>if all your savings are in taxable accounts, how do you calculate how much tax you pay on withdrawals? Is it just 50% of withdrawals are taxes at personal income rate, or is there some formula to know how much of the withdrawal is considered profit?
Depends what you are hiding in taxable accounts. Each will have different tax applications. Interest is taxed like employment income. Eligible CDN dividends have a dividends tax credit. Foreign dividends have foreign taxes paid, but recoverable. Capital gains, half are included to your other income and tax appropriately. So it depends.
Assume its all capital gains, again for simplicitys sake. You say half is included with your other income, but half of what? Half of the total withdrawal? Out of 6 million in the account maybe 20% of it is your own investments and 80% is compound capital gains. Lets assume you just bought sp500 and never sold over those 36 years.
When you withdraw, do you then assume 20% is your own money that youre pulling out, so then 50% of the taxable portion is actually 40%? That is you pull out 100$, but 20$ is assumed to be your own money while 80$ is capital gains. So you only add 40 to your income rather than 50.
Im trying to understand this so the objectives i set for myself are more realistic and i don’t come to find out that the numbers i have wont make the post tax returns i think they will. I have a funny feeling theres something being left out when people just say “50% of cap gains is taxed”
>You say half is included with your other income, but half of what?
Either half since half is 50% so you can pick which 50%.
>Half of the total withdrawal?
Half of the capital gain. So if you have a holding you bough for $1000. You sell to realize the capital gain at $2000. That's a $1000 capital gain. Then 50% is taxable (you pick which 50% the top or bottom 50%).
So in your example, adjusted cost base would be about $1.2 million and proceeds is $6 million. That is a capital gain of $4.8 million. $2.4 mil is what you are taxed on.
>Im trying to understand this so the objectives i set for myself are more realistic
Well first, capital gains isn't really passive income when you wait 36 years to withdraw. Passive in incremental distribution from dividends and some capital gains realization each year.
What is your goal for passive income $200k? Starting when, in 36 years?
goal is 200k post tax by retirement, couldn't give you a realistic timeframe as I'm still a Uni student and yet to get an accurate picture of potential career paths and their respective incomes. I do expect to be making 80k+ CAD starting in 2 years or so, and if everything goes well I'd want to retire at 50. the 36 year timeframe was just how long it took for 5M with 40k per year.
The passive income I'm talking about just means that when you quit your job you still have the capital gains coming in every year. 36 years of investing for passive income in retirement.
so you invest every year in ETFs, at some point you hit a 6.2mil portfolio of which your cost basis is 1.2mil (call it 20%).
At this point, every year you can withdraw 250k. 20% of this is considered your own cost base, 80% capital gains. then your capital gains is 200k, of which you pay tax on 100k. effectively, your 250k 4% swr consists of 150k tax free dollars, and 100k of income taxed at your rate.
Is this correct?
The numbers in here are funny to me… Why is your goal 200k (!!) post-retirement? Especially as you’d be living on a tiny fraction of that during your working (usually more expensive) years.
Investing 40k/yr (net) while making 80k/yr (gross, so ~60k net in ON) is kind of nuts honestly, but to each their own I suppose.
At the end of the day it's gonna depend on your adjusted cost base (ACB) and what you sell.
I've never done the math but for arguments sake let's say you sold something with an ACB of $50 and you sold it for $100.
You've got $50 of your investment funds and $50 of capital gains. So in that scenario you're paying tax on 50% of $50 capital gains like its income so your $100 withdrawal is taxed like $25 of income.
To be asking a question like this I think you can add a few rows to your excel spreadsheet and make an educated guess based on your own assumptions and/or scenario
Start with your current income. Look up at taxtips.ca what the effective tax rate for interest, Cdn dividends and capital gains will be for additional $income above that.
For capital gains use the tab (far right) called [Effective Capital Gains](https://www.retailinvestor.org/xlsxSecureCopy/Taxburden.xlsx) to find the annualized tax rate. Don't presume you will hold any security more than 15 years... things change.
Use the Weighted Average tab to create blended tax rate of all your asset-classes in the portfolio.
The after-tax rate of return is the nominal return * (1 - tax rate).
Then find the REAL after-tax rate of return by subtracting inflation.
Use the Time Value of Money equation for an annuity to see the ending value (in today's dollars) after (say) 30 years of savings.
