Unprecedented increase in 401k limits

[haapai]

Aug 20, 2022 15:45:10 GMT -5 djAdvocate said:

Aug 20, 2022 15:25:24 GMT -5 Tiny said:

My reaction is mostly just a ::sigh:: I just don't have enough income to keep up with the ever raising limits on all the tax advantaged accounts I have access to.

That's been one of the "nice" things about the pandemic - my expenses dropped quite a bit in 2020 and thru most of 2021 so I was able to continue maxing my tax deferred accounts at a time when I didn't think I would be able to. So far for 2022 I'm still maxing my tax deferred - but with spending more because "life has resumed" with a side of "inflation" I'm not sure I'll be able to meet the new maximums in 2023 even with a cost of living raise and a slightly bigger bigger annual raise in 2022. I also wasn't expecting to be still employed... I'm not sure what the future holds so it's a little tricky to plan.



Doing a little math 22,500 is 15% of 150,000. If 15% is the amount of recommended savings for retirement - I'm not sure how many American Household's have a 150K gross income. Which means will raising the limits for these kinds of accounts really do much for the majority of Americans?? It's looking and feeling like it's more of a boon to higher income families/individuals than anything else.       They can get a little further ahead - while I just kind of hang on and hope for the best. 

by my calculations, 18.3% (note- not sure this is household):



Approximately 33.6% of Americans make over $100,000 per year, with 15.3% of that number being those who make between $100,000-$150,000.

That's gotta be household or taxpaying unit income.  There is no way that is individual income, even gross income. 

Correct me if I am wrong.  I'll take it well.

[Rukh O'Rorke]

Aug 21, 2022 15:04:28 GMT -5 jerseygirl said:

Aug 21, 2022 14:54:44 GMT -5 Rukh O'Rorke said:

I think it just human nature! Do you think you will do the one big move out of 401 rollovers and take the big tax hit?

Wondering if you have done a cost/benefit analysis. Looks like max IRMAA is $578.30/month. So an additional cost of less than 14k/year for insurance. plus may another 10k for the base medicare charge? So maybe 25k/year for 2 people. That is not alot considering alternate sources for insurance in the post 65 age groups, and to paying a one-time tax of 32-37% on a large transfer of funds from pre-tax to post tax may not be worth it. Of course, may also favorable impact a lot of other taxes over the next 2-3-4 decades.

If everyone was charged "full rate" for medicare, and then lower income levels got a "discount" rather than apply a surcharge on higher earners - I wonder if that would adjust people perceptions?

Thanks Rukh!! You put it very succinctly. This year I’m probably just donating my whole RMD to the charity I’m on board. So wouldn’t count on our income. We may be getting a vacant dorm at the school for the deaf to convert for low income deaf deaf blind seniors. If the state approves contract it’s a deal!! But the state is sooo slow. We’ve been trying to get this done with different developers but now have this opportunity with the state. It’s been 15 years of disappointments.

Sounds like a very worthwhile endeavor! wishing you luck in getting it done, 15 years is a long time!

[Ava]

Well, I don't think I will have to worry about IRMAA and higher taxes in retirement.
I don't have a lot saved in retirement accounts, even though I max out. I started late in the game.
Plus, retirement will happen in another country, and I don't need a ton of money.
Pre tax contributions are valuable to me because I can get more for my money.
I'm not sure I would be able to max retirements account if catch up are available as Roth only.
I'm thinking I'll use the money to pay off the car note, and after that save the extra money to go towards the mortgage and SL.

[jerseygirl]

Ava if you’re a US citizen you’ll still need to pay US taxes even in another country

[tcu2003]

Trying to guess future tax rates seems like a crapshoot. DH and I ended up switching to dumping everything in our Roth 401k options a few years ago (might have been closer to 5 or 6 years by now). We both have a ton already in the traditional 401k, and the company match is in the traditional bucket, so we figured we’d try to split things up. Who knows if that will be the right choice or not.

[Rukh O'Rorke]

Aug 21, 2022 18:20:25 GMT -5 tcu2003 said:

Trying to guess future tax rates seems like a crapshoot. DH and I ended up switching to dumping everything in our Roth 401k options a few years ago (might have been closer to 5 or 6 years by now). We both have a ton already in the traditional 401k, and the company match is in the traditional bucket, so we figured we’d try to split things up. Who knows if that will be the right choice or not.

seems wise. I should probably start siphoning off at least a little bit into Roth. Anything I put into roth would move from pre tax to min of 22% taxed. So 1k into pretax vs 780 into roth.

so if I max out the new ketchup at 7.5k, that means 1,650 additional payroll taxes or about $64/pay period. I guess that isn't too bad overall. oh - then state taxes of 371/yr, about 14 per pay period.

