Ordinary income is income taxed under ordinary income brackets rather than preferential capital-gains rates. IRA withdrawals are treated as ordinary income, so taxes reduce the amount available for spending. section 9.2.2 section 9.3.3
Apply ordinary-income taxation to withdrawal planning by:
- Computing tax from income, a deduction, and progressive federal brackets. section 9.2.2
- Grossing up an IRA withdrawal when spending needs are stated after tax. section 9.2.2
- Recognizing that ordinary income is taxed before long-term capital gains and can push gains into higher brackets. section 9.3.3
Grossing up an IRA withdrawal
With $120,000 of IRA income and a $13,850 standard deduction, calculated federal taxes are $18,876. Meeting $120,000 of after-tax spending therefore requires a pretax withdrawal of about $144,836.84. section 9.2.2
Stacking with capital gains
With $80,000 of ordinary income and $40,000 of long-term gains, simplified calculations produce $12,600 of total tax. Increasing ordinary income to $90,000 raises total tax to $15,300 because more gains enter the 15% bracket. section 9.3.3
Listing 9.2 Computing taxes from income
def calc_taxes(income, TaxTable, deduction):
taxable_income = income - deduction
i = 0
tax = 0
bottom = 0
while taxable_income > bottom:
bracket_income = min(TaxTable.iloc[i]['top_of_bracket'],
taxable_income) - bottom
tax += TaxTable.iloc[i]['rate'] * bracket_income
bottom = TaxTable.iloc[i]['top_of_bracket']
i += 1
return tax
Inspect the bracket-by-bracket calculation that converts ordinary income and a deduction into tax. section 9.2.2
