Step 6 of of the Retirement Planning Process is “Minimize the Tax Liability”.
I haven’t met a retiree recently who is told me that they think that tax rates will be going down in the future. With trillions of dollars of debt and unfunded liabilities in the future, it’s important to control the amount of taxes that will be paid on IRA distributions, since it is very likely that future tax rates will increase.
If you’re curious about the state of the current national debt and unfunded liabilities visit http://www.usdebtclock.org/.
The truth is, the recent Trump tax legislation provided most a gift to minimize tax liability in retirement by providing a short window to take advantage of. Keep in mind that they expire beginning in 2026.
With careful planning, additional IRA distributions or Roth conversions can be completed in the years before IRA owners reach age 70 and ½. Remember this is the year that Required Minimum Distributions begin and the ability to control how much must be taken and taxed begins to go away.
Additional IRA distributions after age 70 and ½ once RMDs begin don’t just hit hard in regard to extra taxes. They hit the taxation of Social Security hard as well. If combined income exceeds $44,000 for a married couple, the provisional income test for the taxation of Social Security gets triggered. This can cause a reduction of up to 25% (due to federal taxes) on an income source that may have previously been tax free.
Where will you get the additional 25% of the income you’re missing? From your IRA, of course. And the cycle continues….additional withdrawals, additional income, additional taxes.
The best time to control your taxes is early in retirement before you turn 70 and ½. With careful planning, taxes can be paid at the current lower rates, but care must be taken to draw up a well thought through plan and determine the exact amount to withdraw each year.
Before taking any action, always consult your tax preparer and financial advisor.
If you have any questions please feel free to contact me.