Life in your 60s may just be the best decade of your life (for tax planning); you have retirement in mind and plans to spend time doing the things you have worked so hard for over your career. Whether your goals include traveling around the world, spending time with grandkids, getting more involved in the community, playing more golf, or finding a new hobby, we all have ideas of the opportunities we would love to get to when we have “more time.” Retirement tends to afford us the flexibility to do more of what makes us happy, face our fears, or reenergize our focus. However, what if I were to tell you that your 60s are not just your golden years for enjoying life the way you envision, but your golden years for planning for significant tax savings in the future?
Certainly tax planning is probably the last thing on your mind as you tackle the fun list of “Things to do in Retirement,” but that is precisely the time it may make the most sense to consider a Roth conversion. We’ve all been told to “Defer! Defer! Defer!” and so by deferring taxes, we will save more in the long-run. However, deferring may not be the best solution if your retirement accounts have grown to a sizable amount. Take, for instance, your future Required Minimum Distributions (RMDs). This is the minimum amount you must take out of your IRAs and 401(k)s when you reach the IRS’s favorite age: Age 70 1/2. That required distribution may have a significant impact on your taxable income. Your first year RMD is equal to 3.65% of your December 31st value and reaches over 11.6%, and growing, at age 95. For example, let’s assume you are a 70 1/2 year old with a $1,000,000 IRA. You would need to take out $36,500 in Year 1, and likely every dollar would be subject to income taxes. Now let’s assume you have a $1,000,000 in your IRA today and you are only 60 years old. It grows an average of 6% per year until age 70 1/2. Now you have to take your first RMD. That amount would be over $65,000. It will climb to around $300,000 in your mid-80s at the same average rate of return. Add in Social Security and pensions, and some retirees won’t see a tax break at all in retirement. In fact, many retirees may find themselves paying more in income taxes than they did during their working years!
So what are your options? One strategy is to consider a Roth conversion in the years when your income is lower, and before hit the magic age for RMDs. This allows you to funnel money into a tax free account, smoothing out your taxes over time, and ultimately reducing the lifetime taxes you will owe to the RIS. The goal is to find the right conversion amount each year depending on your total income sources to keep you within a specified tax bracket and lower your overall tax liability over your lifetime. Conversions give you greater control over when you pay taxes rather than being forced to because of your age.
The other hidden benefit to Roth conversions is that the IRS gives you an out. Until October 15th of the following year, you could undo the conversion if market values decline significantly, tax laws change or your tax situation changes, allowing you to effectively see the dealer’s hand (Uncle Sam and the Stock Market in this case) and put your best tax foot forward.
Roth IRAs can also be used as a great estate planning tool allowing you to leave your legacy to your heirs with tax free distributions for life. Who wouldn’t love tax free income for life?
At Doyle Wealth Management, we can help. We can model all of these projections for you to determine if a Roth conversion makes sense for your portfolio and adjust our decision year by year. Additional taxable income affects a few other factors that are important in tax planning, from making sure you understand how your Medicare costs are affected, to avoiding the additional Medicare surtax of 3.8%. All of these factors from growth rates in your portfolio, growth rates in the tax table, how Social Security is taxed, and your future sources of income help us to answer 3 very important questions:
- Does a Roth conversion make sense for me?
- Does a Roth conversion make sense for my legacy?
- And, does a Roth conversion keep more moeny in my pocket to enjoy the wonderful years of retirement ahead?
Let Doyle Wealth Management help you love your 60s as the best (Tax) time of your life!