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Gap Years

The Gap Years – Tax Planning Opportunities in Retirement

We often refer to the years between retirement and when an individual turns 70 years old as the gap years in retirement.  The point from which you stop earning employment income until you turn age 70 often presents a unique situation – your taxable income may be very low.

The Gap Years

The reason age 70 is the key is that often we recommend our clients wait until age 70 to begin collecting Social Security and of course in the year you turn 70.5 you must begin taking Required Minimum Distributions – both of these events can increase your taxable income substantially. 

For illustrative purposes. 
This does not represent the circumstances of any RegentAtlantic client.

So what can we do to take advantage of these “gap years”?  It presents a great planning opportunity to take full advantage of your lower tax bracket in those years and you have a number of options to utilize those low tax brackets.

Roth Conversions

Being in a low tax bracket provides a great opportunity to perform partial conversions of your Traditional IRA to your Roth IRA.  While in the short-term you are accelerating the tax you are paying, you will never pay tax again on your Roth assets which can be beneficial later in life by providing you tax-free growth and then withdrawals.  Since you are also pulling money out of your Traditional IRA it also has the ancillary benefit of lowering your future RMD’s which inevitably will at a higher tax rate.

IRA Withdrawals

Rather than Roth conversions, another option is to begin taking money out of your IRA’s before you reach Required Minimum Distribution Age.  If project your future RMD and add on Social Security you can get an idea of what your future tax bracket will be.  For example let’s say a married couple expects future retirement income to be $200,000, placing them in the 24% marginal tax bracket.  If we can fully utilize the 10%, 12% and 22% tax brackets during the “gap years” by pulling out IRA assets you will be better off long-term in terms of your overall tax bill.  Like the Roth Conversion by removing assets from your Traditional IRA today, you also lower your future RMD’s and your future tax bill as a result.

Taking Capital Gains 

Putting the IRA aside for a minute the other option is to take long-term capital gains from your taxable account to reset your cost basis on appreciated securities.  Capital gains rates are 0% for married couples who have under $78,950 of taxable income so retirees in their “gap years” may have the opportunity to take capital gains and pay nothing in tax.

Those with low-income years in retirement have a great planning opportunity.  If you would like to explore which of these options might best fit your situation, please reach out to your RegentAtlantic Wealth Advisor today.

Important disclosure information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.

This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.

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