I guess I could/should do it. But as you say you never know what with future tax scenarios - like adding a fed sales tax rather than upping income tax rates, then roth becomes less attractive.

Will think on it some more!

[tskeeter]

Aug 20, 2022 17:18:38 GMT -5 Rukh O'Rorke said:

Aug 20, 2022 17:11:37 GMT -5 Rukh O'Rorke said:

Wait…are you saying all catch up is mandated as post tax?? That will really hurt me….

Am mending to clarify….hurt me on taxes in the moment, might work out long term to be a good thing?

Need to know marginal tax brackets for 2023…..


And 2033



And beyond!

When I looked at this question last fall, I assumed that sooner or later the tax proposals on the table would be implemented and taxes for many of us would go up. Since I continue to hear the same numbers bandied around in various contexts, it seems that the proposals are increasingly likely to become reality.

In that context, I assumed that the 2022 income tax rates would be adequate for some rough, if optimistic, projections.

If you take your current 401K balance, add annual investments until you retire, and inflate by 8% each year until you’re 72, what will your balance become and what are the RMD’s on that amount?  

When I did this exercise, I discovered that our RMD’s alone would force us into the top tax bracket.  Then add two Social Security checks, dividends, and a pension, and we’re firmly in a tax bracket we don’t want to be in.  Rukh, I suspect that you’re at risk of being in the same situation.

Based on our 401K projections, we decided to do Roth conversions for several years.  Paying 24% now beats the heck out of paying 38%, or maybe more, in the future.  I just wish I had been smart enough to divert some of the retirement savings to a Roth back when our marginal tax rate was less than 20%.

[teen persuasion]

Aug 21, 2022 18:47:46 GMT -5 tskeeter said:

Aug 20, 2022 17:18:38 GMT -5 Rukh O'Rorke said:

Am mending to clarify….hurt me on taxes in the moment, might work out long term to be a good thing?

Need to know marginal tax brackets for 2023…..


And 2033



And beyond!

When I looked at this question last fall, I assumed that sooner or later the tax proposals on the table would be implemented and taxes for many of us would go up. Since I continue to hear the same numbers bandied around in various contexts, it seems that the proposals are increasingly likely to become reality.

In that context, I assumed that the 2022 income tax rates would be adequate for some rough, if optimistic, projections.

If you take your current 401K balance, add annual investments until you retire, and inflate by 8% each year until you’re 72, what will your balance become and what are the RMD’s on that amount?  

When I did this exercise, I discovered that our RMD’s alone would force us into the top tax bracket.  Then add two Social Security checks, dividends, and a pension, and we’re firmly in a tax bracket we don’t want to be in.  Rukh, I suspect that you’re at risk of being in the same situation.

Based on our 401K projections, we decided to do Roth conversions for several years.  Paying 24% now beats the heck out of paying 38%, or maybe more, in the future.  I just wish I had been smart enough to divert some of the retirement savings to a Roth back when our marginal tax rate was less than 20%.

You have inflated the growth of the investments, but you haven't adjusted the tax brackets or standard deductions for inflation.  Either inflation adjust both sides, or reduce your growth factor to discount for inflation and work in real $$.

I'd usually think of pensions, SS, and dividends first (as unavoidable base income), and RMDs last - mostly because all of the others start before RMD age so RMDs are the new added income item, and because you can donate your RMDs to avoid tax on them.  The pension, SS, dividends fill up your lower brackets first, and RMDs sit on top - in my mental version at least.  Well, dividends float to the top, too, because of the different LTCG taxes for those.  So I guess it's pension, SS, RMDs, w/ dividends separate.

[jerseygirl]

Do any of you really think taxes will be lower in the future?

[Rukh O'Rorke]

Aug 21, 2022 18:47:46 GMT -5 tskeeter said:

Aug 20, 2022 17:18:38 GMT -5 Rukh O'Rorke said:

Am mending to clarify….hurt me on taxes in the moment, might work out long term to be a good thing?

Need to know marginal tax brackets for 2023…..


And 2033



And beyond!

When I looked at this question last fall, I assumed that sooner or later the tax proposals on the table would be implemented and taxes for many of us would go up. Since I continue to hear the same numbers bandied around in various contexts, it seems that the proposals are increasingly likely to become reality.

In that context, I assumed that the 2022 income tax rates would be adequate for some rough, if optimistic, projections.

