Retirees of any age with large IRAs must understand that their IRA accounts can be hit with estate and income taxes when they die. And RMD rules could cause future income tax burdens while they are alive. However, IRA owners
between ages 59½ and 70½ have a great opportunity to use the tax law to their advantage and reduce IRA taxes.
If they are in lower tax brackets (10% or 15%), they can remove just enough money from their IRAs to use up those brackets thereby reducing their IRA taxes. When they turn 70½, they will have reduced the amount subject to RMD. Their future tax brackets may be lowered because of smaller withdrawals, and they will have shifted more of their assets out of their IRA. And most assets held outside an IRA pass income-tax-free to beneficiaries.
In other words, if possible, withdraw money from your IRA if you are in a lower tax bracket (e.g. 15%) any year after you reach 59½. Don’t wait to start withdrawals until age 70½.
Here’s an example that illustrates the opportunity and reduced IRA taxes. Bill and Linda are both retired, have large IRAs, and are age 60. Their taxable income will be $30,000 this year.
The tax law extends the 15% tax bracket to $65,100 for couples filing jointly. Thus, Bill and Linda could convert $35,100 worth of their IRAs to Roth IRAs this year and fully use up their 15% tax bracket.
| Married Individuals Filing Joint Returns and Surviving Spouses | |
| If Taxable Income Is: | The Tax Is: |
| Not over $16,050 | 10% of the taxable income |
| Over $16,050 but not over $65,100 | $1,605 plus 15% of the excess over $16,050 |
| Over $65,100 but not over $131,450 | $8,962.50 plus 25% of the excess over $65,100 |
| Over $131,450 but not over $200,300 | $25,550 plus 28% of the excess over $131,450 |
| Over $200,300 but not over $357,700 | $44,828 plus 33% of the excess over $200,300 |
| Over $357,700 | $96,770 plus 35% of the excess over $357,700 |
The federal income tax rate on the $35,100 conversion will be 15% ($5,265). And after Bill and Linda hold the Roth IRAs for five years, they can withdraw the money tax-free. Each year they will repeat the process and continually shift a large portion of their IRA to a Roth.
If Bill and Linda had waited until they were 70 ½ and subject to RMD, the withdrawals may have pushed them into a higher marginal tax bracket so that they would have paid IRA taxes of 25% and not 15%.
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