## How to pay ZERO taxes in retirement with 6-figure expenses

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
#Cruncher
Posts: 2712
Joined: Fri May 14, 2010 2:33 am
Location: New York City
Contact:

### Re: How to pay ZERO taxes in retirement with 6-figure expenses

Bongleur wrote:
Sat Feb 17, 2018 9:53 pm
You can imagine that if you retired into a 0% bracket, but needed \$100,000 -- do some guesses as to the future bracket schedule & see how much money you would pay in taxes -- and remember that you need the entire \$100,000, so you would be withdrawing more to cover the taxes. Which is also taxed at the highest bracket rate... ad infinitum. Ah, Calculus...
No calculus is required. After guessing the marginal tax bracket, only algebra is needed. For example, assuming 2018 brackets and standard deduction, let "w" be the withdrawal amount:

Code: Select all

``````Single
14,089.50 Tax on 82,500 [top of 22% bracket] = 10% * 9525 + 12% * (38700 - 9525) + 22% * (82500 - 38700)
w - (w -  12,000 - 82,500) * 0.24 - 14,089.50 = 100,000
0.76w +  22,680                  - 14,089.50 = 100,000
0.76w =  91,409.50
w = 120,275.66
Joint
8,907 = tax on 77,400 [top of 12% bracket] =  10% * 19050 + 12% * (77400 - 19050)
w - (w -  24,000 - 77,400) * 0.22 - 8,907 = 100,000
0.78w +  22,308                  - 8,907 = 100,000
0.78w =  86,599
w = 111,024.36``````
Alternatively you could amend the Compare sheet of my Marginal Tax Rates spreadsheet to calculate after tax income and then use Excel's Goal Seek tool to find the ordinary income such that after tax income will be \$100,000.

Code: Select all

``````
Single     Joint
------     -----
Rate: ord income bracket 1            10%       10%
Rate: ord income bracket 2            12%       12%
Rate: ord income bracket 3            22%       22%
Rate: ord income bracket 4            24%       24%
Floor: ord income bracket 2         9,525    19,050
Floor: ord income bracket 3        38,700    77,400
Floor: ord income bracket 4        82,500   165,000
Non-SS Ordinary Income            120,276   111,024 <-- found with Goal Seek

