Taxes on withdrawals

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Steve
Posts: 5
Joined: Sun Mar 18, 2018 12:46 am

Taxes on withdrawals

Post by Steve » Sun Mar 18, 2018 12:59 am

I am a little puzzled on the "taxes on withdrawals" column in the detail view of the planner. When I retire I will have a taxable portfolio value and a tax free portfolio value. I have percents loaded in the investment tax rates and income tax rates boxes. I have the order of withdrawals to be taxable first until it is depleted and then tax free from then on. So why when I look in the detailed view there is no taxes on withdrawals while I am withdrawing taxable funds but then when I switch over to the tax free withdrawals now the taxes on withdrawal column shows I am paying quite a lot of taxes? Seems backwards, I should be paying taxes on my taxable gains as they are withdrawn to fund my expenses which it says is zero.

jimr
Posts: 498
Joined: Thu Feb 28, 2008 6:48 pm

Re: Taxes on withdrawals

Post by jimr » Sun Mar 18, 2018 8:10 am

First, gains on the taxable portfolio are taxed each year as they happen and that means the basis of the taxable portfolio is assumed to always be 100%. As a result, withdrawals from the taxable portfolio don't have any taxes due.

From what you've described I can't say why you're seeing taxes on withdrawals showing up later in retirement. If you could provide more details on any other cash flows that you have in additional inputs that might help.

Jim

Steve
Posts: 5
Joined: Sun Mar 18, 2018 12:46 am

Re: Taxes on withdrawals

Post by Steve » Sun Mar 18, 2018 6:37 pm

Hey Jim, so am I understanding this correctly in that all gains in the taxable portfolio have taxes taken into account within the rate of return that one specifys? That means the planner is assuming you are selling all your gains each year instead of only calculating the tax on what is withdrawn from that account? I must be looking at this incorrectly because that wouldn't make sense.

Okay so a little more information for you. In the first year that the planner shows me owing taxes after my taxable portfolio is drained and I am only withdrawing from the tax free one. The only other cash flows that happen are the pension and SS that shows I pay taxes on but that amount between my gross and your planner's net after tax income is completely different than the "taxes on withdrawal" column. The detailed view shows clearly what the expenses I have expected for the year and how much will need to be withdrawn from my tax free account to meet those expenses minus the pension and SS I get. Everything makes sense except the "taxes on withdrawal" column because the pension and SS taxes are already accounted for in the net income column. So why is the planner saying I am paying taxes on withdrawal when all my withdrawals are from a tax free portfolio? I double checked the additional input page and there is no other cash flows for that first year that the taxes start. Thanks for your help here.

jimr
Posts: 498
Joined: Thu Feb 28, 2008 6:48 pm

Re: Taxes on withdrawals

Post by jimr » Sun Mar 18, 2018 9:48 pm

It would be easiest if you could email a .frp file that shows what you're seeing.

PLEASE DON'T SEND YOUR ACTUAL PLAN DETAILS. Instead, change the inputs to obscure the amounts and other private information. You can use the Save-as function when you save the example file.

Once you have created the sample .frp file, please email it to me at info@flexibleRetirementPlanner.com

Thanks,

Jim

jimr
Posts: 498
Joined: Thu Feb 28, 2008 6:48 pm

Re: Taxes on withdrawals

Post by jimr » Sun Mar 18, 2018 9:58 pm

Steve wrote:Hey Jim, so am I understanding this correctly in that all gains in the taxable portfolio have taxes taken into account within the rate of return that one specifys? That means the planner is assuming you are selling all your gains each year instead of only calculating the tax on what is withdrawn from that account? I must be looking at this incorrectly because that wouldn't make sense.
That's roughly how it works. Taxes are deducted from gains (using the investment tax rate) before the gains are reinvested back into the portfolio. This is of course a simplification, but it's necessary that to make the tax model manageable.

This simplification is an example of the planner trying to error on the side of being more conservative. If in real life you can defer a large amount of the gains in the taxable portfolio and pay the taxes many years later, your real life experience would be a little better than what the plan shows, all else equal.

grittonb
Posts: 1
Joined: Wed May 22, 2019 4:25 pm

Re: Taxes on withdrawals

Post by grittonb » Wed May 22, 2019 4:30 pm

Was there ever an answer to why there are taxes on withdrawals from a tax free account?

Thanks
Bruce

jimr
Posts: 498
Joined: Thu Feb 28, 2008 6:48 pm

Re: Taxes on withdrawals

Post by jimr » Wed May 22, 2019 4:33 pm

IIRC, the issue in this case was that the "Min IRA Withdrawal Age" was set higher than the retirement age, so the "taxes" that were shown were actually the early withdrawal penalty on funds that were withdrawn before reaching the minimum withdrawal age.

sherzlich
Posts: 1
Joined: Mon Apr 22, 2019 5:25 pm

Re: Taxes on withdrawals

Post by sherzlich » Thu Jun 13, 2019 12:18 pm

Also, remember that taxes are due on withdrawals from traditional IRA's and 401k plans. Those aren't tax free accounts - they're tax deferred accounts.

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