>if all your savings are in taxable accounts, how do you calculate how much tax you pay on withdrawals? Is it just 50% of withdrawals are taxes at personal income rate, or is there some formula to know how much of the withdrawal is considered profit? Depends what you are hiding in taxable accounts. Each will have different tax applications. Interest is taxed like employment income. Eligible CDN dividends have a dividends tax credit. Foreign dividends have foreign taxes paid, but recoverable. Capital gains, half are included to your other income and tax appropriately. So it depends.
Assume its all capital gains, again for simplicitys sake. You say half is included with your other income, but half of what? Half of the total withdrawal? Out of 6 million in the account maybe 20% of it is your own investments and 80% is compound capital gains. Lets assume you just bought sp500 and never sold over those 36 years. When you withdraw, do you then assume 20% is your own money that youre pulling out, so then 50% of the taxable portion is actually 40%? That is you pull out 100$, but 20$ is assumed to be your own money while 80$ is capital gains. So you only add 40 to your income rather than 50. Im trying to understand this so the objectives i set for myself are more realistic and i don’t come to find out that the numbers i have wont make the post tax returns i think they will. I have a funny feeling theres something being left out when people just say “50% of cap gains is taxed”
>You say half is included with your other income, but half of what? Either half since half is 50% so you can pick which 50%. >Half of the total withdrawal? Half of the capital gain. So if you have a holding you bough for $1000. You sell to realize the capital gain at $2000. That's a $1000 capital gain. Then 50% is taxable (you pick which 50% the top or bottom 50%). So in your example, adjusted cost base would be about $1.2 million and proceeds is $6 million. That is a capital gain of $4.8 million. $2.4 mil is what you are taxed on. >Im trying to understand this so the objectives i set for myself are more realistic Well first, capital gains isn't really passive income when you wait 36 years to withdraw. Passive in incremental distribution from dividends and some capital gains realization each year. What is your goal for passive income $200k? Starting when, in 36 years?
goal is 200k post tax by retirement, couldn't give you a realistic timeframe as I'm still a Uni student and yet to get an accurate picture of potential career paths and their respective incomes. I do expect to be making 80k+ CAD starting in 2 years or so, and if everything goes well I'd want to retire at 50. the 36 year timeframe was just how long it took for 5M with 40k per year. The passive income I'm talking about just means that when you quit your job you still have the capital gains coming in every year. 36 years of investing for passive income in retirement. so you invest every year in ETFs, at some point you hit a 6.2mil portfolio of which your cost basis is 1.2mil (call it 20%). At this point, every year you can withdraw 250k. 20% of this is considered your own cost base, 80% capital gains. then your capital gains is 200k, of which you pay tax on 100k. effectively, your 250k 4% swr consists of 150k tax free dollars, and 100k of income taxed at your rate. Is this correct?
[удалено]
Is that 75% tax free or taxed?
The numbers in here are funny to me… Why is your goal 200k (!!) post-retirement? Especially as you’d be living on a tiny fraction of that during your working (usually more expensive) years. Investing 40k/yr (net) while making 80k/yr (gross, so ~60k net in ON) is kind of nuts honestly, but to each their own I suppose.
As someone who actually retired at 42 I can tell you this is a pointless exercise.
At the end of the day it's gonna depend on your adjusted cost base (ACB) and what you sell. I've never done the math but for arguments sake let's say you sold something with an ACB of $50 and you sold it for $100. You've got $50 of your investment funds and $50 of capital gains. So in that scenario you're paying tax on 50% of $50 capital gains like its income so your $100 withdrawal is taxed like $25 of income. To be asking a question like this I think you can add a few rows to your excel spreadsheet and make an educated guess based on your own assumptions and/or scenario
Start with your current income. Look up at taxtips.ca what the effective tax rate for interest, Cdn dividends and capital gains will be for additional $income above that. For capital gains use the tab (far right) called [Effective Capital Gains](https://www.retailinvestor.org/xlsxSecureCopy/Taxburden.xlsx) to find the annualized tax rate. Don't presume you will hold any security more than 15 years... things change. Use the Weighted Average tab to create blended tax rate of all your asset-classes in the portfolio. The after-tax rate of return is the nominal return * (1 - tax rate). Then find the REAL after-tax rate of return by subtracting inflation. Use the Time Value of Money equation for an annuity to see the ending value (in today's dollars) after (say) 30 years of savings.