Don't understand tax calculations on withdrawals (1 of 2)

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eric
Posts: 35
Joined: Wed Apr 20, 2016 6:06 pm

Don't understand tax calculations on withdrawals (1 of 2)

Post by eric »

[I tried submitting this post and got the message "The submitted form was invalid. Try submitting again." No further explanation. Maybe the post is too long. I'll try breaking it in two.]

I'm trying to figure out how the tax calculations work. In my test run, taxes seem too high.

I did a simplified test run with these inputs:
Current age & Retirement age = 65
Inflation & Standard Deviation = 0
Investment tax rate = 15
Income tax rate = 30
Taxable portfolio value = 0
TaxDeferred portfolio value = 1,000,000
Investment style = custom, Return & Std dev = 0
Annual retirement income & Annual retirement spending = 100,000

I'm reviewing the amounts on the Detailed View.
As expected, I see:
After tax income = 70,000
Additional withdrawal = 30,000

But:
Taxes on withdrawal = 19,999. Where does this come from??

(Continued in next post....)

eric
Posts: 35
Joined: Wed Apr 20, 2016 6:06 pm

Re: Don't understand tax calculations on withdrawals (1 of 2)

Post by eric »

(Continued)


Additional withdrawal with taxes = 49,999. (As far as I can tell, this is the total withdrawal, not the *additional* withdrawal - since the portfolio value is reduced by 50,000 in the next year.)

I don't understand where the 19,999 comes from. My tax rate is 30%. As far as I can tell, the tax should be
a) 30% of the total amount withdrawn, which would be 30% of 30,000 = 9,000
b) plus 30% of the additional withdrawal amount to cover the tax in (b).

But if the taxes are 19,999 and the tax rate is 30%, this implies a total taxable withdrawal of 66,666. (19,999 = 30% of 66,666.) But the actual withdrawal is 50,000.

Where am I going wrong? Where does the 19,999 come from?

Do you have a more detailed explanation of what all the amounts mean, and how they're calculated? I've looked at the Planner Output page in the documentation - http://www.flexibleretirementplanner.co ... er-output/ . But it doesn't offer very much detail of the individual fields or how they're calculated.

Thanks very much.

jimr
Posts: 670
Joined: Thu Feb 28, 2008 6:48 pm

Re: Don't understand tax calculations on withdrawals (1 of 2)

Post by jimr »

Eric,

I can't seem to replicate what you've described. When I enter the info above, I get an additional withdrawal amount of $30k, taxes of $12,857, and a total withdrawal of $42,857. Any chance there's something enabled in additional inputs?

Also, you've probably noticed that Required Minimum Distributions (RMDs) kick in starting at age 70. You can disable RMDs in settings.

eric
Posts: 35
Joined: Wed Apr 20, 2016 6:06 pm

Re: Don't understand tax calculations on withdrawals (1 of 2)

Post by eric »

OK, I'll take a more careful look. The 12,587 figure is what I figured out manually and what I would have expected.

I started with a new scenario with everything zeroed out, but not a new file. Is it possible that some of my additional inputs were taken into the same scenario? I zeroed out everything on the main page, but it didn't occur to me to check the additional
Inputs. Maybe that's it. I'm not home now, but I'll check later.

I appreciate your help in figuring this all out and your responsiveness in responding to my various posts in the past week or so since I discovered FRP. It's a very nice tool.

jimr
Posts: 670
Joined: Thu Feb 28, 2008 6:48 pm

Re: Don't understand tax calculations on withdrawals (1 of 2)

Post by jimr »

Creating a new scenario should give you a new setup with all the defaults and nothing in additional inputs. However, if the 'copy scenario from' checkbox is checked, then the new scenario will copy everything from the source scenario including additional inputs.

eric
Posts: 35
Joined: Wed Apr 20, 2016 6:06 pm

Re: Don't understand tax calculations on withdrawals (1 of 2)

Post by eric »

I reran the test and got correct results.

What I might have done is: use Manage to create a new scenario named Test. I was careful not to check the Duplicate Data from... button. But it's possible that I then did my testing in Scenario 1, rather than changing to Test. I suspect the problem was related to the additional inputs. I closed the file, so can't be sure.

A clumsy error. Anyway, thanks again for your help.

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