Taxes During Retirement

My name is Charles Bittman, but everyone calls me Sandy.
I'm not a salesman and I'm not here to sell you anything.

I was forced into retirement 5 years ago and made
a few minor mistakes. My domestic partner is 9 years younger than I am, she is a widow, and it has been
my obsession over the last 5 years to find out the correct answers on the proper steps for her to take to achieve
the most secure retirement possible.

My goal today is to share what I have learned with you.

Use the arrow keys on your keyboard to move from one slide to the next.

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I am not a qualified Investment Advisor or Certified Public Accountant. I am totally unqualified to give you any of this advice. So, use the information in this presentation at your own risk!
The problem here is that no one else will give you this information.

If you ask your broker or investment advisor about the marginal tax rates you pay while receiving Social Security, they will tell you to talk to your tax accountant. They can literally lose their brokers license if they give you tax advice!

Your tax accountant at H&R Block or other storefront tax services rarely have any idea which are the best investment strategies to use or which stocks, bonds, or funds to invest in.

A CPA can give you this advice, but let's be honest, is it worth their time and effort to help you save a few hundred or maybe 1 or 2 thousand dollars a year, how much are you willing to pay for that service? I talked to the investment guy at my bank and that is exactly what he told me.

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Some History

  • 1935: Social Security initiated, declared tax free.
  • 1974: Employee Retirement Income Security Act created the IRA.
  • 1979: Provision added to the Internal Revenue Code — Section 401(k).
  • 1983: Social Security Act Amendment, 50% taxable.
  • 1993: Omnibus Budget Reconciliation Act, 85% taxable.
  • 1997: Taxpayer Relief Act, Roth IRA established.

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Marginal Tax Brackets
at 50%
at 85%
at 15%
As each additional dollar of income causes 50 cents or 85 cents of your Social Security Benefits to also become taxable income, your taxable income increases by $1.50 or $1.85, not just one dollar, which creates the following marginal tax brackets. 10% 15% 18.5%
12% 18% 22.2% 49.95%
22% N/A 40.7%

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The first section comes directly from the IRS tax brackets. It illustrates the published "taxable income", standard deduction over age 65, the "gross income", and the width of each tax bracket. The second section illustrates the same information for your Marginal tax brackets "ONLY IF" your Social Security Benefit is exactly $30,000 and you are also receiving exactly $3,000 in long term gains!

Single 20K 25K 30K 35K 40K Yes
Benefit Amount LTCG or QD
Married 40K 50K 60K 70K 80K No

This interactive image is based on the 2019 tax brackets!

There are no standards for Marginal Tax Brackets. Your personal brackets depend on your marital status and the various sources and levels of your retirement income.

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2018 Social Security Sweet Spots

There are three primary retirement income sweet spots that you can plan for: completely tax free income, limiting your income so that you never enter the 85% taxability level, and earning all you can without entering your personal Tax Hump.

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The Marriage Penalty

At 85% taxability, it take an additional $20,471 of taxable income for the Partners to "catch up",
but the Domestic Partners still have an advantage. On alternate years one partner stops
their income at the start taxation level while the other covers the bills.

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Retirees are beginning to recognize the importance of larger fixed income sources for the rest of their lives.

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How are your SS benefits calculated?

The best way to find out your benefits level at your full retirement age is
to go to the Social Security website or local office and get your actual benefit level. Your benefit is calculated by multiplying your earnings each year,
but not more than each year’s max, by the inflation “Index Factor” for that year to get your annual “Indexed Earnings”. Then you sum up the top 35 years and divide by 35 to get your average yearly earnings.

Your estimated monthly retirement benefit at your
full retirement age will be: 90% of the first $11,112
plus 32% of the next $55,884 (from $11,112 to $66,996), plus 15% of everything over the $66,996 income level.

As you can see, the benefit levels are slanted toward those with lower incomes.

Once you know your benefit level at your Full Retirement Age, you can go to Social Security's Early/Late page,, enter your birthday and the year and month that you want to start your benefits, and the page will then tell you the percentage of your full benefit that you will receive “For the Rest of your Life”!

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Social Security Benefits by Age and Birth Year

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Earning $60,000, Retire On $48,000

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Earning $80,000, Retire On $60,000

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The Shift from Pensions to 401Ks

The concept of retirement has changed drastically over the past 45 years. Retirement for our parents relied on their Social Security income and their Pensions.

A pension was basically a Lifetime Contract. You received a fixed monthly income for the rest of your life, and some pensions also included cost of living increases!

Pensions today are being replaced by 401Ks and IRAs. These are merely different methods of saving for retirement. There is NO CONTRACT and when the money runs out, the income stops, and stock market volatility and taxes can play significant roles in how long our savings will last.

Longevity is becoming a major factor in our retirement. Will you outlive your money?

  • Eliminating costly taxes
  • Minimizing your stock market risk
  • Guaranteed income for life

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Stock Market Risk

How can you lose money on something called Securities?

The market goes through “correction cycles” from time to time, and it usually recovers within a year or two. But that is for the market in general, not each symbol or sector of the market.

