Latest news with #RequiredMinimumDistributions
Forbes
20-05-2025
- Business
- Forbes
Strategic Roth Conversions: Timing Your Tax Strategy For Maximum Retirement Value
The largest transfer of retirement wealth in history is happening—not to heirs, but to the IRS. Roth conversions aren't just about tax rates; they're about creating tax-free optionality throughout retirement and for your heirs. Recently, I met a couple who were planning for retirement. They had done everything "right': maxed out 401(k)s for decades, built a $2.5 million nest egg, and were ready to enjoy their golden years. But they didn't realize they were sitting on a tax-time bomb that would detonate when they turned 73. With Required Minimum Distributions (RMDs) and Social Security, they'd be forced into higher tax brackets than during their working years—exactly the opposite of what traditional retirement planning promises. Their situation isn't unique. Millions of successful savers are unknowingly heading toward unnecessary taxation. However, a window of opportunity exists between retirement and RMDs that could save six or even seven figures in lifetime taxes—if you understand how to navigate Roth Conversions and this sweet spot. The typical approach, 'convert to fill your current tax bracket,' oversimplifies a complex opportunity. Effective Roth conversion strategies consider: When properly integrated, these factors reveal your true "Conversion Sweet Spot,' which might be significantly larger or smaller than conventional wisdom suggests. For many retirees, this phase offers the largest conversion potential, especially if: Even after RMDs begin, tactical conversion opportunities may exist: Strategic Roth conversions require coordination with: Roth conversions aren't just about tax rates, they're about creating tax-free optionality throughout retirement and for your heirs. In an increasingly tax-uncertain future, this flexibility may prove to be your retirement plan's most valuable asset. All of this said, make no mistake: What people need when they retire is cash flow, not necessarily taxable income.
Yahoo
05-05-2025
- Business
- Yahoo
From tackling taxes to doubling down on debt — here's what Americans can (and should) do at age 59 ½
Age 59 ½ isn't considered a popular milestone, but it probably should be. At this age, a flurry of new financial options and benefits become available to you. It's also a good time to double-down on your investment strategy so that you can make your retirement as comfortable as possible. I'm 49 years old and have nothing saved for retirement — what should I do? Don't panic. Here are 5 of the easiest ways you can catch up (and fast) Thanks to Jeff Bezos, you can now become a landlord for as little as $100 — and no, you don't have to deal with tenants or fix freezers. Here's how Nervous about the stock market in 2025? Find out how you can access this $1B private real estate fund (with as little as $10) If you're quickly approaching or already at this underrated milestone, here's what you should know. According to the Internal Revenue Service (IRS), 'most retirement plan distributions are subject to income tax and may be subject to an additional 10% tax.' However, at age 59 ½, withdrawals are no longer subject to that 10% penalty. That means it's easier to start drawing down cash from your 401(k) plan, Roth IRA or any other qualified retirement program. To be clear, just because you can easily withdraw money doesn't necessarily mean you should. But having the option to start living off some of your nest egg gives you the flexibility and peace of mind you need as you rapidly approach retirement. One way to take advantage of this flexibility is to consider commencing a Roth IRA conversion. This maneuver is when you take money from a traditional retirement account (like a traditional IRA or 401(k)) and move it into a Roth IRA. When you do this, you pay taxes now on the money you move, but then it can grow tax-free — and you won't owe taxes when you take it out in retirement. At age 59 ½, your withdrawals are no longer subject to a 10% penalty, which means it's cheaper to start moving money to the Roth IRA. This age is also a sweet spot because it's roughly 13 years away from age 73, which is when you have to start making Required Minimum Distributions (RMDs). To be fair, most Americans retire before the age of 65, while the median retirement age is 62, according to research from the Transamerica Center for Retirement Studies. That means you may be just a few years away from retirement at 59 ½, and should be ramping up your efforts in this final stretch. Read more: Here are 5 'must have' items that Americans (almost) always overpay for — and very quickly regret. How many are hurting you? Every single year of added income or compounded growth can make a big difference to your lifestyle in retirement. With that in mind, 59 ½ is the ideal age to set yourself up so your golden years are as comfortable as possible. Aggressively paying down any outstanding debt is a great idea at this age. According to the 2022 Survey of Consumer Finances, many retirees are still carrying debt. Households headed by people aged 65 to 74 had a median debt balance of $45,000. But if you aggressively pay down debt from the age of 59 ½ to retirement, you could put yourself in a better position than most of your peers. You could also double down on your savings and investment strategy before your income stops. You can start making catch-up contributions to your 401(k) and other retirement plans from the age of 50, according to the IRS, but 59 ½ isn't too late to start doing so. Finally, this is the right age to consider all the subjective aspects of your retirement lifestyle. Take the time to figure out what you value most and create a strategy to make that possible in this final stretch before you leave the workforce. If you want to spend more time with family, consider moving closer to where they are, and if you don't enjoy home maintenance, consider moving to a condo where management takes care of it all. Consider this age a pivotal period from your old life to your new one. Want an extra $1,300,000 when you retire? Dave Ramsey says this 7-step plan 'works every single time' to kill debt, get rich in America — and that 'anyone' can do it Rich, young Americans are ditching the stormy stock market — here are the alternative assets they're banking on instead There's a 60% chance of a recession hitting the American economy this year — protect your retirement savings with these essential money moves ASAP (most of which you can complete in just minutes) This article provides information only and should not be construed as advice. It is provided without warranty of any kind. Sign in to access your portfolio
