The Retirement Maneuver More People Should Be Making
It's hard to hand over a big portion of your retirement savings when you're old or getting there. Every fiber in your being shrieks 'mistake.' And sometimes it is a mistake, as it was for Bob and Sandy Curtis, who forked out $840,000 in entrance fees for a continuing care retirement community that subsequently filed for bankruptcy.
Other times, though, writing a very big check is exactly the right thing to do for your long-term financial health. I'm referring to 'Rothification,' a maneuver that costs a lot in taxes up front but raises your potential living standard in the long run. I wrote about it last year.
Rothification is the conversion of an ordinary individual retirement account or 401(k) into a Roth I.R.A. For simplicity I'll stick with the case of converting an ordinary I.R.A. to a Roth I.R.A. from here on.
In an ordinary I.R.A., you put in money that hasn't been taxed yet. (You can also put in money that has been taxed, but I'm going to ignore that complication.) Money in the I.R.A. grows tax-deferred. Later, when you withdraw money from the I.R.A. to cover retirement expenses, you pay taxes on the withdrawals as ordinary income. An ordinary I.R.A. can be a good deal if you expect to be in a lower tax bracket in retirement than during your working years — say, because you won't have a lot of retirement savings to draw upon.
A Roth I.R.A., the mirror image, is stuffed with money that's already been taxed. The money grows tax-free, and when you withdraw from it, you don't have to pay any taxes on either the original contribution or any subsequent gains. It's a great deal if your tax bracket in retirement is as high or higher than it was during your working years, as happens more often than many people expect. It can sometimes be a good bet even if you're in a lower tax bracket in retirement: Because the withdrawals don't count toward your taxable income, they help you avoid many years of income-related taxes on Social Security, lower your Medicare premiums and limit required minimum distributions from your ordinary 401(k) or I.R.A., which are taxed.
Now, back to writing that big check. The pain of a Roth conversion comes when the government demands its cut up front. The money you take out of an ordinary I.R.A. to fund the Roth I.R.A. looks like regular income to the Internal Revenue Service and is taxed as such. The maneuver may push you into a higher tax bracket — say from 22 percent to 24 percent, 32 percent, or even 35 percent.
Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.
Thank you for your patience while we verify access.
Already a subscriber? Log in.
Want all of The Times? Subscribe.
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Yahoo
36 minutes ago
- Yahoo
Retirees, Should You Take a Required Minimum Distribution (RMD) Now or Later in 2025?
Tax-deferred investment accountholders upon reaching a certain age must take required minimum distributions (RMDs), but they have flexibility as to exactly when. Many retirees take RMDs as monthly or quarterly installments because doing so strikes a balance between the pitfalls associated with taking withdrawals early or late in the year. Wall Street expects very little upside in the S&P 500 in the rest of 2025, and the market is rife with downside risk, which makes a case for taking RMDs sooner rather than later. The $23,760 Social Security bonus most retirees completely overlook › Tax-deferred investment accounts such as traditional IRAs, 401(k) plans, and 403(b) plans are subject to required minimum distribution (RMD) rules. That means accountholders upon reaching a certain age -- 73 years old for anyone born in 1951 or later -- must withdraw some money annually or pay severe penalties. Generally, RMDs must be completed before the end of the calendar year. The only exception is that someone taking his or her first RMD can delay until April 1 of the subsequent year. Those guidelines leave retirees with three options: Take the full RMD early in the year, break it into periodic installments, or delay it until the end of the year. Which strategy is best? Generally speaking, there is no best time to take an RMD. There are pros and cons to each withdrawal strategy. The most suitable choice depends on personal circumstances and preferences. Here are a few things to consider: Take RMDs early in the year: The upside to taking RMDs early in the year is you no longer need to worry about making the withdrawal once it's complete. The downside is you will need to make at least one estimated tax payment. In addition, taking the withdrawal early in the year means you forfeit time during which your money could have grown in a tax-deferred environment. That could be costly if the stock market performs well in the months following your RMD. Take RMDs throughout the year: This strategy is a good middle ground. The upside to taking RMDs throughout the year is you get regular income and strike a good balance between taking RMDs early, which reduces the time your money spends in a tax-deferred account, and taking them late, which could force you to withdraw money during a stock market downturn. The downside is you will have to make quarterly estimated