If you take your current 401K balance, add annual investments until you retire, and inflate by 8% each year until you’re 72, what will your balance become and what are the RMD’s on that amount?  

When I did this exercise, I discovered that our RMD’s alone would force us into the top tax bracket.  Then add two Social Security checks, dividends, and a pension, and we’re firmly in a tax bracket we don’t want to be in.  Rukh, I suspect that you’re at risk of being in the same situation.

Based on our 401K projections, we decided to do Roth conversions for several years.  Paying 24% now beats the heck out of paying 38%, or maybe more, in the future.  I just wish I had been smart enough to divert some of the retirement savings to a Roth back when our marginal tax rate was less than 20%.

Given your equation here, I'd get up to about 5.5 m and start at 72 with around 200k RMD, based on  a 3.65% withdraw which is what I find on a table. if goes up to 75 for the first year - are the percentages the same? 75 from the old table is a hair over 4%. So I'd stilll only be in the 32% tax rate. But as the percent for the RMD increases and the investments grow, it could happen 10 or so years into the RMD timetable.

However! I have no intention of ever getting to 5.5 million and continuing to work enough to have extra to invest, let alone max 401ks! I might dabble with PT work just for some career fulfillment, defray living expenses, etc. But once I hit a 3.5% withdraw rate for a nice lifestyle and no major spending planned, color me done. Will likely stop FT time work if I get to a 4.5% WR with just a few big tickets on the horizon.

[Rukh O'Rorke]

Aug 21, 2022 19:22:46 GMT -5 jerseygirl said:

Do any of you really think taxes will be lower in the future?

I think it depends what POV you are looking at it from. What bracket you're in. I think the upper brackets will likely increase in percentage, but I expected the lower brackets to remain the same/ish and to be widened and for standard deductions to increase. So that lower levels of income with likely have lower taxes in the future but higher income will have more taxes in future.

[azucena]

This talk makes me think even more to push DDs eventual teen income into Roth deposits to get a huge jump on retirement for them.

[teen persuasion]

Aug 21, 2022 19:22:46 GMT -5 jerseygirl said:

Do any of you really think taxes will be lower in the future?

It's more about whether you will have a lower marginal tax rate in retirement than you do/did while working.

I will be in a higher bracket, and owe taxes after many years of refundable credits due to having kids.  But our marginal rate will be much lower in retirement, because we will no longer be eligible for those kid refundable credits, so can't be phased out of them by increased income.

The other big part is, in retirement you likely have lower absolute income, but since you are no longer paying FICA, no longer contributing to retirement accounts, etc, your disposable income is equivalent at a lower AGI.  Social Security income is max 85% taxable (IOW, at least 15% discount on taxability), Roth withdrawals are not taxed, selling taxable has reduced tax rates for LTCG and return of basis is not taxed, spending from savings accounts are not taxed, etc.  Many states do not tax SS, may not tax pensions, etc.  All of which means your retirement dollars can go further than earned income dollars did.

[Rukh O'Rorke]

Aug 21, 2022 14:54:44 GMT -5 Rukh O'Rorke said:

I think it just human nature! Do you think you will do the one big move out of 401 rollovers and take the big tax hit?

Wondering if you have done a cost/benefit analysis. Looks like max IRMAA is $578.30/month. So an additional cost of less than 14k/year for insurance. plus may another 10k for the base medicare charge? So maybe 25k/year for 2 people. That is not alot considering alternate sources for insurance in the post 65 age groups, and to paying a one-time tax of 32-37% on a large transfer of funds from pre-tax to post tax may not be worth it. Of course, may also favorable impact a lot of other taxes over the next 2-3-4 decades.

If everyone was charged "full rate" for medicare, and then lower income levels got a "discount" rather than apply a surcharge on higher earners - I wonder if that would adjust people perceptions?

oof! Looks like I totally misinterpreted the table I was looking at. I thought the surcharge was 578.3/month for incomes over 500k/750k single/couple - but that is the entire medicare amount! so about 7k year for health insurance no matter how rich you are.

www.medicareresources.org/medicare-eligibility-and-enrollment/what-is-the-income-related-monthly-adjusted-amount-irmaa/

For an income of about 150k single, 300k couple the cost of insurance is a little over 5k/year/person. $5,307.60. Less than 4% of income for health insurance. For someone without IRMAA, say a 50k income - the premium is 170.10, a hair over 2k/year, and 4.1% of income. Unfortunately - the 50k earner and a 20k earner will pay the same, and those are the ones that will actually suffer, paying 10% of their very small income to medicare premiums.

