![]() “The real gain from this game is smoothing tax brackets” later in retirement. “If you’re in a period when you’re in a low tax bracket, that’s when you want to take it out of your IRA,” he says. Here’s Why.īut bonds are yielding less than inflation, meaning there is no growth in value from letting them sit in a tax-deferred account, Kotlikoff notes. The 4% Withdrawal Rule Shouldn’t Be a Rule.It’s Time for a Midyear Review of Your Finances.Inflation Greets Retirees Emerging From the Pandemic. ![]() Many early retirees have a lot of their wealth in bonds, which they keep in tax-deferred accounts to escape taxation on the interest. The current low interest rates make deferring taxes less valuable, says economist The taxes on their estates will be larger and their heirs eventually will yet pay more taxes when they pull money out of an inherited tax-deferred account.īy contrast, with a Roth conversion, “you get all the tax-free growth from the day you do it until the day the kids take out the money,” Weininger says. Wealthy clients like this will probably pay around 40% to do a Roth conversion, reducing the size of their estate and their estate taxes.īut it will be far more costly if they don’t do a Roth conversion. Roth conversions also make sense for wealthy retirees who have estates too large to be covered by the $11.7 million per person lifetime tax exemption, says Bruce Weininger, a Chicago financial advisor and certified public accountant at Kovitz. A middle-income client might be doing Roth conversions in the 12% tax bracket, whereas an upper-income client may be doing them all the way up to the 24% bracket, she says. Marianela Collado, a wealth advisor and certified public accountant in Plantation, Fla., analyzes each client’s anticipated future taxes and determines when current Roth conversions make sense to avert higher taxes in the future. Otherwise, retirees have to pull even more money from their tax-deferred account to cover taxes. Roth conversions make sense for retirees who have enough after-tax money to pay the taxes on the funds being converted. Or they could leave it tax-free to their heirs. Any money they take out of the Roth for the rest of their lives will be tax-free. Instead of spending $109,450 from a tax-deferred account, they could convert $109,450 in assets from tax-deferred account to a Roth IRA account and pay the same $9,328 tax bill. The value of the assets is taxed at the time of transfer as ordinary income.Ĭonsider the earlier example of a couple with no other taxable income. In the simplest type of Roth conversion, investors transfer assets from a tax-deferred account to a Roth account. “If we have flexibility where we can draw from any of the three accounts, we have a lot more leverage over their future taxes,” Will says.įor many retirees, particularly upper-income ones, Roth conversions early in retirement are the best way to lower their taxes later in retirement. For example, toward the end of the year, if Will sees his clients are hitting a higher tax bracket, he will advise them to pull money out of an after-tax account instead of tax-deferred account. Retirees can frequently save money by alternating between different buckets. Optimally, they will enter their 70s with three buckets of money: an after-tax bucket, a tax-deferred bucket, and tax-free bucket for the Roth IRA, Will said. Greg Will, a financial advisor and certified public accountant in Frederick, Md., refers to retirees’ late 60s as their “gap years.” The decisions they make then will affect their taxes for the rest of their lives. Some early retirees in low tax brackets can save even more by converting tax-deferred accounts to Roth accounts. Many seniors should therefore consider tapping their tax-deferred accounts earlier in retirement and pay taxes while income is still relatively low, wealth advisors and accountants say. Either rate is lower than they are likely to pay after they begin collecting Social Security. ![]() That same couple can take out $108,850 and pay $9,328 in taxes, an 8.6% tax rate. ![]() And that often means paying more tax in early retirement to reduce tax later.īy way of example, he notes that a couple over 65 years old with no other taxable income can withdraw $47,700 from a tax-deferred account and pay just $1,990 in taxes, a tax rate of just 4.2%. Sarenski says clients instead should be focused on reducing their lifetime taxes. ![]()
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