As is the case with anyone nearing retirement age, thinking about minimizing taxes and reducing any future RMDs (Required Minimum Distribution) should be top of mind. The last thing you want is to find yourself in a position where you are suddenly in a higher tax bracket while retired.
This is the exact case one Redditor is currently looking to avoid with a post in r/Fire. The 60-year-old Redditor and his wife are nearing retirement and are looking at all of the potential paths ahead of them that can reduce any future required minimum distributions.
This is great reading for anyone looking to retire in the near future, as there is a better-than-good chance they will be in the same position.
The Current Situation
With this current Reddit post, we have a 60-year-old male Redditor and his 52-year-old wife who are “nearing retirement and exploring strategies to minimize taxes and reduce future RMDs.” As it stands today, they currently have an approximately $3.1 million net worth.
To better break this down, they have around $2.8 million in 401(k) accounts, with an additional $200,000 in Roth IRAs. In addition, there is another $100,000 in a brokerage account. Of course, the best part is that their house is already paid off, so there are no financial concerns over the home.
The Redditor estimates the couple’s annual expenses will be around $100,000 while retired. As a result, they are considering a move to gradually convert the wife’s 401(k) to a Roth IRA over the next decade. This would allow them to stay within the 22% tax bracket and not kick them into the 24% bracket when they start to take out RMDs.
The Redditor hopes to discover whether they can meet their goals while making the wife’s savings accessible for when she turns 59.5 years of age.
The Recommended Path Forward
While I’m not a financial advisor (and don’t play one on TV) and, as a result, can’t give concrete financial advice, the best path forward is to talk to a professional financial advisor.
This caveat aside, the Reddit comment section is always filled with helpful advice. Perhaps the most notable piece of information is that the RMD concern shouldn’t be of note until the Redditor hits 73 years of age. According to the IRS, those aged 73 and older must make any withdrawals from IRAs and retirement plans.
In other words, there is still time to think through this strategy and model a few different scenarios. This said, there seems to be some agreement among Reddit to worry less about hitting the 24% tax bracket right now by making changes to accounts instead of having this situation play out later.
The benefit here is that you will have already lowered your earned income just as Social Security and RMDs start to come into play on your taxes in your 70s. The hope is that by doing so, you’ll be paying slightly more taxes now but saving on taxes later on when income slows down or stops completely, and you’re living off whatever you have in retirement.
Spend Today For Savings Tomorrow
Ultimately, it’s okay to think through some different strategies for this Redditor, and it’s essential that they look at this as a test balloon. Additionally, as the Redditor also asked about potential tools or resources they can use to model different scenarios, one recommendation was to try boldin.com, where you can input all of your financial information and then let it create different projections based on the potential scenarios this Redditor has envisioned.
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