Barron’s Retirement recently explored which bills you should first touch in retirement to reduce taxes. The common wisdom to always withdraw taxable brokerage or bank accounts first is often wrong. It all depends on whether you are in early retirement in high or low tax.
Following that article, we explored reader questions about Roth IRA conversions and other maneuvers to reduce retirement taxes:
How does the five-year rule affect Roth IRA conversions?
Let’s take a step back. In a Roth conversion, you take money from a tax-deferred account, pay income tax, and put it into a non-taxable Roth IRA account.
If you are at least 59½ years old, you can always withdraw the money you have recalculated without paying taxes or penalties. However, you need to wait five years from January 1 when you first opened the Roth IRA to be able to raise earnings tax-free, says Mike Piper, a St. Petersburg-certified public accountant.
Another thing is whether it is wise to get money out of Roth so quickly. Because Roth bills are so tax-efficient, they are often – but not always – the last bills you should touch in retirement.
“If you have a compelling reason to keep your income as low as possible in a given year, then spending with a Roth account can make sense,” Piper says.
Do I need my earned revenue for Roth conversion?
No. It is true that direct contributions to the Roth account must come from the realized income. However, when you make a Roth conversion, the money comes from a tax-deferred account and there is no income claim.
“You can retire and make Roth’s conversion,” says economist Laurence Kotlikoff of Boston University, which sells retirement income smoothing software. “You can be unemployed and do a Roth conversion. It’s not really about earnings. ”
Is there a revenue limit for Roth conversions?
No. There is a limit for direct Roth contributions, but not for conversions. “If you make $ 3 million a year, you can’t contribute to Roth,” says Scott Bishop, CPA and financial advisor at Avidian Wealth Solutions in Houston. “But you can turn into Roth.”
I’m worried about tax rates rising? Is Roth conversion a good idea?
Fear of a tax increase is one of the best reasons for Roth’s conversion. Generally, it makes sense to make these conversions when your future tax rates will be higher than your current ones. This could be because you will have a higher taxable income in the future than you currently have. But it could also be because tax rates are rising, and you’re trying to lock in today’s lower rates with a Roth conversion.
Greg Will, financial advisor and CPA from Frederick, Md., Advises clients to make Roth conversions for just that reason. “Tax rates are at the lowest levels for most types of income,” he says. “Just looking at the deficit, it seems pretty unlikely that tax rates will go down in the future and it’s relatively likely to go up – at least for certain people.”
How much should I worry about launching higher retired Medicare premiums?
A lot. These top bumps can be expensive. Your monthly Medicare premium is based on your modified adjusted gross income two years earlier. A married couple could earn up to $ 176,000 in 2019, and still each pays a minimum Medicare Part B premium of $ 148.50 a month in 2021. But if their income exceeds that level, premiums begin to rise rapidly. (It’s here Medicare rate table.) A couple who earned $ 277,000 in 2019 will pay a monthly premium of $ 386.10 each year. In addition, they will owe premiums for Medicare supplementation or for medications.
One of the best ways to lower your future Medicare premiums is a Roth conversion while you are in early low tax retirement before you start drawing Social Security.
Even if you don’t have enough income to run a higher Medicare premium in a couple, you can get one after your spouse dies and the survivor is taxed as a single person. One individual pays a higher Medicare premium this year if he had an income of more than $ 88,000 in 2019.
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