same is true for qualified dividends.. But one cannot say have 83K in QD, AND 89K in CG and pay no tax

1+1=2 and 2 > 1 news at eleven. Or more accurately 83+89=172 and the scenarios we were discussing were about 117.

I'm really not sure why you felt the need to tell people that roughly half again as much income could be taxed differently as though that was anything anyone was confused about.

 

[juanmedina]

For people that are still decades away from collecting Social Security, are you still contributing to your Social Security by manufacturing income or using some other method? Having 24 years of 0 contributions and using 35 work years kills my 62 year old potential benefit by 42% from what is projected to be right now. I am not counting on SS but is something nice to have nevertheless.

 

[Oil4AsphaultOnly]

For people that are still decades away from collecting Social Security, are you still contributing to your Social Security by manufacturing income or using some other method? Having 24 years of 0 contributions and using 35 work years kills my 62 year old potential benefit by 42% from what is projected to be right now. I am not counting on SS but is something nice to have nevertheless.

I've long written off social security. Remember that you're paying into it while working. A quick google shows that the ROI of social security is 2 percent above inflation, while treasury bonds have an ROI of 3 percent above inflation. So the math just doesn't support paying into it.

 

[CHGolferJim]

I've long written off social security. Remember that you're paying into it while working. A quick google shows that the ROI of social security is 2 percent above inflation, while treasury bonds have an ROI of 3 percent above inflation. So the math just doesn't support paying into it.

Well, SS contributions aren’t optional, and you might double-check the t-bill returns. Believe inflation indexed t-bills offer 2% above inflation, and that’s higher than the historical average for non-indexed.

 

[lencap]

In fairness to SS, there is an embedded disability policy in the program as well. If you're disabled, you will get a benefit. Also, the spousal benefit is another feature. Typically that benefit is available whether or not the spouse meets the minimum earnings requirement, or the time in the system to qualify for any benefit. Since it maxes out at 50% of the spouse with the higher income, that could be a step up in benefit if the spouse earned less than half the amount equal to the other spouse's income, or if the spouse didn't work at all.

 

[Oil4AsphaultOnly]

Well, SS contributions aren’t optional, and you might double-check the t-bill returns. Believe inflation indexed t-bills offer 2% above inflation, and that’s higher than the historical average for non-indexed.

I know the contributions aren't optional, but juanmedina was asking about making voluntary contributions into it by "manufacturing income". So my ROI reference was to illustrate that investing that money into ones retirement fund could potentially yield a better return than making the voluntary contributions. The "embedded disability policy" that lencap mentioned, as well as the spousal benefits, are nice to have bonuses though.

But due to compounding, I'm still convinced that I can get better "benefits" from my own investments than from SS.