It's not terrible if a tax is unavoidable due to you being at the very top of the income pyramid. However, if someone can foresee this and pay tax early (pre-SS & pre-Medicare) by doing Roth conversions, they may be able to avoid:
-The taxable IRA income causing their Social Security going from 0% or 50% taxable to being taxed on 85% of it
-Paying IRMAA, which is money out for no additional benefit
-Possibly paying taxes in the next higher bracket
Imagine a scenario where someone with a Roth IRA would have tax-free Social Security, but drawing from a regular IRA would put their provisional income in the level that would make it 85% taxable...that's a 42% marginal tax rate if in the 22% bracket (22% + 22% x 85%)!
That may not be avoidable if a person is getting a generous (taxable) pension, but those are becoming less common, so people are increasingly living off of their Social Security + IRA (taxable or Roth).
A couple weird things:
-This doesn't make Social Security tax free. It reduces taxes for those over 65, but many people delay taking SS until FRA (of like 67) or even to age 70 if they expect a long life. -Someone taking SS at age 62 (or 63 or 64) isn't eligible for that extra deduction. -Social Security was already lightly taxed for those with low incomes, or should I say *taxable* incomes, because if you're getting a high income but it's coming from Roth IRA/401k money, it's not taxable. -It's good for four years. How do you make a good long term plan when stuff changes materially so often?
I with they would have just upped the breakpoints for the 50% and 85% taxability to account for inflation.
Careful about wanting to be in the IRMAA paying club. I know many couples who didn't, but after the death of one spouse, were suddenly thrust into that club because the income limits go down by half for singles.
The last few years, I have been doing partial Roth conversions, which add to taxable income and increase AGI. I've been careful to make sure the AGI is below the amount that would trigger IRMAA. Now, AGI will have to be lower to take the extra over-65 deduction, and I'd rather take a known tax break now than keep a higher Roth conversion and lose that extra standard deduction.
This will be the last year of HSA eligibility, so I'll max out on that. I don't see any other ways to keep AGI down besides really reducing the Roth conversions. Have I missed anything useful?
I guess this is one of those "good 'problems' to have," but I'd still like to keep doing bigger Roth conversions prior to going on Social Security.
I can only think of three major financial mistakes.
I went with IRA investments for my wife and myself for the first three or four years of my working career because 401k's were portrayed as "salary deferral," and I was worried that if I left the company the money might be lost. So, I missed out on several years of matching money in my 401k--65% matched on up to 10% of income contributed. Luckily, I got clued in eventually.
Looking for the "ideal portfolio," I added things like REITs (worked out OK), a Biotech ETF (a dud after 2015) and a commodities fund (did well in 2022, but that didn't make up for years of underperformance prior).
Held a little too much company stock in my 401k. The company match, plus half of the employee contribution was in stock, and I should have been more aggressive in selling it after the vesting period. When the company went bankrupt, I lost a significant portion (painful but not catastrophic) of my 401k.
Sticking to one wife, driving older cars and not panic-selling during the 2000-2002 and 2008-2009 crashes probably more than compensated for the mistakes.
A couple years ago, I was obligated to file my federal taxes on paper. Because my company had its pension plan turned over to the PBGC, I was eligible for the Health Coverage Tax Credit (partially refunded health insurance premiums between separation and Medicare) for one year. Unfortunately, the HCTC wasn't renewed in successive years so I got to pay in full myself in subsequent years. But that one year the form for HCTC credit was only on paper. It also required documentation of each and every premium payment and proof that the health insurance plan was eligible for the HCTC (more pages).
Also, we had an optional part of the pension program which I paid into with after-tax dollars. So, a portion of my PBGC payment is free from tax, but requires a (paper only) worksheet. A small part of my (greatly reduced) pension is tax-free until 2050. Therefore, money I started contributing in 1984 will have earned 0% interest, but be tax-free.
My paper federal taxes were nearly an inch thick that year.
Besides the number of investors needed to keep markets functioning, is the number of dollars. That is, one foundation or hedge fund could have the same effect as many many individual investors as far as the effects discussed in this article.
It seems like people are caught up in the percent return they're going to get, or having a "smooth ride," and not focusing on having the most money at whatever future point they need it (e.g., retirement). Most people invest every paycheck, so the money is there every two weeks, or twice a month or whatever cadence, regardless of what the stock market is doing. If you think you're going to "time the market," your competition is fund managers with a research staff behind them. If you just invest in whatever your target asset allocation is each paycheck, and the stock market goes up--hooray, your portfolio goes up. If the market goes down, future investments will be made at a lower price, increasing your return when the market finally does go up. There is certainly a case for not being 100% in the S&P500 or US Total Market depending on one's age and temperament. But, trying to time the market requires one to be correct at least *twice*--once to know when to get out, and again to know when to get back in.
When I used to run, I passed by a mailbox whose contents were dumped in front of it. It appeared that someone had gone through the mail waiting for the postal carrier to pick up, taken what they wanted, and dumped the rest on the ground. After that, I made sure to never leave outgoing mail in the mailbox over night. We put the mail in the box the morning we want it to go out. That doesn't provide ironclad security, but it removes one of the easiest avenues to theft.