Technology, the NASDAQ index, closed 1990 at the 373.8 level. By March of 2000 it had risen to 5,132.52, a 1,273% increase. Within 18 month it down to 1,108.94, a lost of 78.4% of its value.

Where would you be today if all you saw was the potential of a 10 fold increase in your money in 10 years and you put everything into that one sector in March of 2000 and ended up losing 78% of your entire retirement savings in 18 months?

It took more than 12 years for the NASDAQ to regain its previous high in June of 2015 and it hovered at that same level for 13 months.

The overall market recovered because while technology was losing, the money shifted to industrials, banking, medical, and many other sectors that increased in value.

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Everyone deserves to own a home

HUD dropped downpayments from 20 to 10 to 5 to 3, and finially zero down.
Compound gain for the first 5 years was 58.4%.
It caused a bubble which had to pop!


Minimum Required Distributions

To calculate the year’s minimum distribution amount, take the age of the retiree on Dec. 31 of that year and find the corresponding distribution period. Then divide the value of the IRA by the distribution period to find the required minimum distribution.

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Roth Conversions

The profit or loss on a Roth Conversion depends on your Marginal Tax Brackets at the time you do the conversion vs when you use the money.
The conversion can also be used as a Back Door Roth Contribution by paying the taxes due from sources other than the converted funds.

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Medicare MAGI

Taxes are not the only cost when doing a Roth Conversion. There is also the potential that if your MAGI, Modified Adjusted Gross Income, exceeds the Medicare income limits two year in the future, your Medicare premium could also increase for one year.

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The Widow's Penalty

When one spouse dies, the survivor typically has similar or only slightly less taxable income than the married couple had reported. Yet the widow or widower generally files their taxes as single, rather than on a joint return.

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The Widow's Penalty

When married the couple had Social Security benefits of $25,000 and $30,000. They also had additional income from Pensions, Annuities, and MRDs totaling $45,000 each year.

When the first person passed away, the survivor collected the larger Social Security benefits of $30,000, all of the pensions and annuities continued for the survivor, and all of the joint IRA funds were also passed to the survivor with the associated MRDs.

As illustrated above, the survivor's tax burden increased by $3,002 even though their gross income we decreased by the smaller $25,000 Social Security benefit!


There are two basic types of annuities: immediate and deferred.
Do you want to start getting money now, or let it grow and start later?

The growth of the annuity can be either fixed or variable,
is the growth tied to the overall market or some other group of investments?

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The Cost of Waiting

Each year that you wait you are loosing the guaranteed annual increase in your Benefit Base.

You are gambling on will the stock market outperform or underperform 7%,
or will if crash with a major correction?

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I was forced to start my SSB at $30,000 and I was getting 2 years of Tax Free Long Term Disability at $21,000. Not knowing what I know now, I also started my pension at $5,000 and Annuity at $10,000, stupid mistakes!

If I had not started the pension and annuity, I could have done a $12,400 Roth Conversion each year TAX FREE!
My SS taxation “basis” would have been $30,000/2 + $12,400 = $27,400, $2,400 over, $1,200 taxable plus $12,400 equals $13,600 which is exactly the standard deduction of $12,000 plus $1,600 over 65.

Two years later my Annuity could have been started at $11,881, $1,881 a year extra for the rest of my life. I’m not sure how much the pension would have increased!

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A Thanksgiving Tradition that you might consider is to calculate your taxes at the end of November. Knowing how close your current income levels place you to your personal Tax Hump will also tell you how much additional money could be withdrawn from your IRA without going into your Tax Hump.

Use this information to do a Year End Roth Conversion every December to:

  • Reduce the size of your IRA and its MRDs.
  • Increase the size of your Roth, available tax free cash on demand!

If you have extra cash available, use it to pay the taxes as a Back Door Roth Contribution!

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I’m not trying to recommend that you download my personal spreadsheet from my website, if you did you would have to update the Federal Tax Brackets and other tax information each year, or your calculations would be wrong! But, using that spreadsheet, here is the type of data that you would need to consider each year when you calculate how much IRA you can convert to Roth!

The most important item is that just because your current income levels place you $19,825 away from your hump, it only takes $10,716 of extra income at the 85% taxability level to get you there!

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What we talked about

  • Everyone has different Marginal Tax Brackets during retirement.
  • Pensions are being replaced by 401Ks.
  • The stock market is risky.
  • "Some" annuities are like pensions.
  • The profit or loss on a Roth Conversion depends on your Tax Brackets at the time of the conversion vs when you, or your surviving spouse, use the money.
  • Conversions after the age of 62 could effect your Medicare premiums.
  • A surviving spouse will probably face higher tax brackets.

The Bottom Line

What I hope your take away from this conversation will be the knowledge that everyone’s taxes are different during retirement, and that your personal tax rates can include some extremely high marginal tax rates.

Find out what your tax rates will be and take them into consideration while planning for and living in retirement.

Also be aware of the tax situation that your spouse will be facing when you pass away first and take steps necessary to make things easier on them.

At least now you know that these tax situations exist, I hope that you take steps to give yourself a great retirement.