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The $10k Monthly Tax-Free Income Plan!

Let’s start with how your social security income is taxed, a more detailed explanation.

Your total provisional income is subject to taxes when considering how much of your social security income will be taxed and half of your social security income is counted in this equation.

Let’s take a combined social security income of $55,000 for a married couple filling jointly with both members aged 65.

Half of your social security income is considered provisional income and subject to income taxes.

Half of $55,000 is $27,500

 

 

 

The way it works is this:

Divide your social security benefit, in the example $55,000 by 2 and we have $27,500.

Add 27,500 + your 401k income of $19,000 to equal $46,500.

 

The social security guidelines is this:

There’s 3 income brackets we’ll be working with, the first one is dealing with any provisional income above $44,000.

The second one is dealing with income above $32,000 not exceeding $44,000.

The third backet deals with income below $32,000.

We’ll be dealing with a zero percent tax, a 50% tax and an 85% tax.

 

 

The 85% of your income that exceeds $44,000 will be taxed as normal income taxes.

In our example $46,500 which is the total income to include half of your social security income plus $19,000 from your tax deferred 401k account, this $46,500 is $2,500 over the social security taxable limit of $44,000.

Therefore 85% of $2,500 will be subject to income taxes.

85% of $2,500 equals $2,125.

You will pay income taxes on $2,125.

 

Next, we’ll look at the amount for the 2^nd bracket which includes any amount over $32,000 not exceeding $44,000.

This amount equals $12,000, obviously $12,000 plus $32,000 gives us $44,000. The tax bracket for this level is taxed at 50% and 50% of $12,000 equals $6,000.

Therefore $6,000 will be subject to income taxes.

The 3^rd and final bracket is any income under $32,000 is taxed at zero percent.

 

Now let’s add up all taxable income.

 

From bracket one we have $2,125 plus income from bracket 2 which is $6,000 plus income from bracket 3 which is zero dollars for a total of $8,125.

$8,125 of your social security income will be subject to regular income taxes.

 

The next step is to add this amount to all provisional income you are receiving.

 

$8,125 which is your taxable social security income plus $19,000 which is income from your tax deferred 401k account equals $27,125.

 

Many advisors get this wrong because they use a flat tax calculation instead of a progressive tax calculation for social security benefits purposes.

 

In this example $27,125 is subject to regular income taxes.

HOWEVER, we are not done yet.

As of 2023 the standard deduction for a married couple filling jointly age 65 or older is $28,700.

If we claim this $28,700 standard deduction against our $27,125 in taxable income, we are left with a negative       -$1,575

In this example by claiming the standard deduction of $28,700, only provisional income that exceeds this amount will be taxed.

$27,125 is less than the standard deduction of $28,700 and this results in zero taxes being owed.

 

Total income for this scenario is $55,000 of tax-free income by way of social security, $19,000 of tax free income by way of your tax deferred 401k account. For a total of $74,000. Because the distribution from your 401k tax deferred account is less than the standard deduction, you will pay zero taxes on your 401k distributions.

 

Our $19,000 401k distribution also accounts for the age 72 RMD. Currently the RMD factor for age 72 is 27.4. If you multiply 27.4 by the standard deduction of $28,700 currently, our maximum 401k account balance can’t exceed $786,380. A balance of $786,380 would trigger a mandatory distribution of $28,700.

If you had no other income to include no social security income. You could have a 401k or IRA balance of $786,380 and receive $28,700 each year from your 401k account and never pay income taxes on the distributions.

However, as a result of having a nice social security income benefit, we had to account for this income. This is where future planning comes in.

The money in our 401k in excess of our future RMD will be repositioned into our tax-free bucket at today’s historically low tax rates via a Roth Conversion.

This amount will also account for half of our social security income benefits. To accomplish this, instead of leaving $786,380 in our 401k, we’ll reposition down to $520,000 in our tax deferred 401k account.

 

As a result, our couple has $520,000 in a tax deferred 401k account. Initially we repositioned down to $786,380 to the RMD limits and again down to $520,000 to account for social security taxation. We repositioned a total of $450,000 into a Roth IRA by way of a Roth Conversion or Back Door Roth. This process was done over several years to avoid jumping into a higher tax bracket. The Roth IRA provides this couple with $18,000 of tax-free income with no RMDs.

 

They also had an LIRP -Life Insurance Retirement Plan funded with an IUL policy (Index Universal Life Insurance Policy) with an account balance of $283,394.69 (@ 6.2% growth) by age 67.

The LIRP -Life Insurance Retirement Plans provides $19,077.24 tax-free income for 35 years with a fixed zero percent wash loan along with no RMDs.

If after 10 years long-term care services are needed for the husband. The policy death benefit at age 78 would be 284,603 of this amount the policy would pay a $210,606.22 lump sum LTC Benefit.

We would roll this $210,606.22 lump sum benefit into an asset-based annuity with a long-term care rider multiplier of 2.5X.

With the 2.5X multiplier the $210,606.22 annuity face value would increase to $526,515.55 of income tax free money when needed for long term care services. The benefits not used will transfer to the spouse upon the husband’s death.

 

We also have $350,000 in a taxable investment account which we pull out $10,000 each year income tax free.

 

How are you able to pull out money tax free from a taxable investment account?

 

 

 

With a taxable investment account for the year 2023 you may qualify for the ZERO percent long-term capital gains rate with taxable income of $44,625 or less for a single filer and $89,250 or less for a married couple filling jointly.

In our example our couple’s taxable income is way below $89,250 which results in zero taxes owed on the $9,000 distribution from the taxable account furthermore Only earned income (salary or other wages) or net income from self-employment counts toward Social Security and is subject to the withholding contribution. Capital gains are not part of this income.

In other words, your capital gains will not cause higher taxation on your social security income.

 

 

 

 

With this example we have created 5 buckets of income-tax free money.

 

1. $54,000 Income Tax Free Social Security Benefit.
2. $19,000 Income Tax Free via our Tax Deferred 401k
3. $18,000 Income Tax Free Roth IRA Distributions
4. $19,077 Income Tax Free Life Insurance Distributions
5. $10,000 Income Tax Free Via Taxable Investment Acts.

A total income of $120,077 Income Tax Free.

 

The 10k Monthly Tax-Free Income Plan.