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

[SageBrush]

My tax bill for 2021 was $120,000, for 2022 my tax bill was $68,000.

More likely you are quoting mAGI or taxable, not your tax bill

E.g.,

For a couple filed jointly with sole income from an IRA of $88k a year, the
mAGI is about $88k,
Taxable (after standard deduction) is about $64k,
And the tax bill is about $7350

I was wondering how to reduce the tax hit

You, and another 200M or so taxpayers.

 

[Unpilot]

More likely you are quoting mAGI or taxable, not your tax bill

E.g.,

For a couple filed jointly with sole income from an IRA of $88k a year, the
mAGI is about $88k,
Taxable (after standard deduction) is about $64k,
And the tax bill is about $7350



You, and another 200M or so taxpayers.

I’m pretty sure I know my tax bill....it hurt.

 

[dhanson865]

According to this article it would be worse in 2026 so I guess you should try and get hit by those taxes now as opposed to later.

Preparing for the 2025 Tax Sunset

The 2018 Tax Cuts and Jobs Act created tax changes for corporations and individuals. Individual changes are expiring after the 2025 tax year.

creativeplanning.com

Other Changes​

There will be numerous other changes to tax provisions once the TCJA has fully sunset. Many of these don’t offer great planning opportunities but are important to be aware of to help guide you through planning.

Itemized Deductions​

• The standard deduction will lower by almost half, adjusted for inflation. This will greatly increase the likelihood that you will be itemizing your deductions going forward.

 

[SageBrush]

I’m pretty sure I know my tax bill....it hurt.

You said your tax bill was $120k. If true, then your income is ~ $500k a year. So there are two choices here: either you need remediation in taxes for noobs, or you win the whiner of the month award.

 

[Oil4AsphaultOnly]

You said your tax bill was $120k. If true, then your income is ~ $500k a year. So there are two choices here: either you need remediation in taxes for noobs, or you win the whiner of the month award.

Did you miss the part where Unpilot made one-time withdrawals to pay for things? On top of the fact that extra had to be taken out to pay for the ADDITIONAL taxes, which incurred additional taxes?

The point of his question was "how to minimize the pain". We all have to pay taxes, there's just more than one way to do it. And part of early retirement is knowing how to make that retirement money last longer.

 

[Unpilot]

You said your tax bill was $120k. If true, then your income is ~ $500k a year. So there are two choices here: either you need remediation in taxes for noobs, or you win the whiner of the month award.

whiner of the month huh... I guess we are done.

 

[dhanson865]

The Standard Deduction is ~ 27k for a 'married, joint return' tax return

If e.g. you take ~ $27k from an IRA or from W-2 wages, then (~ $89K - $27K) = $62k of Cap gains is in the 0% tax bracket and the remainder is likely in the 15% tax bracket

While the standard deduction "is", my post was about my retirement in 2-3 years from now. So it looks like that standard deduction might get cut quite a bit by then.

There will be numerous other changes to tax provisions once the TCJA has fully sunset. Many of these don’t offer great planning opportunities but are important to be aware of to help guide you through planning.

Itemized Deductions​

• The standard deduction will lower by almost half, adjusted for inflation. This will greatly increase the likelihood that you will be itemizing your deductions going forward.

View attachment 958599

 

[SageBrush]

Itemized Deductions​

• The standard deduction will lower by almost half, adjusted for inflation. This will greatly increase the likelihood that you will be itemizing your deductions going forward.

That is misleading unless it happens in isolation. The revisions that happened during the Trump era were a wealth transfer from the coasts to the mid-western and southern states. It is a fair guess that if the state welfare is reduced, the tax deductions that were eliminated will be reinstated.

 

[juanmedina]

I’m pretty sure I know my tax bill....it hurt.

That was similar to my tax bill in 2021 but then I blew it in 2022 and end up losing a bunch of money. Double ouch when you can only deduct $3k a year or against future profits. I wish you can get a lump sum back just like when you have to pay if you make money.

 

[MikeC]

That was similar to my tax bill in 2021 but then I blew it in 2022 and end up losing a bunch of money. Double ouch when you can only deduct $3k a year or against future profits. I wish you can get a lump sum back just like when you have to pay if you make money.

This has been argued here before but my impression is that you can make it all back in capital gains (future profits) the next year, it's only income that the limit is $3k/year. This point is probably going to be relevant for a lot of us for our 2023 taxes. @mongo what do you say?

 

[mongo]

This has been argued here before but my impression is that you can make it all back in capital gains (future profits) the next year, it's only income that the limit is $3k/year. This point is probably going to be relevant for a lot of us for our 2023 taxes. @mongo what do you say?

