But, you may want to take IRA withdrawals anyway. The reason is simple: Taxes are On Sale!
Jim Lorenzen, CFP®, AIF®
Required minimum distributions (RMDs) have been eliminated for 2020 due to the COVID-19 pandemic; but, you just might want to consider taking a distribution anyway. Why?
Taxes are on sale!
The dirty little secret is that all that money in your IRA isn’t yours, unless you have so many deductions or credits that you can zero out all your income – not likely. We have a tendency to look at our statement’s IRA balance and think all that money is ours. It isn’t . At some point, Uncle Sam will take a chunk of it. It will happen when you begin withdrawing it. So, the only question is at what rate?
Few people are aware that the current tax laws is set to expire – it ‘sunsets’ – on December 31,2025, about 5 years from now (that allows for tax increases without anyone in Congress having to vote for it, though many would happily do it earlier anyway).
So, you can take your IRA money now at ‘sale prices’ or take it later at higher prices. Why would you want to do that (besides the obvious)?
The SECURE Act has eliminated the stretch IRA. This means your heirs could have a big problem when you and your spouse pass away. Odds are it will happen when your kids are in their peak earning years; want to guess what taxes might look like then? When they inherit your IRA(s), they will be required fully liquidate those IRAs by the end of the 10th year – ouch! Big tax bite.
What can you do? Begin withdrawing your IRA money while taxes are on sale over the next five years and do a Roth conversion on the money each year. You’ll pay taxes now at ‘sale prices’ and the money will grow inside the Roth IRAs tax-free. Now, there’s no RMDs. And, when the time comes, your kids will have to liquidate by the end of the 10th year – but the money will be tax free!
There’s a hidden benefit for you, too: Taxable income is used to determine what percentage of your Social Security is deemed taxable; it’s also used to determine Medicare premiums. The less money you have in your traditional IRAs, the less the RMDs – and the less taxable income you have. Hmmm.
If you have a comprehensive financial plan, a Roth conversion analysis should be a normal part of your planning process. The savings over the life of your plan, and to your kids, could be substantial. There are a number of issues to be considered, age, possible penalties, etc., so be sure to talk with your financial advisor. Don’t have one? See below!
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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742. IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.
Opinions expressed are those of the author. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.