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

  9:53AM

  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

  10:09AM edited 10:11AM

  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

  12:46PM edited 1:41PM

  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

  2:45PM edited 2:52PM

  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.
  
  More recently, Roth conversion is allowed within tradition 401(K) plan. You pay tax for the year of conversion. I will be doing that when the market pull back in this Iran war. Compounding growth is a good thing, but the tax burden on withdrawal is not apparent until later in life.