The conventional wisdom when I was socking money away in an IRA and a 401k was that tax rate in retirement would be lower than when working. What I never considered was that withdrawals from those accounts are taxed at a lower rate than I paid while working, but they also make more of my SS benefit taxable. So while my overall tax rate is very low, my marginal rate on IRA/401k withdrawals beyond what I need to live on would be 27.24%.Even so I'm considering beginning to take a little extra each year to build a fund for big purchases like autos and home improvements. I could take an extra $9K and I would still be in the 15% bracket so my modest capital gains would not be taxed. My state doesn't tax SS or retirement plan withdrawals so no impact there. My overall tax rate would go up to 8.33% of total income from current 4.38%.I have to start RMD in 2016. Am I crazy to take extra from the retirement plans now?
Am I crazy to take extra from the retirement plans now?There is a difference between taking money from a retirement account, which may be a taxable event, and spending the money, which is usually a wealth-dissipating event. Assuming you have correctly analyzed your own situation, it makes sense to take money from the retirement accounts when it will incur the least tax.If I understand correctly, your plan is to have smaller low-tax withdrawals over several years instead of a larger high-tax withdrawal the year you need to fund a big purchase. Sounds reasonable to me, assuming only that you won't spend more just because you have more money outside the retirement accounts.Patzer
I have to start RMD in 2016. Am I crazy to take extra from the retirement plans now? No. I will be 59.5 in 2014 and I plan to work with projections each year to consider when best to take money from my tax-deferred accounts and I'm not planning any purchases.
You could also convert the amount to a ROTH annually. ROTH IRAs don't have an RMD requirement. Have you run the calcuations on how much the distributions would change the amount of your Social Security that is taxable?
The percentages I gave come from a spreadsheet I developed years ago to estimate my taxes in various situations. It's proven extremely accurate over several years. I'd have to have an additional $12K of income before I reach the maximum 85% of SS taxable. But above $9K I begin to lose the 0% rate on my qualified dividends and long term capital gains.
When you do your projections, keep in mind that every dollar you withdraw from your IRA before you are subject to RMDs will reduce the size of the RMDs when you are forced to take them. (RMDs are calculated based on the previous 12/31 balance.)Larger RMDs could lead to more tax on your SS benefits and/or surcharges to your Medicare B premium.Ira
The effect on RMD has been one factor in my consideration. Also the effect of waiting until a big expenditure comes up and having to fund it all at once can mean a very big tax hit.
I've actually been discussing a strategy similar to Bill's with DH recently, so this discussion is very timely for me. I had not considered VKG's idea of converting funds to a Roth instead of pulling them out and putting them in taxable accounts. Unless we increase our spending goals, we are likely to leave a good sum to our kids when we die. Though the non-spousal inherited Roth will still be subject to RMDs, IMO this is still a better way to inherit money, and will allow us to control our taxable income better in life.Any glaring pitfalls? We've avoided converting our traditional IRAs to roths at this time because of high taxes, but this will go down considerably in retirement.IP
Interesting point on benefit of roth conversion: Now, since your wife's FRA (Full Retirement Age) is in two years, we know she's almost a decade younger than you are. You may beat the odds but the statistics indicate she could be a widow for sometime. If you have reason to think your life expectancy will not be extraordinarily long but hers might, a Roth can be more attractive because she'll be filing as a single taxpayer and may be subject to higher rates. For instance the 25% bracket starts at taxable income of $72, 501 for joint filers but for single filers that bracket starts at $36,251. http://www.marketwatch.com/story/when-do-roth-conversions-lo...FWIW,IP
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