clifp
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
- Joined
- Oct 27, 2006
- Messages
- 7,733
In the recent thread on retiree paying zero in taxes. Onward posted a very interesting link to a Rick Ferri piece Avoiding Taxes As A Retiree Isn’t So Easy. Frankly it was an eye opener for me.
The article is well worth reading, but the TLR is this.
Even if you have been happily enjoying modest tax rates in the early stages of retirement, when you turn 70.5 RMD are going substainially increase your taxes. The example Rick uses is an affluent couple who retires with $2 million in 401K/IRA at age 60,by age 70.5 2 million has grown to $4 million with a 7% return. They are required to withdraw at least 144k, putting them in pretty high tax bracket and decreasing a number of other benefits.It is worth noting that if you have a $1 million in your retirement accounts by 50, you will also likely hit $4 million by age 70.5.
What Rick fails to mention is if you followed conventional wisdom you also delayed taking social security (for at least one spouse) until age 70. Because SS benefit increase pretty rapidly a working couple that take SS at age 70 can easily get another $50-70K in SS benefits. This means that you'll see a spike in income of more than $200K for a couple when they turn 70 and the tax bracket will shoot up from say 15% to 33%.
So here is the interesting dilemma. Conventional wisdom is you withdraw money from tax deferred account last to maximize the benefits of tax free compounding. Conventional wisdom is that you delay SS, because this is the least expensive COLA adjusted annuity you can purchase.
I am pretty sure that conventional wisdom is correct in both cases if these were strictly independent decisions, but they are not. If you do both you'll end up with a big spike in income at age 70. I haven't done any calculations, but my estimate is that tax wise you are much better off smoothing your income in your 60s than seeing a big spike in the 70s.
The question is which is the better approach, withdrawing money from your IRA and/or doing a ROTH conversion or taking SS at full retirement age or possible even at 62. Or even more fundamentally how do you go about modeling this question?
The article is well worth reading, but the TLR is this.
Even if you have been happily enjoying modest tax rates in the early stages of retirement, when you turn 70.5 RMD are going substainially increase your taxes. The example Rick uses is an affluent couple who retires with $2 million in 401K/IRA at age 60,by age 70.5 2 million has grown to $4 million with a 7% return. They are required to withdraw at least 144k, putting them in pretty high tax bracket and decreasing a number of other benefits.It is worth noting that if you have a $1 million in your retirement accounts by 50, you will also likely hit $4 million by age 70.5.
What Rick fails to mention is if you followed conventional wisdom you also delayed taking social security (for at least one spouse) until age 70. Because SS benefit increase pretty rapidly a working couple that take SS at age 70 can easily get another $50-70K in SS benefits. This means that you'll see a spike in income of more than $200K for a couple when they turn 70 and the tax bracket will shoot up from say 15% to 33%.
So here is the interesting dilemma. Conventional wisdom is you withdraw money from tax deferred account last to maximize the benefits of tax free compounding. Conventional wisdom is that you delay SS, because this is the least expensive COLA adjusted annuity you can purchase.
I am pretty sure that conventional wisdom is correct in both cases if these were strictly independent decisions, but they are not. If you do both you'll end up with a big spike in income at age 70. I haven't done any calculations, but my estimate is that tax wise you are much better off smoothing your income in your 60s than seeing a big spike in the 70s.
The question is which is the better approach, withdrawing money from your IRA and/or doing a ROTH conversion or taking SS at full retirement age or possible even at 62. Or even more fundamentally how do you go about modeling this question?