Yah, offsets future capital gains but only $3k a year towards normal income. So if most of your money is in IRAs and your cash trading account goes red, it sucks.

@juanmedina, if you are talking mon-retirement future profits, you can deduct you past losses.

 

[dhanson865]

OK I've been doing all the math for various scenarios of stock price for when I turn 55 and leave my current job.

If I leave before I turn 55 I can still access all the same funds and just pay 10% extra tax as a penalty?

If by next summer TSLA was a 3.5T company with ~$1000 a share price could I just give the IRS an extra 10% on my taxes for 4 or 5 years and pull out whatever I want?

Then is it taxed as 10% of the withdrawal or 10% extra tax on top of the amount on Line 16 of the 1040?

If I want to live off $55,000 a year until I'm 59.5 years old and my tax on the 1040 for that is ~$2,000 a year. Is my penalty for early withdrawal a few hundred per year or is it a few thousand a year (based on the withdrawals)?

I suppose if it's thousands per year I just live frugally and pull as much as I can from my retail stocks before pulling from the 401k but I just want to make sure I understand the scenario.

 

[Oil4AsphaultOnly]

OK I've been doing all the math for various scenarios of stock price for when I turn 55 and leave my current job.

If I leave before I turn 55 I can still access all the same funds and just pay 10% extra tax as a penalty?

If by next summer TSLA was a 3.5T company with ~$1000 a share price could I just give the IRS an extra 10% on my taxes for 4 or 5 years and pull out whatever I want?

Then is it taxed as 10% of the withdrawal or 10% extra tax on top of the amount on Line 16 of the 1040?

If I want to live off $55,000 a year until I'm 59.5 years old and my tax on the 1040 for that is ~$2,000 a year. Is my penalty for early withdrawal a few hundred per year or is it a few thousand a year (based on the withdrawals)?

I suppose if it's thousands per year I just live frugally and pull as much as I can from my retail stocks before pulling from the 401k but I just want to make sure I understand the scenario.

Glad you're asking this, because the wording matters. It's NOT 10% extra tax (aka 10% extra of what your taxes would've been). It's an EXTRA 10% tax (aka tax rate that's applied to your taxable income). So for your $55,000/year example, the penalty would be an additional $5,500 in taxes due for that year.

It's a pretty hefty penalty designed to discourage early withdrawals. Earlier in this thread, people were discussing IRS Rule 72t (aka S.E.P.P - Substantially Equal Periodic Payments) for doing early withdrawals under special conditions that would avoid the 10% penalty. But you have to be VERY diligent about it, otherwise if you mess up, you'll owe the 10% penalty for EVERY YEAR that you've been taking those early withdrawals!! So use that rule with care.

 

[CarlS]

before pulling from the 401k

Also, check out the 401k rule of 55, which allows you to take money from a 401k penalty free if you leave your job at age 55 or later: The Rule of 55

 

[mongo]

OK I've been doing all the math for various scenarios of stock price for when I turn 55 and leave my current job.

If I leave before I turn 55 I can still access all the same funds and just pay 10% extra tax as a penalty?

If by next summer TSLA was a 3.5T company with ~$1000 a share price could I just give the IRS an extra 10% on my taxes for 4 or 5 years and pull out whatever I want?

Then is it taxed as 10% of the withdrawal or 10% extra tax on top of the amount on Line 16 of the 1040?

If I want to live off $55,000 a year until I'm 59.5 years old and my tax on the 1040 for that is ~$2,000 a year. Is my penalty for early withdrawal a few hundred per year or is it a few thousand a year (based on the withdrawals)?

I suppose if it's thousands per year I just live frugally and pull as much as I can from my retail stocks before pulling from the 401k but I just want to make sure I understand the scenario.

Yes, you can, but here's the pain point, if living off retirement, 10% isn't 10%.

At 55k a year you are around the 12% or 22% federal tax brackets

Per 1000 net:
12% base tax rate
1000/(1-.12) = 1,136
12% + 10% = 22%
1000/(1-.22) = 1,282 gross a 13% increase

22% base tax rate
1000/(1-.22)=1,282 gross
22% + 10% = 32%
1000/(1-.32) = 1,471 gross a 15% increase

State taxes make things worse

If you were more than 5 years out from 59-1/2, convertions to a Roth would let you avoid the penalty.

 

[dhanson865]

Yes, you can, but here's the pain point, if living off retirement, 10% isn't 10%.

