Newspaper article St Louis Post-Dispatch (MO)

Oops: Let's Take Another Look at Retiree Tax Advice

Newspaper article St Louis Post-Dispatch (MO)

Oops: Let's Take Another Look at Retiree Tax Advice

Article excerpt

Several eagle-eyed and carefully calculating readers have brought me back to an issue I first wrote about at the beginning of the summer: What's your true retirement tax rate?

At that time, I alleged that most retirees had lower-than-expected tax rates, and could well afford to pull money out of tax-deferred accounts without worrying too much about the tax consequences. I was wrong.

It's true, as both my article and original research by T. Rowe Price in Baltimore suggested, that average tax rates for retirees are low. That's because a substantial portion of their income might come in non-taxable form, such as some Social Security and pension benefits and earnings from tax-free municipal bonds. But the marginal rate paid by some retirees, particularly those who earn enough to have 85 percent of their Social Security benefits taxed (roughly $34,000 for singles, $44,000 for joint filers, including half of those benefits), can be substantial. That's where I erred. I offered as example a couple earning $35,000 in taxable dividends and interest and $19,200 in Social Security benefits and projected that their marginal tax rate on a $10,000 IRA withdrawal would be 15 percent. Suffice to say there was a mistake in my math. In fact, that couple's marginal federal tax rate on that withdrawal would be close to 36 percent, not counting state taxes. Every $10,000 withdrawal would leave only $6,400 in after-tax spending power, even in a no-tax state. Why? Added income can cause retirees at middle income levels to have more of their Social Security benefits pushed up into taxable territory, and can also cause them to become ineligible for the $1,125 tax credit available for post-65 year olds with low earnings. This means that a retiree could have a higher effective tax rate at the same level of income than a younger working person. …

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