Code: Select all

``````Deductions plus Exemptions         12,000    24,000
Taxable Income                    108,276    87,024
Taxable: ord income bracket 4      25,776       -
Taxable: ord income bracket 3      43,800     9,624
Taxable: ord income bracket 2      29,175    58,350
Taxable: ord income bracket 1       9,525    19,050
Tax: ord income bracket 4           6,186       -
Tax: ord income bracket 3           9,636     2,117
Tax: ord income bracket 2           3,501     7,002
Tax: ord income bracket 1             953     1,905
Total tax                          20,276    11,024
After tax income                  100,000   100,000``````
Edited 6/30/2018 11:30 AM to replace broken link to Goal Seek.
Last edited by #Cruncher on Sat Jun 30, 2018 10:29 am, edited 1 time in total.

ivk5
Posts: 493
Joined: Thu Sep 22, 2016 9:05 am

### Re: How to pay ZERO taxes in retirement with 6-figure expenses

Bongleur wrote:
Sat Feb 17, 2018 9:53 pm
Which is also taxed at the highest bracket rate... ad infinitum. Ah, Calculus...
Off topic but tax gross-up requires only basic algebra...

Juice3
Posts: 71
Joined: Sun Nov 05, 2017 7:40 am

### Re: How to pay ZERO taxes in retirement with 6-figure expenses

ivk5 wrote:
Sun Feb 18, 2018 3:03 pm
Bongleur wrote:
Sat Feb 17, 2018 9:53 pm
Which is also taxed at the highest bracket rate... ad infinitum. Ah, Calculus...
Off topic but tax gross-up requires only basic algebra...
Still off topic and ivk5 is very correct

Differential calculus is the study of the rate of change of a function and thus a reasonable description of most tax topics here. General tax strategy is to increase income to the point where rate of change increases or reduce income to the previous point the rate of change changed.

Lieutenant.Columbo
Posts: 1178
Joined: Sat Sep 05, 2015 9:20 pm
Location: Los Angeles CA

### Re: How to pay ZERO taxes in retirement with 6-figure expenses

Juice3 wrote:
Sat Jun 30, 2018 8:48 am
ivk5 wrote:
Sun Feb 18, 2018 3:03 pm
Bongleur wrote:
Sat Feb 17, 2018 9:53 pm
Which is also taxed at the highest bracket rate... ad infinitum. Ah, Calculus...
Off topic but tax gross-up requires only basic algebra...
Still off topic and ivk5 is very correct

Differential calculus is the study of the rate of change of a function and thus a reasonable description of most tax topics here. General tax strategy is to increase income to the point where rate of change increases or reduce income to the previous point the rate of change changed.
Juice3, did you instead mean that Bongleur was correct?
Lt. Columbo: Well, what do you know. Here I am talking with some of the smartest people in the world, and I didn't even notice!

Juice3
Posts: 71
Joined: Sun Nov 05, 2017 7:40 am

### Re: How to pay ZERO taxes in retirement with 6-figure expenses

Lieutenant.Columbo wrote:
Sat Jun 30, 2018 12:59 pm
did you instead mean that Bongleur was correct?
They are both correct in my opinion

Posts: 50245
Joined: Sat Dec 20, 2008 5:34 pm
Contact:

### Re: How to pay ZERO taxes in retirement with 6-figure expenses

Juice3 wrote:
Sat Jun 30, 2018 8:48 am
ivk5 wrote:
Sun Feb 18, 2018 3:03 pm
Bongleur wrote:
Sat Feb 17, 2018 9:53 pm
Which is also taxed at the highest bracket rate... ad infinitum. Ah, Calculus...
Off topic but tax gross-up requires only basic algebra...
Still off topic and ivk5 is very correct

Differential calculus is the study of the rate of change of a function and thus a reasonable description of most tax topics here. General tax strategy is to increase income to the point where rate of change increases or reduce income to the previous point the rate of change changed.
Marginal tax rate is the calculus discussed here. In some cases, it could be a partial derivative.

See the wiki: Marginal rates explained
To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

JBTX
Posts: 4447
Joined: Wed Jul 26, 2017 12:46 pm

### Re: How to pay ZERO taxes in retirement with 6-figure expenses

livesoft wrote:
Thu Dec 22, 2011 4:40 am
OK, provocative thread title. Let's see if it holds water.

The setup:

Married, filing jointly, ages 55.
They need \$100,000 a year after-tax to pay for expenses. Typical rule of thumb is that the sustained withdrawal rate from a portfolio is 4%, but they also have the possibility of Social Security benefits that would go towards that \$100K, so give the couple \$2 million in a portfolio split half in taxable and half in tax-advantaged. Of the tax-advantaged, 94% is in tax-deferred 401(k), 403(b), traditional IRA accounts and 6% in Roth IRAs.

They have been diligently tax-loss harvesting and the stock market has not done so well in the last few years, so their net gains in the taxable assets are essentially zero. That is, they have enough carryover losses to deduct \$3,000 from ordinary income each year for quite a while. If they sell any taxable assets, the net capital gain will be essentially zero for a number of years. Their taxable portfolio generates 2% in qualified dividends each year. They get a foreign tax credit as well. They live in a state with no state income taxes.

They have a kid in college and one in high school who will go to college, thus they will get education credits, but they pay for college partially out of 529 plans (not included in portfolio described above).

They have no debts and own their home mortgage-free. They take the standard deduction in odd years and bunch property taxes and charitable contributions into even years.

They will delay taking SS until age 70 while converting their tax-deferred assets to Roth IRAs between ages 55 and 70.

OK, that's the setup. Any comments before we compute the taxes and the amount of Roth conversions each year?
This thread has been an excellent thread at creating an ongoing discussion and illustrating a particular concept. Sorry if this has been addressed, I didn't go through the entire thread, but the above bolded/underlined seems to me to be the most problematic assumption. It doesn't seem practically possible to tax lost harvest, and minimize cap gains along the way, and then at retirement have little or no unrealized capital gains. I would think such exercises would actually increase unrealized capital gains - with the ultimate goal of realizing them in pre social security retirement at a zero or low cap gains rate.

But doesn't this present a problem of capital gains/ordinary income stacking (or whatever you call it) that increases your actual marginal rate, in that in a zero income tax period, you are now trying to pull off roth conversions, and at the same time liquidate taxable assets that have unrealized capital gains?

Topic Author
livesoft
Posts: 64182
Joined: Thu Mar 01, 2007 8:00 pm

### Re: How to pay ZERO taxes in retirement with 6-figure expenses

Here is something to consider which I use: If I have a taxable account, then it produces dividends which I can spend or reinvest. If I reinvest those dividends especially in the 5 years before retirement, then those lots have not gained as much as the lots from 20 years ago. If I end up selling the lots with the least gains, then I am spending return-of-capital which is not taxed.

I am doing Roth conversions and selling shares to spend and spending dividends. Since my spouse works one can consider that income the equivalent of a retiree's pension. We don't pay zero taxes, but we pay about 3% total of AGI only because of the Roth conversion.
This signature message sponsored by sscritic: Learn to fish.
{"found_math": false, "script_math_tex": 0, "script_math_asciimath": 0, "math_annotations": 0, "math_alttext": 0, "mathml": 0, "mathjax_tag": 0, "mathjax_inline_tex": 0, "mathjax_display_tex": 0, "mathjax_asciimath": 0, "img_math": 0, "codecogs_latex": 0, "wp_latex": 0, "mimetex.cgi": 0, "/images/math/codecogs": 0, "mathtex.cgi": 0, "katex": 0, "math-container": 0, "wp-katex-eq": 0, "align": 0, "equation": 0, "x-ck12": 0, "texerror": 0}