tax payments. Take RMDs late in the year: The upside to taking RMDs late in the year is maximizing the time your money spends in a tax-deferred account. In addition, it eliminates the need to make estimated tax payments. But the downside is you may have to withdraw money while the market is down. RMDs are based on the account balance at the end of the previous year. The amount does not change if the market declines in the next year. So if stocks fall sharply before your RMD, the withdrawal will be a larger percentage of your portfolio than had you taken the money sooner. Retirees often choose the second RMD strategy -- periodic installments taken monthly or quarterly -- because it splits the difference between the two extremes. In most cases, that decision makes sense. But retirees with a substantial amount of money invested in stocks should think twice about their withdrawal strategy in 2025. The S&P 500 (SNPINDEX: ^GSPC) is commonly regarded as the best benchmark for the entire U.S. stock market. The median forecast from 17 Wall Street analysts says the index will end the year at 6,100. That implies just 2% upside from its current level of 5,983. That forecast makes a case for retirees taking RMDs sooner rather than later this year. Wall Street sees little upside in stocks in the remaining months of 2025, but the market is rife with downside risk because of changes in trade policy and elevated valuations. To elaborate, the S&P 500 is trading near its record high despite President Trump's imposing sweeping tariffs earlier this year. While those tariffs have yet to affect the economy, most experts anticipate higher prices and slower growth in the future. The stock market could fall sharply at the first sign those economic conditions are materializing. In addition, the S&P 500 currently trades at 21.6 times forward earnings. A fairly expensive valuation that exceeds the five-year average of 19.9 times forward earnings and the 10-year average of 18.4 times forward earnings. While the elevated valuation alone is unlikely to cause a stock market downturn, it could make any future downturn particularly severe. Here's the bottom line: It often makes sense to spread RMDs throughout the year, but I think the current market environment warrants a different strategy. The downside risk in the stock market means it may be prudent for retirees to take withdrawals sooner rather than later. Of course, if possible, you should always talk to a financial advisor who knows your personal circumstances before making decisions. If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known could help ensure a boost in your retirement income. One easy trick could pay you as much as $23,760 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Join Stock Advisor to learn more about these Jennewine has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. Retirees, Should You Take a Required Minimum Distribution (RMD) Now or Later in 2025? was originally published by The Motley Fool Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
3 hours ago
- Yahoo
Working While Receiving Social Security: Understanding the Rules
You can work and collect Social Security in many cases, but there are some rules. The Social Security earnings test dictates how your benefits could be withheld. If you've already reached full retirement age, the earnings test doesn't apply. The $23,760 Social Security bonus most retirees completely overlook › Can you work and collect Social Security benefits at the same time? The short answer is yes, but it depends on your personal situation. In some cases, workers who receive retirement benefits, or other types of Social Security benefits, can see some or all of their monthly benefits temporarily go away. That's where the Social Security earnings test comes in. In a nutshell, depending on your age and how much earned income you have, some or all of your Social Security benefits can be withheld. Does the earnings test apply to you? And if it does, what can you expect to happen to your Social Security benefits? Here's a quick rundown of what all working seniors need to know. For the purposes of the Social Security earnings test, beneficiaries who have applied for retirement benefits fit into three categories. Each category has different rules and limitations when it comes to the potential withholding of benefits. So the first step in figuring out how the earnings test could affect you is to determine which category you fall into, expressed as such: You will reach your full Social Security retirement age after. You will reach (or have reached) your full Social Security retirement age during. You reached full retirement age before. If you're in the third category, it's an easy answer: The Social Security earnings test does not apply to you. You can work and earn as much money as possible, and it won't affect your Social Security payments whatsoever. If you're in one of the first two categories, the general idea is that some or all of your Social Security benefits can be withheld if your income exceeds a certain threshold. Here's what I mean. If you will reach your full retirement age after 2025, the earnings test is the most restrictive. You can earn up to $23,400 