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If you have spent your working life contributing to a 401k or tIRA, you likely have a considerable amount saved up, and Uncle Sam is licking his chops at getting his share once you turn 70 1/2 and have to start taking RMDs.
One way to whittle down that tax bite is to reduce the amount of your pre-tax savings in those accounts.
This goes against what most financial 'experts' have been saying for years, that retirees should withdraw money from taxable accounts before touching 401ks and IRAs.
But I think the best strategy is to do Roth conversions in the years before you start taking Social Security or a pension (if you're lucky enough to have one).. while still in a low (15%) marginal tax bracket. You'll be paying at a low tax rate, likely lower than once you turn 70 1/2 and are getting SS/pension and those dreaded RMDs. Once the money is in a Roth, it grows tax free, and withdrawals are also tax free.
Your beneficiaries will get it tax free, or you can use it as a tax-free emergency fund for home repairs, a new car, etc.
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I always do ROTH conversions during lean earning yrs. (when effective tax rate < 10%)
yrs with high expenses = ROTH Conversions(income prop remodels / business losses / accelerated depreciation ...)
Yrs with high earnings = deductible contribution to 'traditional' IRA. (Property sales, 1031 or depreciation recapture, severance pay out, realized gains on stocks...)
Jury is out as to what future rates will be, my guess is they will not be less that 10% + the benefit of tax sheltered earnings growth within my ROTH. I have been wrong before
I am 58 and probably at the highest tax rate I will be as I hope to retire in 7 years. Looking for tax free growth I am currently contributing 10 of my 12% 401 contribution towards the Roth option. I am also moving the max $6,500/year from a taxable acct to a Roth.
Given my future tax situation, including moving to a state with no state income tax, I'm wondering if this is the right move.
We use the entirety of the 0% tax tier (std deduction + exemptions) for Roth conversions since the other income divs and cap gains is taxed after that at 0% anyway. Would probably do the 10% tier too if not for managing income to maximize Obamacare.
I am 58 and probably at the highest tax rate I will be as I hope to retire in 7 years. Looking for tax free growth I am currently contributing 10 of my 12% 401 contribution towards the Roth option. I am also moving the max $6,500/year from a taxable acct to a Roth.
Given my future tax situation, including moving to a state with no state income tax, I'm wondering if this is the right move.
If you think you will spend all your money in your/spouses lifetime might not be a good mode.
It all depends on your tax rates and your monthly retirement income. Look to see when your medicare insurance rate increase due to your income.
You might want to project your income and tax through retirement to get the answer. In general a mixture of ROTH and taxable retirement benefits is ok.
Note the 401k ROTH probably has an RMD at 70 1/2 so maxing the IRA ROTH is a good idea. No RMD on it.
You can probably roll the 401k ROTH to the IRA at some point and avoid the 70 1/2 RMD.
I am 58 and probably at the highest tax rate I will be as I hope to retire in 7 years. Looking for tax free growth I am currently contributing 10 of my 12% 401 contribution towards the Roth option. I am also moving the max $6,500/year from a taxable acct to a Roth.
Given my future tax situation, including moving to a state with no state income tax, I'm wondering if this is the right move.
So 7 more years at your highest tax rate ?
Are you counting SS + Pension + RMD in your retirement calculations ?
How does this compare to your current income/tax rate ?
Are you going to own property in the new tax free state (figure much higher RE taxes)
Generally I think a Roth is good but probably only if you have a job change/gap year(s) with lower income or if you retire early (before 65) then you can max the Roth but no sense to pay tax (at a high (est?) rate now just to be able to do a Roth conversion. You can leave money in a Mutual fund and not cash it out and get tax free growth.
so much is linked to taxable income in retirement that even if your rate is a bit higher the roth can win by a wide margin .
everything from getting ss taxed , to what you pay for medicare , to rmds , and utilizing the zero capital gains bracket are all based on taxable income
That went into my thinking as well MJ, so many advantages to a lower taxable income. . To answer a few questions I have no pension so SS, 40, part tij work and home sale proceeds will fund my retirement, I have been putting 10% into my Roth 401 for years, again sacrificing a larger contribution for tax free growth. The $6,500 transfer from a brokerage to the Roth really carries a pretty small tax bite on any given year.
Thoughts? I was always under the impression Roths are the way to go, my goal is limiting future expenses such as taxes.
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