Taxes on IRA withdrawl question

[progree]

5. Your actual marginal tax rate could be higher, much higher ...

Last edited Mon Jul 4, 2022, 06:32 PM - Edit history (1)

One way, as Yonnie points out in #3, is more of your SS income may be taxable, and instead of 22% marginal rate, it COULD be effectively 1.50 * 22% = 33%, or a 1.85 * 22% = 40.7%.

Another gotcha is that if you have capital gains, additional ordinary income (and that's what a traditional IRA withdrawal is, tax-wise) can cause more of the capital gains to be taxable at the 15% capital gains rate. That can add 15 percentage points to your actual marginal rate.

and that's just federal hit. If you have state income taxes, that has to be considered too.

A 3rd way that one's marginal tax rate could be higher than the tables show is the surcharge on Medicare Part B and Part D premiums. Not something most people with a 12% nominal marginal tax rate have to worry about, but if you are talking about paying off a mortgage, that's a big chunk of money and that could lift your AGI into the range that causes you to pay a higher monthly premium.
https://rcsplanning.com/insights/medicare-irmaa-surcharges

I personally experience all three of the above, so I know of what I speak.

Also, a minor point, on the federal, the 2nd tax bracket is 12%

https://taxfoundation.org/2022-tax-brackets/
2022 taxes
TAX RATE FOR SINGLE FILERS FOR MARRIED INDIVIDUALS FILIN… FOR HEADS OF HOU…
10% $0 to $10,275 $0 to $20,550 $0 to $14,650
12% $10,275 to $41,775 $20,550 to $83,550 $14,650 to $55,900
22% $41,775 to $89,075 $83,550 to $178,150 $55,900 to $89,050
24% $89,075 to $170,050 $178,150 to $340,100 $89,050 to $170,050
32% $170,050 to $215,950 $340,100 to $431,900 $170,050 to $215,950
35% $215,950 to $539,900 $431,900 to $647,850 $215,950 to $539,900
37% $539,900 or more $647,850 or more $539,900 or more

Edited to add the remaining lines of the tax table

Edited to add after reading #16 -- just so that this post is somewhat complete as far as the tax / benefits / subsidies impact of additional "income" --

ACA premium subsidy amounts depends on one's income ... and I'm pretty sure a withdrawal from a Traditional IRA is going to count as income for this purpose. Not 100% sure, but pretty sure.

It was an issue back in my ACA days when I did a Roth conversion -- which is treated in part as a withdrawal from a Traditional IRA -- and I lost my ACA subsidy because of it.