for the year, or $1,950 per month, with no impact to your benefits. Beyond that, $1 of your Social Security benefits can be withheld for every $2 in earnings. For example, if you earn $30,000 in 2025 and won't reach full retirement age during the year, you will have exceeded the earnings test threshold by $6,600. That means $3,300 would be withheld from your Social Security checks. Finally, if you reach your full retirement age during 2025, the earnings test limit is much higher at $62,160, or $5,180 per month, and only months before your birth month are considered. In other words, if your birthday was April 12, only earnings from January through March are subject to the earnings test. Furthermore, for earnings above the threshold, $1 is withheld for every $3 in excess earnings. First, I want to point out that I deliberately used the word "withheld" when discussing the earnings test limits. If you exceed the earnings test limits and get a lower Social Security benefit as a result, the withheld benefits are not necessarily lost. Once you reach full retirement age, your monthly Social Security payment will be adjusted upward to reflect any withheld money. Second, there's no perfect answer to the question of whether you should claim Social Security while you're still working if the earnings test is likely to affect you. Depending on your financial situation, it could certainly make sense to claim benefits even if some of the money is likely to be withheld. But on the other hand, if you're working and don't necessarily need the extra money, it could make more financial sense to wait. The bottom line is that the Social Security earnings test is a big factor in determining whether older adults who are still working should claim benefits before full retirement age. But it isn't the only factor. It's important to consider your financial situation, family situation, health, and more to decide the best move for you. If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known could help ensure a boost in your retirement income. One easy trick could pay you as much as $23,760 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Join Stock Advisor to learn more about these Motley Fool has a disclosure policy. Working While Receiving Social Security: Understanding the Rules was originally published by The Motley Fool Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
8 hours ago
- Yahoo
Social Security may run dry earlier than previously anticipated, trustees say
The trust funds for Social Security and Medicaid will run out of money in as little as 8 years, a shorter time frame than previously estimated, according to a report issued Wednesday by the programs' trustees. The Social Security fund will run dry in 2033, unless Congress combines the program's old-age and disability funds, in which case insolvency would arrive in 2034, the report found. A finding last year predicted Social Security would become insolvent in 2035 or 2036. Medicare's hospital insurance fund is expected to run out of money in 2033, the report said. MORE: Trump admin live updates: Trump to delay TikTok ban for 3rd time 'Social Security and Medicare are vital programs that support tens of millions of Americans across the country,' U.S. Secretary of Treasury Scott Bessent said in a statement. 'This data underscores the need for lawmakers to take action to support the long-term viability of these programs.' If Congress fails to address the projected budget shortfalls, automatic cuts will dial back Social Security benefits by 23% and Medicare hospital benefits by 11% in 2033, the report found. Roughly 66 million Americans receive medical coverage through Medicare, while 70 million people are set to receive Social Security benefits this year. The Social Security and Medicare trust funds generate revenue through a payroll tax paid by employees and employers, setting the income apart from the overall federal budget. The programs routinely spend more money than they take in through such taxes. President Donald Trump has vowed to safeguard Social Security and Medicare, even as the White House pursues spending cuts at other federal programs and agencies. The Department of Government Agency, formerly led by Elon Musk, sought to eliminate what it described as 'waste, fraud and abuse' in Social Security and Medicare. In March, the White House backed such efforts in a memo. MORE: Fed holds interest rates steady, defying Trump Last year, the Government Accountability Office, a federal agency, estimated that taxpayers lose as much as $521 billion annually to fraud, much of which occurs in entitlement programs like Medicare. The Centers for Medicare and Medicaid Services (CMS) have stopped more than $100 billion in potentially fraudulent expenditures over recent months, the agency said in a statement. Still, those possible savings make up a fraction of roughly $1.9 trillion in spending for Medicare and Medicaid in 2023, the most recent year for which data is available. 'Medicare provides essential coverage for millions of American seniors, but this year's report underscores the urgent need for serious, sustained reform to secure its long-term future,' CMS Administrator Mehmet Oz said in a statement.