Yahoo
01-05-2025
- Business
- Yahoo
The 1 Thing You Can't Do With Your Required Minimum Distributions in Retirement
Many retirees favor tax-deferred accounts like traditional IRAs for their long-term growth potential. However, once Required Minimum Distributions (RMDs) begin, the IRS wants its share. Some retirees look to Roth IRAs as a way to grow their savings tax-free, but there's one big restriction. Here's the one thing you can't do with your RMDs in retirement and smarter strategies to achieve long-term benefits. Read Next: Try This: When it comes to RMDs, there's one hard rule that often surprises retirees: they can't be converted to a Roth IRA. It's a common misunderstanding and one that can complicate tax planning if not addressed early. 'Required Minimum Distributions or RMDs, cannot be converted into Roth IRAs because, by the time they happen, it's simply too late,' said Samuel Flaten, certified financial planner (CFP) and partner at Narrow Road Financial Planning. 'The IRS mandates that once you reach a certain age — currently 73, depending on an individual's date of birth — you must begin taking distributions from your pre-tax retirement accounts like IRAs or 401(k) [plans].' Discover Next: Allowing conversions of RMDs would let taxpayers bypass the very tax the IRS requires them to pay in retirement. If an individual has taken an RMD for the year, that portion cannot be contributed or converted and attempting to do so could trigger penalties. 'People hear about Roth conversions being smart tax moves and assume they can apply them to anything, including RMDs,' Flaten said. 'But the rule is clear: RMDs must be withdrawn and taxed and only funds above and beyond the RMD amount can be converted to a Roth.' Many retirees don't realize they've waited too long to start thinking about tax strategy until their first RMD arrives. What seems like a routine withdrawal can trigger a cascade of financial consequences that catch even diligent savers off guard. 'By then you've lost most of your flexibility,' Flaten said. 'In some cases, RMDs can be much larger than expected, especially if you've saved diligently or had strong market returns. When those large distributions hit your tax return, they can cause all kinds of unintended consequences – higher Medicare premiums, more of your Social Security being taxed or just jumping into a higher bracket altogether.' An overlooked factor is the years leading up to the RMD age, which is a critical window for proactive tax planning. 'If your goal is to reduce future RMDs or minimize the taxes they bring, the best thing you can do is start planning well before they begin. The most powerful strategy is Roth conversions during the early retirement years — after you've stopped working but before RMDs and Social Security begin,' Flaten said. 'During this window, your income may be unusually low, which gives you the chance to fill up lower tax brackets with intentional conversions,' Flaten explained. 'You're effectively pre-paying tax at a rate you can control, which can dramatically reduce RMDs later and create a pool of tax-free income in the future.' In addition, Flaten said some employer plans even allow in-plan Roth conversions or backdoor Roth contributions while individuals are still in the workforce. Even retirees who are already subject to RMDs still have meaningful tax-planning opportunities. For those who give to charity, the Qualified Charitable Distribution (QCD) offers a way to fulfill their RMD while keeping that amount out of their taxable income. A QCD allows retirees to send up to $108,000 annually directly from their IRA to a qualified charity. The amount counts toward their RMD but is excluded from their taxable income. 'For clients who are already charitably inclined, this can be a game changer,' Flaten said. 'I've had more than one client give generously out of their bank account without receiving any tax benefit, simply because they didn't itemize. The QCD bypasses that issue altogether.' The smartest move of all is early planning. 'The earlier you start planning, the more choices you'll have,' Flaten said. 'RMDs aren't inherently bad, but without a strategy, they can feel punitive. Thoughtful planning, especially in the years leading up to them, can soften the blow and even turn them into part of a broader retirement income plan. The mistake is waiting too long to act.' More From GOBankingRates Mark Cuban: Trump's Tariffs Will Affect This Class of People the Most How Far $750K Plus Social Security Goes in Retirement in Every US Region How To Get the Most Value From Your Costco Membership in 2025 12 SUVs With the Most Reliable Engines Sources Samuel Flaten, Narrow Road Financial Planning. This article originally appeared on The 1 Thing You Can't Do With Your Required Minimum Distributions in Retirement
Yahoo
10-04-2025
- Business
- Yahoo
Tax Day Countdown: 4 Tax Rules To Know Before Converting Your IRA Account
