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Ask an Expert: Tax Planning in Advance Can Save You Big in Retirement Thumbnail

Ask an Expert: Tax Planning in Advance Can Save You Big in Retirement

In our Ask an Expert Series, the Financial Advisors of Propel address common misconceptions, mistakes, and missing information we in media stories.

Recently, the New York Times ran an article about the difficult decisions that retirees are struggling with when forced to make a withdrawal from their IRA accounts: “When You’re Forced to Cash Out in a Bearlike Market”.

Current IRS rules require that every IRA owner make a minimum annual withdrawal (known as a “required minimum distribution” or RMD) once they reach the age of 72. The amount of the RMD varies depending on the age and account balance of the IRA owner. For those with large balances accumulated from years of contributions to 401(k) plans, the RMD amounts can be significant enough to impact their tax bracket, social security taxation, Medicare premiums, and more.

The RMD issue is well-illustrated in the article by retiree Ms. Frazier, who recently turned 72 years old:

What should Ms. Frazier have done to prevent this predicament?

First, she could have avoided getting into this position by listening to the advice of a fiduciary financial advisor at Propel.

IRA owners can begin taking distributions as early as age 59 ½ without penalty.  Mrs. Frazier could have mitigated the current tax trap by taking an annual distribution much earlier.  With careful calculations, she could have kept these annual withdrawals minimal to prevent bouncing into the next tax bracket.  If she didn’t need the funds of the annual withdrawal, she could simply reinvest the funds.

For many, a great option is to use a Roth IRA account through a process called a Roth conversion.  A Roth has no RMD requirement and is a tax-advantaged account that allows your investments to grow tax-free until you need them.  Tax-free means no capital gains tax and no income tax, thus avoiding the increase of taxable income on your tax return.

Roth IRAs are hard to beat! Implementing this strategy can really help to lower your lifetime tax bill1.

If Ms. Frazier, of the above article, had a Roth account at her disposal, she could easily withdraw $8000 for her dental work and not worry about bumping up her tax bracket.

This is just one of the many benefits of using a Roth IRA account as part of your retirement savings strategy. For a deeper dive into more pros of using a Roth, listen as Advisor Danielle Woods gets into this and more in our recent Connecting the Dollars Podcast Episode 12: “Eye on Estate Planning - Strategic Use of Investment Accounts.”

1This is not tax advice. This example is for educational and illustrative purposes only. Please consult with a tax professional. Only they know your unique tax situation.