Are you ready for a surprise? You could be in a higher tax bracket when you are retired and reach age 70, than when you are working at age 60.
On the face of it, it seems counterintuitive, since surely you would have less income in retirement. But for retirees who have built a nice nest egg in their tax-deferred retirement plans, the Required Minimum Distribution dictated by the IRS at age 70 ½ can create enough taxable income to push them into a higher tax bracket — and create a Medicare premium surcharge to boot.
Tax planning can save the day! The window of time between retirement and age 70 ½ is a golden opportunity to convert a portion of your taxable retirement accounts into tax-free Roth IRAs. Your taxable income may drop a significant amount in the year after you retire, especially if you defer Social Security and delay withdrawals from your taxable retirement accounts.
Structured correctly, you may be in the 12 percent or 22 percent bracket, and may even be in the 0 percent capital gains bracket for some period, too. Yes, you’ll owe tax on the dollar amount you convert to Roth IRA’s, but by measuring how much you can convert and still stay in the lower brackets, you pay less tax to create this forever tax-free asset.
Once you’ve held the Roth for five years, you can withdraw money tax-free (and it’s not counted in the Medicare surcharge calculation either). Or just leave the account to grow, since Roths are not subject to RMD withdrawal requirements.
Plan ahead for this strategy because you’ll need a combination of cash and brokerage accounts for low-tax cash flow to live on while you’re using your low tax bracket years for taxable Roth conversions. Remember, even if you do need to sell appreciated stocks or mutual funds, you may owe no (or minimal) capital gains tax in these lower brackets.
And even if you didn’t need another reason to act, I’ll still give you one: taxes are on sale under our new tax code! Through 2025, tax rates are probably the lowest of your lifetime. A multi-year Roth IRA conversion strategy is complicated – so talk with your tax professional.
Contact Yvonne Marsh at Wealth Management, LLC, 504 Ebenezer Road, Knoxville, by calling 865-622-2162 or visitiing www.marshwealth.com/. Financial Planning & Investment Advisory Services are offered through Marsh Wealth Management, LLC, an independent investment advisor registered with the state of Tennessee. Marsh is an Investment Advisor Representative of MWM in the state of Tennessee. Marsh Professional Group, LLC, is a TN registered public accounting firm and a separate legal entity from MWM. For a detailed discussion of MWM and their investment advisory fees, see the firm’s Form ADV on file with the SEC at www.adviserinfo.sec.gov.