I'm going to just file this away under pretty damn reasonable and move on. Not even going to give any thought to this in my own tax planning as it is definitely more trouble than it is worth to try to get out of paying this. I sure won't have more than 500k/year in income (but if I do! I will happily pay the surcharge) I will like end up on the 1st or 2nd tier of surcharge, so something akin to 65 or 135 ish a month extra. If it's more - I will happily pay and hope I am defraying the cost to someone with very low retirement income, thankful that I am not. You know - barring any extraneous circumstances that might wreck my planning here.....knocking on wood....

[Rukh O'Rorke]

Aug 21, 2022 20:53:59 GMT -5 teen persuasion said:

Aug 21, 2022 19:22:46 GMT -5 jerseygirl said:

Do any of you really think taxes will be lower in the future?

It's more about whether you will have a lower marginal tax rate in retirement than you do/did while working.

I will be in a higher bracket, and owe taxes after many years of refundable credits due to having kids.  But our marginal rate will be much lower in retirement, because we will no longer be eligible for those kid refundable credits, so can't be phased out of them by increased income.

The other big part is, in retirement you likely have lower absolute income, but since you are no longer paying FICA, no longer contributing to retirement accounts, etc, your disposable income is equivalent at a lower AGI.  Social Security income is max 85% taxable (IOW, at least 15% discount on taxability), Roth withdrawals are not taxed, selling taxable has reduced tax rates for LTCG and return of basis is not taxed, spending from savings accounts are not taxed, etc.  Many states do not tax SS, may not tax pensions, etc.  All of which means your retirement dollars can go further than earned income dollars did.

thanks! very thorough round up of the differences.

I expect nothing less from teen persuasion!

[Ava]

Yes, I'm a US Citizen and I know I'll have to pay taxes even though I'll live in another country.
But I'm not worried because I don't expect to have a lot of money in retirement.

[The Walk of the Penguin Mich]

Aug 21, 2022 21:17:04 GMT -5 Rukh O'Rorke said:

Aug 21, 2022 14:54:44 GMT -5 Rukh O'Rorke said:

I think it just human nature! Do you think you will do the one big move out of 401 rollovers and take the big tax hit?

Wondering if you have done a cost/benefit analysis. Looks like max IRMAA is $578.30/month. So an additional cost of less than 14k/year for insurance. plus may another 10k for the base medicare charge? So maybe 25k/year for 2 people. That is not alot considering alternate sources for insurance in the post 65 age groups, and to paying a one-time tax of 32-37% on a large transfer of funds from pre-tax to post tax may not be worth it. Of course, may also favorable impact a lot of other taxes over the next 2-3-4 decades.

If everyone was charged "full rate" for medicare, and then lower income levels got a "discount" rather than apply a surcharge on higher earners - I wonder if that would adjust people perceptions?

oof! Looks like I totally misinterpreted the table I was looking at. I thought the surcharge was 578.3/month for incomes over 500k/750k single/couple - but that is the entire medicare amount! so about 7k year for health insurance no matter how rich you are.

www.medicareresources.org/medicare-eligibility-and-enrollment/what-is-the-income-related-monthly-adjusted-amount-irmaa/

For an income of about 150k single, 300k couple the cost of insurance is a little over 5k/year/person. $5,307.60. Less than 4% of income for health insurance. For someone without IRMAA, say a 50k income - the premium is 170.10, a hair over 2k/year, and 4.1% of income. Unfortunately - the 50k earner and a 20k earner will pay the same, and those are the ones that will actually suffer, paying 10% of their very small income to medicare premiums.

I'm going to just file this away under pretty damn reasonable and move on. Not even going to give any thought to this in my own tax planning as it is definitely more trouble than it is worth to try to get out of paying this. I sure won't have more than 500k/year in income (but if I do! I will happily pay the surcharge) I will like end up on the 1st or 2nd tier of surcharge, so something akin to 65 or 135 ish a month extra. If it's more - I will happily pay and hope I am defraying the cost to someone with very low retirement income, thankful that I am not. You know - barring any extraneous circumstances that might wreck my planning here.....knocking on wood....

Not quite.  That is just for Medicare premiums.  Prescription plans are also subject to IRMAA, I am waiting to see what is going to be added to my $50/mo prescription plan now (I expect it to double) and I’m paying $378 (I think) in IRMAA on my Medicare right now.  Add to this that my Medigap plan is $321/mo.  So I’m paying about $800/mo for insurance.  When TD is eligible next year, double that to $1600, or about $20,000 year for insurance.
 
Add to this that if you are on Medicare, it is incredibly hard to find a GP in this town, they are not accepting new patients.   

