How Taxes are Calculated

[kman]

Hello,

I suspect this question has been answered elsewhere, so please bear with me.

I'm running a very simplified scenario to verify how taxes are calculated:

Tax deferred portfolio value=$1,000,000 with taxable and tax free set to zero
Return on investment and standard deviation both set to zero
$50,000 annual spending, stable spending policy
Inflation set to zero
Income tax rate=10%
Nothing added in additional inputs page

Based on the above I would expect the yearly tax to be $5000. What I'm seeing is a tax of $5555 per year, which is effectively 11.11% instead of the specified 10%. I tried other interest rate values and got the following:

For 5% tax rate expected tax would be $2500 versus $2631 per the program
For 20% tax rate expected tax would be $10,000 versus $12,500 per the program

Am I missing something fundamental about how the program works?

Thanks in Advance

[jimr]

This may sound confusing, but what you're seeing is the effect of the extra tax on the extra withdrawal amount needed to pay the taxes.

If you specify $50k for spending, the actual withdrawal amount will get grossed up to cover all the taxes that will be due on that $50k withdrawal. For the initial $50k withdrawal, the taxes will be $5k, so an extra $5k needs to get withdrawn to pay the taxes due. But that extra $5k withdrawal is also taxed at 10%, causing an extra $500 in taxes to be due. So a $500 withdrawal is made, which causes an extra $50 in taxes to be due, and so on.

Would that explain what you're seeing?

[kman]

Yes that does make sense. Thanks for the explanation.