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Military Pensions and IRA withdrawals


dsimpson

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I turned 70 ½ this year and began making mandatory IRA withdrawals. I received a big surprise when I began to file my tax returns.

 

I am retired military and, for 16 years after retirement, I worked for a civilian company and made contributions to a 401k plan. During my peak earning years, my marginal tax rate was 25%. The money that I was putting into my 401k would have been taxed at that rate. I retired from that company and when eligible, I made a couple of withdrawals from my 401k to supplement my military pension. The year before I began drawing Social Security, I made a 401k withdrawal which raised my federal income tax an amount that translated to a 14% tax on the 401k withdrawal. And that illustrates the advantage of the 401k tax deferred income – income that would have been taxed at 25% was actually taxed at 14%.

 

As the above example illustrates and I was led to expect, when I began making 401k withdrawals, my marginal tax rate would be lower than when I made my contributions into my 401k plan. And that remains true today for me. My marginal tax rate this year is 15%. But when I start making mandatory withdrawals from my 401k this year, I will be paying 27% of that in increased taxes. How can that be?

 

The amount of Social Security that is taxable depends on income. Since I receive a military pension, a portion of my Social Security is taxable. So, even though I remain at a marginal tax rate of 15%, my taxes increase much more than 15% of my 401k withdrawal because the taxable portion of my social security income will increase by a large amount. This year, my taxes will increase by 27% of my 401k withdrawal, higher than my marginal tax rate when I made the contribution to my 401k plan.

 

Now, I’m not expecting any sympathy for a triple-dipper. I just wanted those in my situation to be aware. If I had it to do all over, I would have made much larger 401k withdrawals each year prior to starting Social Security and delayed drawing Social Security until a later age.

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Now you tell me Doug. I don't have military retirement. I have a federal retirement plus SS that I am already paying taxes on a portion. I knew I would take a tax hit but I fear it will be more than I thought base on your presentation. I have about 1 1/2 years untill I get there.

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I hear you, bigjim. Anyone with a pension or any type of additional income can end up in my situation. My mandatory minimum withdrawal caused the taxable amount of my social security to increase by almost an equal amount. So, not only am I paying 15% tax on my IRA withdrawal, I am also paying a 15% tax on the extra social security that is taxable.

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When you contributed to your 401 or TSP, was it a Roth or traditional?

Stephen & Karen and our six boys, ages 21, 21, 19, 17, 14, & 11
Stephen - Military retiree (as of summer 2012) & current DOI employee (Big Bend National Park)
Karen - Homeschooling stay-at-home mom & veteran
San Antonio, Texas

Fulltimed May 2013 - July 2014 (yes, all eight of us!)
Open Range "Rolling Thunder" (H396RGR - fifth wheel toy hauler bunkhouse) - SOLD
Ford F-350 diesel dually - for the camper
Ford E-350 fifteen passenger van - for the crew

Our unfinished travel blog: http://coach-and-six.blogspot.com/

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You may be in the 15% tax bracket but that doesn't mean you are paying that.

 

I have company retirement, SSA, 401K and Interest income.

I use Turbo Tax and it says for the last few years I am in the 15% bracket, but my effective tax rate has been under 10%

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As a federal retiree, I converted my TSP (thrift savings plan) to an IRA to get more investment options. When I was eligible to make penalty free withdrawals, I then started converting amounts I could reasonably afford to pay the taxes on to a Roth IRA. It was a slow process, but reduced the size of the mandatory withdrawals considerably.

The one that dies with the most toys is still dead!

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My wife, not military but was civil service for 7 years had her TSP put in a regular 401k and I used my second career for buying the house and property and investing in USAA Funds. I don't have a 401k and will be happy to pay the adjusted 15% or less on capital gains when I cash in my 7 year investment long in Tesla, and our funds non 401 as well as the funds we bought during the "almost depression" at fire sale prices in 2007-2009. So that puts me in a different position with my military retirement. We are going to inherit quite a bit this year liquid and real property. We will consult our tax person this coming month as soon as we have all my SH's forms in hand for her Estate sale biz last year. It will be minimal because she cared for her dad most of 2016 on a leave of absence. She goes back to work part time once the house and acreage is cleaned up and sold.

RV/Derek
http://www.rvroadie.com Email on the bottom of my website page.
Retired AF 1971-1998


When you see a worthy man, endeavor to emulate him. When you see an unworthy man, look inside yourself. - Confucius

 

“Those who can make you believe absurdities, can make you commit atrocities.” ... Voltaire

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I must be missing something. 21 yrs active duty. 25 years CSRS. Transferred TSP to an annuity at 70 1/2 . Wife not eligible for SS so she gets half of mine. 38% of SS Taxable. The fact that you served in the military has no bearing on whether SS benefits are taxable. Amount of taxable SS depends on your combined income. Adjusted gross income puts me in the 25% tax bracket. Effective tax rate for 2015 11.9%. Didn't have any long term cap gains. Are they taxed at 15% regardless of rest of income? I guess I'm not understanding the variety of tax percentages mentioned above.

Chuck & Lola
WV
Retired USCG

2013 Ford F450/2013 Lifestyle 37RESL

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O boy! I am going to have a lot to learn regardless. Thanks for the heads-up thread, as it is really going to bite us in the next year or two if we don't get on the ball.

 

I sure am going to have a lot of questions for our tax person this year. We both elected to take our SS at age 62 and are both drawing it as of last year.

 

Thanks for the wake up call Doug!

RV/Derek
http://www.rvroadie.com Email on the bottom of my website page.
Retired AF 1971-1998


When you see a worthy man, endeavor to emulate him. When you see an unworthy man, look inside yourself. - Confucius

 

“Those who can make you believe absurdities, can make you commit atrocities.” ... Voltaire

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A month ago I gave a presentation to a club on "Things Your Financial Advisor Never Told".

 

In the presentation, I asked people to list to best financial decision and also their worst financial decision. I then said, another clue was they were the SAME decision.

401-K's and Traditional IRA's were for most people the best decisions they made for retirement security. It also was the WORST decision in many cases.

 

Those accounts basically take capital gains and dividend income and CONVERT them to ordinary income. Since my traditional IRA's were opened so long ago the entire gain is basically capital gains!!! But every year I made a withdraw it comes out as ordinary income.

 

I really do not understand why this is not more of a political issue. When you look at the math. Wow, do you pay a penalty for having a traditional IRA!!

 

I would like the law revised to tax distributions from a traditional IRA as capital gains and ordinary income based on earnings history. That would be fair.

Vladimr Steblina

Retired Forester...exploring the public lands.

usbackroads.blogspot.com

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I thought it was but then again, I opted to not call my invested monies 401s or any so called IRA. I invested in buying and selling for years and doubled my money each time I bought and sold on average. Both retail and classic vehicles for years. I've since learned to bank then invest in my homes and then when the profits were too big started looking for a good stock in tech and chose Apple in 2005 and chickened out at the last minute and then thought I missed the big "Pop" (biggest mistake) so continued to wait for Musk and Tesla/Space X to IPO and cleaned out all my stagnant accounts earning .5% from 2007/8 to almost as bad currently.

RV/Derek
http://www.rvroadie.com Email on the bottom of my website page.
Retired AF 1971-1998


When you see a worthy man, endeavor to emulate him. When you see an unworthy man, look inside yourself. - Confucius

 

“Those who can make you believe absurdities, can make you commit atrocities.” ... Voltaire

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