We’re approaching the middle of 2013, and most of us are just starting to get used to the new tax rules that took effect at the beginning of the year. We now have Medicare surtaxes on earnings and income, Social Security taxes reset to historic 6.2% levels, and the re-introduction of the top 39.6% tax bracket.
With all these potential tax increases, you might think that tax planning today should be all about deferring income and accelerating your deductions, just as it was the “good old days” of tax planning. In fact, though, not all of your tax planning should be focused on reductions. It may still make sense for some people to actually increase their income right now.
Someone who could really benefit from accelerating current income is a retiree who is drawing income from his investment portfolio, has a significant IRA balance (let’s say it’s around $3 million), and has not yet hit the magical age of 70½–the age when he’s required to take distributions from any IRAs. For our example, let’s assume the person is age 62. Since our retiree is living off his portfolio, we could assume he is in a relatively low tax bracket. That’s fairly realistic if proper attention has been paid to asset location.
One thing we know is that with a large IRA balance, our retiree will hit a future “bump up” in tax brackets when he begins taking required distributions. As a general rule, a 71-year-old would be required to withdraw around $38,000 for every $1 million invested (per IRS Uniform LifetimeTable). So our investor with a hypothetical $3 million IRA would be required to take a taxable distribution of nearly $114,000. That moves the tax-bracket needle significantly for someone who was previously in a much lower tax bracket. And herein may lie the potential opportunity.
If our retiree is in a lower tax bracket today–and expects to stay there until he begins taking required IRA distributions–he can be opportunistic about taking smaller, interim distributions from the IRA to take advantage of his current, lower tax bracket. With proper planning, our retiree could take distributions from his IRA each year up until age 70½ while remaining in the lower tax brackets by analyzing and managing tax brackets. This gets that money out of the IRA with a lower cumulative tax liability and may also reduce the amount required to be withdrawn at age 70½ which could otherwise be subject to tax in a higher bracket .
A potential second, smart step: If the withdrawals are not needed to meet current expenses, deposit those interim distributions directly into a Roth IRA, where the assets can grow totally tax-free. As you may know, Roth IRAs arenot subject to the same distribution rules as traditional IRAs. This means the assets in the Roth can continue to grow tax-free for the rest of our retiree’s life, assuming the IRS does not change the rules regarding Roth IRAs. He need never withdraw them unless he wishes to do so.
It’s important to note that a Roth conversion like this is not for everyone, especially those who may need the money to fund their retirement cash flow. It takes a lot of planning and number-crunching to determine whether it’s appropriate and to what extent income should be recognized. You should always enlist the help of an accountant, along with your Wealth Advisor, whenever you consider a Roth conversion. As a team, both parties can work together to help you with your strategy.
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Please remember to contact RegentAtlantic if thereare any changes in your personal or financial situation or investmentobjectives for the purpose of reviewing our previous recommendations andservices, or if you wish to impose, add, or modify any reasonable restrictionsto our investment management services. A copy of our current written disclosurestatement discussing our advisory services and fees is available for yourreview upon request. This article is not a substitute for personalized advicefrom RegentAtlantic. This information iscurrent 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 conditionsand may differ from opinions expressed in other businesses and activities ofRegentAtlantic. Descriptions ofRegentAtlantic’s process and strategies are based on general practice and wemay make exceptions in specific cases.
Please remember that RegentAtlantic does notprovide tax advice. Please consult with an advisor or your choosing prior to implementing any of thestrategies discussed in this article.
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.