Comments
It's not terrible if a tax is unavoidable due to you being at the very top of the income pyramid. However, if someone can foresee this and pay tax early (pre-SS & pre-Medicare) by doing Roth conversions, they may be able to avoid: -The taxable IRA income causing their Social Security going from 0% or 50% taxable to being taxed on 85% of it -Paying IRMAA, which is money out for no additional benefit -Possibly paying taxes in the next higher bracket Imagine a scenario where someone with a Roth IRA would have tax-free Social Security, but drawing from a regular IRA would put their provisional income in the level that would make it 85% taxable...that's a 42% marginal tax rate if in the 22% bracket (22% + 22% x 85%)! That may not be avoidable if a person is getting a generous (taxable) pension, but those are becoming less common, so people are increasingly living off of their Social Security + IRA (taxable or Roth).
Post: Increased Deduction for Seniors
Link to comment from July 6, 2025
Well, if someone's paying an effective tax rate of 3.7%, all their income is pretty close to tax free already.
Post: Increased Deduction for Seniors
Link to comment from July 5, 2025
A couple weird things: -This doesn't make Social Security tax free. It reduces taxes for those over 65, but many people delay taking SS until FRA (of like 67) or even to age 70 if they expect a long life. -Someone taking SS at age 62 (or 63 or 64) isn't eligible for that extra deduction. -Social Security was already lightly taxed for those with low incomes, or should I say *taxable* incomes, because if you're getting a high income but it's coming from Roth IRA/401k money, it's not taxable. -It's good for four years. How do you make a good long term plan when stuff changes materially so often? I with they would have just upped the breakpoints for the 50% and 85% taxability to account for inflation.
Post: Increased Deduction for Seniors
Link to comment from July 5, 2025
Careful about wanting to be in the IRMAA paying club. I know many couples who didn't, but after the death of one spouse, were suddenly thrust into that club because the income limits go down by half for singles.
Post: Increased Deduction for Seniors
Link to comment from July 5, 2025
The last few years, I have been doing partial Roth conversions, which add to taxable income and increase AGI. I've been careful to make sure the AGI is below the amount that would trigger IRMAA. Now, AGI will have to be lower to take the extra over-65 deduction, and I'd rather take a known tax break now than keep a higher Roth conversion and lose that extra standard deduction. This will be the last year of HSA eligibility, so I'll max out on that. I don't see any other ways to keep AGI down besides really reducing the Roth conversions. Have I missed anything useful? I guess this is one of those "good 'problems' to have," but I'd still like to keep doing bigger Roth conversions prior to going on Social Security.
Post: Increased Deduction for Seniors
Link to comment from July 5, 2025
I can only think of three major financial mistakes.
- I went with IRA investments for my wife and myself for the first three or four years of my working career because 401k's were portrayed as "salary deferral," and I was worried that if I left the company the money might be lost. So, I missed out on several years of matching money in my 401k--65% matched on up to 10% of income contributed. Luckily, I got clued in eventually.
- Looking for the "ideal portfolio," I added things like REITs (worked out OK), a Biotech ETF (a dud after 2015) and a commodities fund (did well in 2022, but that didn't make up for years of underperformance prior).
- Held a little too much company stock in my 401k. The company match, plus half of the employee contribution was in stock, and I should have been more aggressive in selling it after the vesting period. When the company went bankrupt, I lost a significant portion (painful but not catastrophic) of my 401k.
Sticking to one wife, driving older cars and not panic-selling during the 2000-2002 and 2008-2009 crashes probably more than compensated for the mistakes.Post: My Mistakes
Link to comment from February 22, 2025
A couple years ago, I was obligated to file my federal taxes on paper. Because my company had its pension plan turned over to the PBGC, I was eligible for the Health Coverage Tax Credit (partially refunded health insurance premiums between separation and Medicare) for one year. Unfortunately, the HCTC wasn't renewed in successive years so I got to pay in full myself in subsequent years. But that one year the form for HCTC credit was only on paper. It also required documentation of each and every premium payment and proof that the health insurance plan was eligible for the HCTC (more pages). Also, we had an optional part of the pension program which I paid into with after-tax dollars. So, a portion of my PBGC payment is free from tax, but requires a (paper only) worksheet. A small part of my (greatly reduced) pension is tax-free until 2050. Therefore, money I started contributing in 1984 will have earned 0% interest, but be tax-free. My paper federal taxes were nearly an inch thick that year.
Post: A Tax Filing Conundrum
Link to comment from February 22, 2025
Besides the number of investors needed to keep markets functioning, is the number of dollars. That is, one foundation or hedge fund could have the same effect as many many individual investors as far as the effects discussed in this article.
Post: Blame Game
Link to comment from February 9, 2025
It seems like people are caught up in the percent return they're going to get, or having a "smooth ride," and not focusing on having the most money at whatever future point they need it (e.g., retirement). Most people invest every paycheck, so the money is there every two weeks, or twice a month or whatever cadence, regardless of what the stock market is doing. If you think you're going to "time the market," your competition is fund managers with a research staff behind them. If you just invest in whatever your target asset allocation is each paycheck, and the stock market goes up--hooray, your portfolio goes up. If the market goes down, future investments will be made at a lower price, increasing your return when the market finally does go up. There is certainly a case for not being 100% in the S&P500 or US Total Market depending on one's age and temperament. But, trying to time the market requires one to be correct at least *twice*--once to know when to get out, and again to know when to get back in.
Post: Fear of Heights
Link to comment from February 11, 2024
When I used to run, I passed by a mailbox whose contents were dumped in front of it. It appeared that someone had gone through the mail waiting for the postal carrier to pick up, taken what they wanted, and dumped the rest on the ground. After that, I made sure to never leave outgoing mail in the mailbox over night. We put the mail in the box the morning we want it to go out. That doesn't provide ironclad security, but it removes one of the easiest avenues to theft.
Post: Forget the Check
Link to comment from December 10, 2023