The taxes are due in the year you convert at your regular income-tax rate. If you move a large sum all at once that can bump you into a higher tax bracket. Converting in smaller amounts for several years is a wise move, but even then your income will be higher every year. Because taxes are progressive, you end up paying your highest personal tax rate on those converted IRA dollars.
Many people retire in their late 50s or early 60s, years before RMDs begin, which creates a window of time where tax planning opportunities abound. […] Actively engaging in tax planning can boost your after-tax income in retirement by a meaningful amount.
With lower rates now, you can engage in tax arbitrage.
Withdrawals, since not previously taxed, will be included in your taxable ordinary income. RMDs are the minimum that you must withdraw each year — you can always withdraw more, but withdrawing more than the maximum does not allow you to carry over the difference and lowering your RMD in future years.
The Tax Cuts and Jobs Act should change the way many people make charitable contributions. Few people will be itemizing expenses because of the doubling of the standard deduction and reduction of deductions allowed. That means fewer charitable contributions will be deductible and the tax benefits from making gifts will be lower.
That’s actually good news for many people. Writing a check is not the most efficient way to give to charity. One of the most efficient ways to give is available only to those ages 70½ and older, and the changes should cause many to gravitate toward what for several years has been one of the smartest ways to give.
It’s known as the qualified charitable contribution (QCD). It was in and out of the tax code as a temporary provisions starting in 2006. But Congress made it permanent in the Protecting Americans from Tax Hikes Act of 2015. Under the QCD you make a charitable contribution directly from your IRA.
To understand the benefits of the QCD, first consider how a charitable contribution from an IRA that doesn’t qualify as a QCD is taxed. When the QCD rules don’t apply, a charitable contribution made with IRA funds is first treated as a distribution to the owner. It doesn’t matter if the contribution is made by a direct transfer from the custodian to the charity, or if a distribution is made to the IRA owner who then makes a charitable contribution. In either case, the amount is included in the gross income of the IRA owner.
Maintaining your financial security in retirement is harder than ever. There are factors threatening your plans for lifetime income security. Retirees have had to deal with some of these trends for years, but others are relatively new, or are becoming more significant.
Your job isn’t done when you retire. Things change during retirement, and you have to keep up with the changes. Too often, people who appear to be financially secure at the start of retirement see their assets dissipate because of unforeseen events and mistakes.
While there are a range of trends and factors you need to monitor during the post-career years, there are five I believe are the paramount threats to retirement security for today’s retirees and those soon to retire.
The foundations are crumbling. It’s no secret that both Social Security and Medicare aren’t in good financial shape. Every year the Trustees for Social Security and Medicare issue a report assessing the condition of the programs. While the details change from year to year, the long-term outlook isn’t good. Each year that Congress doesn’t act, we are closer to the time when the programs can’t fully pay the promised benefits.
These two programs are important to the financial stability and independence of most retirees, more than many pre-retirees realize. The importance of the programs grows the longer a person has been retired.
I don’t join the pessimists who say the programs will disappear and you can’t rely on receiving anything from them. But changes are likely, and you have to build flexibility in your retirement plan so you can adapt to those changes.
Changes to Social Security and Medicare are most likely to affect those in the top half of the income and wealth rankings. As in the past, changes to the programs are likely to be means-tested with reduced benefits and higher costs imposed on better-off retirees.