At 55k a year you are around the 12% or 22% federal tax brackets

Per 1000 net:
12% base tax rate
1000/(1-.12) = 1,136
12% + 10% = 22%
1000/(1-.22) = 1,282 gross a 13% increase

22% base tax rate
1000/(1-.22)=1,282 gross
22% + 10% = 32%
1000/(1-.32) = 1,471 gross a 15% increase

State taxes make things worse

If you were more than 5 years out from 59-1/2, conversions to a Roth would let you avoid the penalty.

married filing jointly so lower tax brackets than your examples. Think 10% tax bracket and standard deduction.

No state income tax.

I already have some roth funds but from what I'm seeing that has the same 10% penalty for withdrawing before 59-1/2 that my regular 401k has.

also if I did pull early and pay penalties it wouldn't be my only funds, I have some funds on the retail side that wouldn't have an early withdrawal penalty. I'm just trying to figure out the scale of the penalty

 

[CarlS]

married filing jointly so lower tax brackets than your examples. Think 10% tax bracket.

No state income tax.

I already have some roth funds but from what I'm seeing that has the same 10% penalty for withdrawing before 59-1/2 that my regular 401k has.

But, you can withdraw any and all contributions to your Roth as long as the Roth has been open for 5 years. So, you can't take out any gains without penalty, but any money that you put in can be taken out tax (you put it in after tax) and penalty free.

 

[dhanson865]

But, you can withdraw any and all contributions to your Roth as long as the Roth has been open for 5 years. So, you can't take out any gains without penalty, but any money that you put in can be taken out tax (you put it in after tax) and penalty free.

OK so I have x shares of TSLA in a roth that has been open for several years. Last time I added to that roth was Jan 2023. I bought shares with all the funds I could so there is less than $200 cash left in the fund. In 2028 if I want to pull funds out and I'm still under the age of 59-1/2 I can sell shares and leave the profits in and pull the initial cost of the shares back out? Or did I lock that money in there by buying stock?

If I didn't lock it in, can I sell shares from an over 5 year old account as each tranche of shares becomes 5 years old?

Do the age of the shares matter and the age of the account and the date it was last added to, or is it just a 5 year old or older account even if it has newer funds?

Either way when I turn 59-1/2 I have access to other funds in much larger accounts so it's just a question of if I can have the flexibility to pull from it penalty free or not in that window between the 5 year mark and when I turn 59-1/2.

I also can create additional roth accounts for later use, I'm just trying to make sure I understand how I can use them so I know how granular I need to make future accounts.

 

[dhrivnak]

Reading all these posts, I have no idea how anyone can survive on $110K a year in a HCOL city in the US even assuming all debts are paid off. Looks like I have no easy way to avoid taxes even if I have enough savings to cover my expenses.

Move to TN. We are getting by on about $60K a year. And that includes one significant trip a year, like 7 weeks in Eastern Canada with our little camper. And having solar for the house helps as virtually no utility bills as well.

 

[mongo]

married filing jointly so lower tax brackets than your examples. Think 10% tax bracket and standard deduction.

No state income tax.

I already have some roth funds but from what I'm seeing that has the same 10% penalty for withdrawing before 59-1/2 that my regular 401k has.

also if I did pull early and pay penalties it wouldn't be my only funds, I have some funds on the retail side that wouldn't have an early withdrawal penalty. I'm just trying to figure out the scale of the penalty

10% is still close to the 12% calc
1000/.9 = 1,111
1000/.8 = 1,250
12.5% higher cost

OK so I have x shares of TSLA in a roth that has been open for several years. Last time I added to that roth was Jan 2023. I bought shares with all the funds I could so there is less than $200 cash left in the fund. In 2028 if I want to pull funds out and I'm still under the age of 59-1/2 I can sell shares and leave the profits in and pull the initial cost of the shares back out? Or did I lock that money in there by buying stock?

If I didn't lock it in, can I sell shares from an over 5 year old account as each tranche of shares becomes 5 years old?

Do the age of the shares matter and the age of the account and the date it was last added to, or is it just a 5 year old or older account even if it has newer funds?

Either way when I turn 59-1/2 I have access to other funds in much larger accounts so it's just a question of if I can have the flexibility to pull from it penalty free or not in that window between the 5 year mark and when I turn 59-1/2.

I also can create additional roth accounts for later use, I'm just trying to make sure I understand how I can use them so I know how granular I need to make future accounts.

Trading doesn't matter, just the $ you contributed.
Any contributions can be withdrawn at any time without penalty. Conversions each need a 5 calendar year cooling off period.
So, yes, you can sell shares and pull out up to your total contribution tax and penalty free (it was all post-tax money to begin with)
However! Because it is tax free, you may want to consider leaving it for big purchases that would push you into higher tax brackets.