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Wife & I spent an hour with a CFP we've known for decades. I'm 68, wife 65, and so I asked about RMDs and whether it might make sense for me to withdraw some $ from my qualified retirement account (TIAA) now, when we're in a relatively low tax bracket, rather than later, when the RMDs would push us into a higher bracket.

The CFP did a little math and verified that this would indeed make sense for this year and next year, and so that's what we're going to do. Also, don't forget to send an appropriate amount of withholding tax to Uncle Sam (and your state, if you have state income tax).
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I'm turning 65 and plan to withdraw from my IRA each year whatever amount keeps me in the lower tax bracket to lessen the eventual RMD. If the funds are not needed for living expenses, I should be able to roll them into a Roth.
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How Tax Brackets work (and why being in a higher tax bracket is not as bad as it sounds):

Suppose we had just two tax brackets to illustrate this: 10% and 15%.

The 10% Bracket applies to taxable income from $0 to $18,650 and anyone with income in this range pays 10% of taxable income.

The 15% Bracket applies to taxable income from $18,650 to $75,900 and anyone in this income bracket pays $1,865 plus 15% of taxable income over $18,650.

Why $1,865? Because that is 10% of $18,650. In other words, the first $18,650 of income was taxed at 10% and any income above that amount is taxed at 15%.

Note most importantly, your entire taxable income is not taxed at 15% even if you are in that bracket--only the amount above the threshold for that bracket.

Regards,
Prometheuss
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Hi MisterFungi

You don't mention how long you've been retired and what your marginal tax rate has been since you're paycheck(s) stopped. If you are like most, your taxable income has dropped into the 15% bracket, although this will depend on when you/spouse begin Social Security and a pension if there is one.

For many, but not all, retirees retiring between 62 and 65 will have 'headroom' in the 15% bracket. For example, if a couple married filing jointly have an Adjusted Gross Income of, say, $85,000 with itemized deductions of $15,000 and personal exemptions of $8,100 ($4,050 each for 2017) = $23,100 of total deductions, so $85,000 - $23,100 = $61,900 of TAXABLE INCOME (line 43 of your form 1040). So the 'headroom' in the 15% bracket = $75,900 (top of 15% bracket for married filing jointly) minus $61,900 = $14,000. This means you could do a couple of things to take advantage of this $14,000 of 'headroom':

1. Do a Roth Conversion of $14,000. You'd pay tax on this, but it'll be at the 15% rate. This is a good strategy if you have large Traditional IRA(s) and you will not need the full RMD amount to live on at age 70.5 and beyond.

2. Sell and immediately repurchase $14,000 of long term capital gains (in a taxable account, assuming you have such unrealized gains), which will be taxed at the 0% tax rate as they are in the 15% tax bracket. This effectively gives you a free 'step up' in at least part of the basis of appreciated securities (stocks, funds, etc).

The only potential fly in this ointment of taking advantage of any 15% bracket 'headroom' is Social Security. If you are currently having to include LESS than 85% of your household SS as income, such a strategy as #1 and #2 above will likely increase the % of SS you must include as income, and if so, the effective tax on these two strategies will be greater than 15%.

Which brings me to your CFP. Just curious...why are you bringing this to his attention? He should be suggesting this to you...its his job. This kind of analysis should be his second language. If not, you might consider finding another financial planner.

BruceM
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Bruce, am I correct that the 85% SS limit doesn't apply once you're past full retirement age?
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"Bruce, am I correct that the 85% SS limit doesn't apply once you're past full retirement age? "

They will try to tax your SS, up to 85% of it, no matter HOW old you are.

If you are poor, you likely won't owe any tax.

If you are making $100K a year through investments, not cap gains, they'll whack you 23% or more on it. or more.

t.
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Which brings me to your CFP. Just curious...why are you bringing this to his attention? He should be suggesting this to you...its his job.


Fair enough. This was the first time I'd met with him in that capacity. Still, he'd been doing my taxes for nearly 30 years, so he knows my situation pretty well.

Is it a particularly esoteric idea to withdraw money from a qualified account while retired and still in a low tax bracket so as to reduce future RMDs? I wouldn't have thought so, but maybe it is.
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"Is it a particularly esoteric idea to withdraw money from a qualified account while retired and still in a low tax bracket so as to reduce future RMDs? I wouldn't have thought so, but maybe it is. "
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

The comments I get from planners is that the qualified accounts are typically the
last places to draw down from based on the ability to grow tax-free for a few more
years. If you only have qualified accounts as a source, that logic goes away.

Howie52
We are seeing our "retirement budget" being fleshed out a bit now - and
might be finding the budgeted expenses may be skewed to the high side. But
we may be still in the scared-to-death about not having a paycheck so
don't spend an extra dollar phase.
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Mr.Fungi
I'm a bit confused. A CFP is a Certified Financial Planner who, normally, will be doing financial planning with you. Tax preparation is not financial planning....its tax preparation. Usually, you'll have a CPA, EA (Enrolled Agent) or one of the large tax prep companies (Jackson Hewitt, H&R Block, etc) with state certified tax preparation specialists doing your tax for you. If you've not paying the CFP for other than tax prep, that would explain why he/she is not advising you on how to take advantage of any 15% headroom.

By a 'qualified account', I assume you're speaking of an employer sponsored retirement plan, such as a 401(k) or profit sharing plan? If so, you'd probably be better off doing a direct (agent-to-agent) rollover of the qualified plan balance to your Traditional IRA, which will be entirely tax neutral. Then you can do a Roth conversion using any 15% headroom. This will effectively reduce the RMD you'd otherwise have at 70.5.

BruceM
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I thought you could not do a ROTH conversion once your retired. I have always earned more than the limit that did-qualified me from contributing to a ROTH. Now you are saying once I retire and my income drops to the point where I can contribute to a ROTH I an still do it?

Thanks for the information.
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By a 'qualified account', I assume you're speaking of an employer sponsored retirement plan, such as a 401(k) or profit sharing plan? If so, you'd probably be better off doing a direct (agent-to-agent) rollover of the qualified plan balance to your Traditional IRA, which will be entirely tax neutral. Then you can do a Roth conversion using any 15% headroom. This will effectively reduce the RMD you'd otherwise have at 70.5.

Bruce, I am late getting back to this. Thank you for this suggestion. Last year I moved the $ in my traditional IRA into my Roth (paying the tax on it), but I kept the traditional IRA open just in case I might need it for something later on. It sounds like your idea is that something. Yes, it's $ coming from my employee-sponsored retirement plan and would go into my Roth at Schwab.

Also, my CPA is also a CFP. I had been using him (for > 30 years) solely to do my taxes.
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