Managing Taxes in Retirement

Comments

• DrVenture

  March 6

  Thanks @bee Timely info for me, as I enter that phase of life.
• Observant1

  March 6

  Thank you.
  I'll review this information later.
• Sven

  March 7

  Thank you @bee. Like @DrVenture, i am nearly here. These are invaluable information.
• bee

  March 8

  One more from Humble Dollar:

  When it comes to tax planning for retirement, there’s one key principle I see as most important, and that’s the idea that in retirement, the goal is to minimize your total lifetime tax bill. That’s important because a fundamental shift occurs the day that retirement arrives: In contrast to our working years, when taxes are, to a large degree, out of our control, in retirement, taxes are much more within our control. By choosing which investments to sell and which accounts to withdraw from, retirees have the ability to dial their income—and thus their tax rate—up or down in any given year.
  
  The challenge, though, is that tax planning can be like the game Whac-A-Mole. Choose a low-tax strategy in one year, and that might cause taxes to run higher in a future year. That’s why—dull as the topic might seem—careful tax planning is important. To get started, I recommend this three-part formula:

  tax-smart-retirement/
• Sven

  March 8

  Thanks @bee, we will be doing several Roth conversion before 73. The market has been kind to us and we may end up in higher tax bracket in retirement according to our calculation. Healthcare cost is rising fast this year than that of inflation rate.
• DrVenture

  March 8

  A game of Whac-a-mole describes it perfectly. Or Newton's law. For every (tax) action, there is an equal and opposite reaction, may also be true.
  
  Another unexpected consequence can be NIIT. When taxable income rises high enough that investment income is impacted, as a consequence. One to be aware of. For 2025 a MAGI of $250,000 triggers this.
  
  So many different angles to consider.
• gman57

  March 8 edited March 8

  One more item unfortunately many don't consider. Death of a spouse changes your tax brackets dramatically from MFJ to Single. Another reason to bump up Roth conversions is if you have a spouse with serious health issues. Sad and something we hate to think about but it rears its ugly head as we age.
• DrVenture

  March 8

  Good point @gman57 I had not considered that IRT a Roth conversion.
• Derf

  March 9

  So instead of starting a T-IRA, Start a Roth IRA. That would help the most in my mind. FWIW
  Yes I know the Roth wasn't around when most of us started saving for retirement. Comment made for the younger generation.
• yogibearbull

  March 9 edited March 9

  Roth IRA started in 1998, but the income limit of $100K for them was eliminated only in 2010. So, Roth IRA became viable for many only after 2010 - not loo long ago. Roth IRA income limits now are higher.
• Observant1

  March 9 edited March 9

  I converted my IRA to a Roth IRA in 1998 or 1999.
  If I remember correctly, taxes due could be paid off over four years at the time.
  IRA contribution limits were only $2000 for those under 50.
• Sven

  March 9 edited March 9

  We participated in Roth 401(k) when it became available in 2006 with the company where we worked. It allows for higher contribution limit than those of Roth IRA. The 2026 limit is $24,500 and the catch-up is $8,000 for those over age of 50. Roth 401(k) is funded with after-tax dollar and the entire account is tax-free upon withdrawal. My company matching contribution, however, goes to the traditional 401(k) with pre-tax dollars.
  
  More recently, Roth conversion is allowed within the participant’s tradition 401(K) account. You pay tax on that year of conversion. I will be doing that when the market pull back in this Iran war. While compounding growth is a good thing, the tax burden upon withdrawal is not apparent until later in life.
• Mona

  March 9

  When someone inherits retirement accounts such as a 401(k), Roth IRA, and Traditional IRA, are some of these more valuable to the beneficiary from a tax standpoint?
  
  For example, if siblings, nieces, or nephews (non-spouse beneficiaries) are named as beneficiaries, does inheriting one type of account generally result in less tax for the beneficiary than the others?
• yogibearbull

  March 9

  Most nonspousal beneficiaries will face 10-yr withdrawal window.
  Roth is tax-free.
  In workplace 401k/403b, there may be more paperwork involved vs IRAs.
• Mona

  March 9

  @yogibearbull, thank you.
  
  A follow-up question for conceptual purposes (not exact percentages). If a nonspousal beneficiary is in a 20% tax bracket, is it reasonable to think that an inherited Roth IRA would be roughly 20% more valuable after taxes (I used the phrase "after taxes" because the comparison is being made on an after tax basis, not because the Roth IRA itself is taxed) than an inherited Traditional IRA, assuming the Traditional IRA withdrawals are fully taxable?
  
  
• DrVenture

  March 9 edited March 9

  @Mona I think that is a reasonable assumption, all else equal.
  
  Also, remember that the tax basis step-up may have a significant impact for a taxable account.
  
  I assume that you are asking because you are thinking about which accounts to deplete first. It seems to me that since a 401K or TIRA is fully taxed to heirs and must be distributed within 10 years, and subject to RMDs, that is what should be depleted first.
  
  I would like to hear more views on that topic. Maybe create a new topic?
• msf

  March 9

  My understanding is that since nonspousal beneficiary has ten years to empty an inherited Roth IRA the assets can grow, tax free, for a decade before any assets are withdrawn. That's different from an after-tax IRA, where the principal is tax-free but the growth (even within the IRA) is taxed upon withdrawal.
  
  If one is planning for an IRA to be inherited rather than spent down, then it can make sense to invest in longer term assets (equities rather than bonds) because one is investing for the beneficiary's lifetime, not one's own.
  
  For those fortunate enough to be subject to estate taxes (often state thresholds are lower than federal ones), doing a Roth conversion has another tax benefit. It reduces the size of the estate by the amount of taxes paid on the conversion. This in turn reduces estate taxes.
  
  Finally, a petty point. If the beneficiary is in a 20% bracket, then a Roth IRA is worth 25% more than a T-IRA to the beneficiary. $100 in a T-IRA is worth $80 post-tax. The Roth, worth $100, is worth 25% more than the $80 T-IRA.. (Conversely, the T-IRA is worth 20% less than the Roth.)
• DrVenture

  March 9

  @msf Yes, you are correct. Thanks for the clarification. I removed my comment.
  
  Your comment on estate taxes is also helpful.
• Mona

  March 10

  @DrVenture,

  I assume that you are asking because you are thinking about which accounts to deplete first

  No. I am updating my beneficiaries and thinking about how my retirement accounts would be allocated in the event of my death. Since I have a 401(k), a Roth IRA, and a Traditional IRA, I want to avoid unintentionally "penalizing" beneficiaries who might receive the non-Roth accounts. @msf gave me an idea on how I may handle this.