[TheOtherMe]

The low reimbursement rates are why it's difficult to find a new doctor who will accept Medicare.  It's harder if you are on Medicaid.  

If one has to pay IRMAA, one has significant income.  I will never have to pay IRMAA.  I would love to have that problem.

[Tiny]

Aug 21, 2022 19:22:46 GMT -5 jerseygirl said:

Do any of you really think taxes will be lower in the future?

No.

What I'm hoping is that the levels of income for each tax bracket go up - so even though I might have more income in the future (than now) the dupper limits of the tax brackets will also have increased... keeping my tax burden some what steady.

I don't think I'm saying that right...

[Tiny]

Aug 21, 2022 20:53:59 GMT -5 teen persuasion said:

Aug 21, 2022 19:22:46 GMT -5 jerseygirl said:

Do any of you really think taxes will be lower in the future?

It's more about whether you will have a lower marginal tax rate in retirement than you do/did while working.

I will be in a higher bracket, and owe taxes after many years of refundable credits due to having kids.  But our marginal rate will be much lower in retirement, because we will no longer be eligible for those kid refundable credits, so can't be phased out of them by increased income.

The other big part is, in retirement you likely have lower absolute income, but since you are no longer paying FICA, no longer contributing to retirement accounts, etc, your disposable income is equivalent at a lower AGI.  Social Security income is max 85% taxable (IOW, at least 15% discount on taxability), Roth withdrawals are not taxed, selling taxable has reduced tax rates for LTCG and return of basis is not taxed, spending from savings accounts are not taxed, etc.  Many states do not tax SS, may not tax pensions, etc.  All of which means your retirement dollars can go further than earned income dollars did.

  OMG this... totally this...        

[tskeeter]

Aug 21, 2022 20:40:56 GMT -5 azucena said:

This talk makes me think even more to push DDs eventual teen income into Roth deposits to get a huge jump on retirement for them.

Great idea!  Fund the Roth while DD is in a tax bracket that is close to zero.  Then take advantage of decades of tax free growth.  Maybe shift from investing in the Roth to investing in pretax retirement accounts after 10 or 15 years in the workforce.  (About the time income levels start to drive up tax rates and as effective tax rates climb because you are no longer eligible for child related tax deductions and credits.)

[tskeeter]

Aug 21, 2022 19:12:07 GMT -5 teen persuasion said:

Aug 21, 2022 18:47:46 GMT -5 tskeeter said:

When I looked at this question last fall, I assumed that sooner or later the tax proposals on the table would be implemented and taxes for many of us would go up. Since I continue to hear the same numbers bandied around in various contexts, it seems that the proposals are increasingly likely to become reality.

In that context, I assumed that the 2022 income tax rates would be adequate for some rough, if optimistic, projections.

If you take your current 401K balance, add annual investments until you retire, and inflate by 8% each year until you’re 72, what will your balance become and what are the RMD’s on that amount?  

When I did this exercise, I discovered that our RMD’s alone would force us into the top tax bracket.  Then add two Social Security checks, dividends, and a pension, and we’re firmly in a tax bracket we don’t want to be in.  Rukh, I suspect that you’re at risk of being in the same situation.

Based on our 401K projections, we decided to do Roth conversions for several years.  Paying 24% now beats the heck out of paying 38%, or maybe more, in the future.  I just wish I had been smart enough to divert some of the retirement savings to a Roth back when our marginal tax rate was less than 20%.

You have inflated the growth of the investments, but you haven't adjusted the tax brackets or standard deductions for inflation.  Either inflation adjust both sides, or reduce your growth factor to discount for inflation and work in real $$.

I'd usually think of pensions, SS, and dividends first (as unavoidable base income), and RMDs last - mostly because all of the others start before RMD age so RMDs are the new added income item, and because you can donate your RMDs to avoid tax on them.  The pension, SS, dividends fill up your lower brackets first, and RMDs sit on top - in my mental version at least.  Well, dividends float to the top, too, because of the different LTCG taxes for those.  So I guess it's pension, SS, RMDs, w/ dividends separate.

You’re absolutely right.  Making a provision for adjusting tax brackets would be more accurate.

[giramomma]

Aug 21, 2022 20:40:56 GMT -5 azucena said:

This talk makes me think even more to push DDs eventual teen income into Roth deposits to get a huge jump on retirement for them.

I opened up a Roth IRA for DS. I stuck it in cash the first year, because he only had $200. And then I was too busy with my stuff to change funds.

The up shot is he didn't loose anything when the market dropped.