Vanguard reports that more than 80% of investors could meaningfully improve their modeled retirement outcomes by including Roth conversions in a broader income plan. That doesn’t necessarily mean that four out of five retirees are guaranteed to save money since every person has a different tax situation, life expectancy, and future withdrawal amounts.
Still, the result points to a tax move that deserves a place in many retirement plans. The most valuable opportunity may appear during a brief window when income temporarily falls — after you call it quits at work and before required minimum distributions, or RMDs, begin.
A Roth conversion moves pretax money from a traditional IRA or eligible workplace retirement plan into a Roth IRA. The converted amount generally becomes taxable income for that year, but qualified Roth withdrawals can be tax-free later. In simple terms, you pay tax at today’s rate to avoid potential taxes on the same money and its future growth later.
The real challenge is deciding how much to convert, and when.
Find Out: 14 moves seniors could benefit from but often forget about.
The gap years can create a lower tax window
Taxable income often drops after a paycheck ends but before Social Security benefits and required minimum distributions, or RMDs, begin. Under current law, RMDs generally start at 73 for people born from 1951 through 1959 and at 75 for those born in 1960 or later.
Those gap years may allow a retiree to convert part of a traditional IRA while remaining in a lower federal bracket than they were in during their working years. It isn’t automatically the right move, but the timing can potentially make the tax bill easier to manage.
Source:
https://www.aol.com/articles/vanguard-says-tax-move-benefits-104300000.html
Diem ‘Richard’ Nguyen
Liên Minh Bảo Hiến Mỹ Gốc Việt
Vietnamese American Conservative Alliance (VACA)
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