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Percentage to use for Tax Effect for IRA in Divorce


Janey12
Posts: 15
Topic starter
(@janey12)
Active Member
Joined: 11 months ago

Hi there, I hope someone could help me.  I am trying to figure out what percentage to use for the tax effect percentage that I should apply when calculating the amount that an IRA should be discounted.   I say 20% to use on all pre tax account.  I know it depends on the individual accounts, but my husband will probably not go for that.  So I wanted to be able to use  a standard percentage.  Although he is in a very low tax bracket and I am in a high tax bracket, I am getting the short end of the deal.  But, he will not go for using a lower percentage on his pretax accounts vs mine.  Any help or insight would be very much appreciated.

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earlyretirementnow.com
Posts: 250
(@earlyretirementnowcom)
Member
Joined: 6 years ago

I'm not an accountant. I would start with your current average (effective) tax rate, federal plus state.

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Janey12
Posts: 15
Topic starter
(@janey12)
Active Member
Joined: 11 months ago

Thank you.  I was wondering if anyone knows if you would use a standard rate throughout.  For example 20% for my pretax accounts and 20% for his pretax accounts, or do you base it on each person's tax bracket?  Thank you

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1 Reply
earlyretirementnow.com
(@earlyretirementnowcom)
Joined: 6 years ago

Member
Posts: 250

@janey12   20% effective rate is not that easy to get to unless you are in a really high tax bracket (again: note the difference between effective and marginal).

I once did some calculations and found that in retirement, you need a 6-figure budget to even make it into the 10% federal effective tax rate: 

https://earlyretirementnow.com/2019/11/20/how-much-can-we-earn-in-retirement-without-paying-federal-income-taxes/

?resize=500%2C375&ssl=1

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Janey12
Posts: 15
Topic starter
(@janey12)
Active Member
Joined: 11 months ago

Yes I was going to use an average between my accounts and my soon to be ex's accounts.  The thing is that I think he would want to use a standard percentage on both.  He will not go for using a higher one for me and a lower one for him.  Does anyone know what would be a good choice.  I thought 20%, because it is somewhat an average between both of us.  Any thoughts would be appreciated.  Thank you.

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1 Reply
earlyretirementnow.com
(@earlyretirementnowcom)
Joined: 6 years ago

Member
Posts: 250

@janey12 If you want to high-ball the rate, I'd start with 20%, yeah.

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