Roth IRAs are a popular retirement savings and investment tool, especially for those expecting to be in a higher tax bracket in retirement, because of the tax advantages of certain IRA contributions to a Roth. However, converting your Roth account also comes with immediate tax consequences that require careful planning if you are considering doing so this tax year. Learn More: Find Out: Retirement plans in the United States can get complicated, especially when you factor in taxable income or modified adjusted gross income (MAGI). Here are four tax rules to understand before you convert your IRA to a Roth account to avoid costly surprises and maximize benefits. Converting an IRA to a Roth account means moving money from traditional IRA contributions you've made or from another pre-tax retirement account into a Roth IRA. It makes all pre-tax contributions and earnings taxable during the year of the conversion. In the future, qualified withdrawals from the Roth IRA will be tax-free. 'A conversion is beneficial if you expect to be in a higher tax bracket in retirement,' said Ines Zemelman, an IRS-authorized enrolled agent, tax professional and founder and president of TFX, a tax advisory firm. 'If you are planning to retire abroad, consider cross-border tax implications.' Zemelman recommended spreading the conversions across multiple years to avoid higher tax brackets while minimizing tax liability. The ideal time for a Roth conversion is during the early retirement years, before Required Minimum Distributions (RMDs) or Social Security begin. 'It's beneficial for legacy planning, as Roth IRAs pass tax-free to heirs,' Zemelman said. 'Converting funds before retiring abroad can avoid unfavorable or double-taxation in some countries.' In addition, many employers offer in-plan Roth conversions, said Elizabeth Schleifer, a financial advisor at Armstrong, Fleming & Moore, Inc. 'Employees can transfer money from their traditional (pre-tax) 401(k) to a Roth 401(k) in the same plan,' Schleifer said. 'Employees pay taxes on the converted amount. So, it makes sense to do this if you have an unusually low-income year, either due to a large deductible expense or a drop in income.' Be Aware: A Roth conversion increases your adjusted gross income (AGI) for the year, which can affect several areas of your financial life, not to mention tax deductions. 'A higher AGI may lead to increased Medicare premiums under IRMAA (Income-related Monthly Adjusted Amount), taxation of a larger portion of your Social Security benefits or reduced eligibility for tax credits like the Child Tax Credit or the Saver's Credit,' said Arron Bennett, founder and CEO of Bennett Financials. 'These considerations should be part of an overall financial plan to ensure the conversion aligns with your broader goals.' Bennett said that incorporating other investments, such as in the oil and gas sectors, can help mitigate the tax impact of the conversion and reduce its effect on other financial areas and tax dollars you spend. 'For example, a current oil and gas investment conversion allows for 60 cents on the dollar in tax mitigation, meaning you're only taxed on 40% of the amount being rolled into the Roth IRA,' Bennett said. 'Typically, tax mitigation for these types of conversions is around 42 cents on the dollar. Once converted, the funds grow tax-free, and if specific conditions are met, withdrawals in retirement are also tax-free.' State income taxes are often applicable for Roth conversions, depending on where you live. Your location can greatly affect your ordinary income as well as your earned income. For example, Bennett said Florida and Texas don't impose state income taxes, while California or New York can impose significant state income taxes on conversions. 'It's crucial to understand your state's tax policies and factor them into your planning,' Bennett said. 'If you're planning to relocate to a no-tax state, consider postponing the conversion until after the move to maximize savings.' The bottom line is that whether it is stocks, bonds or even a retirement account, investing involves risks. However, when it comes to your tax situation there are ways to escape penalty-free, or at least lower your tax liability. If you are age 50 or older and are considering converting your traditional IRA to a Roth IRA, make sure you understand the tax rules that will help make that transition a smooth, and more affordable, one. Caitlyn Moorhead contributed to the reporting for this article. More From GOBankingRates 5 Types of Vehicles Retirees Should Stay Away From Buying 5 Cities You Need To Consider If You're Retiring in 2025 4 Things You Should Do if You Want To Retire Early 10 Cars That Outlast the Average Vehicle This article originally appeared on Tax Day Countdown: 4 Tax Rules To Know Before Converting Your IRA Account Sign in to access your portfolio
Associated Press
08-04-2025
- Business
- Associated Press
RETIREES SPEND THEIR LIFETIME INCOME, RATHER THAN SAVINGS
A New Study by Retirement Income Institute Fellows David Blanchett and Michael Finke Finds Retirees Spend More with Lifetime Income WASHINGTON, April 8, 2025 /PRNewswire/ -- Even if they can easily afford it, retirees are reluctant to spend savings for a more enjoyable lifestyle. Instead, retirees spend significantly more from their sources of lifetime income – such as Social Security, pensions, and/or annuities – than they do from their savings in IRAs and other retirement accounts. Those findings are part of a new research study, " Retirees Spend Lifetime Income, Not Savings,' by David Blanchett and Michael Finke, Research Fellows in the Retirement Income Institute (RII) at the Alliance for Lifetime Income. This research builds on their groundbreaking RII paper last year – 'Guaranteed Income: A License to Spend' which demonstrated that people can enjoy retirement more fully if they allowed themselves to spend money more freely. 'Overall, the analysis suggests that converting savings into lifetime income could increase retirement consumption significantly, especially for married households,' the study notes. 'Our analysis clearly demonstrates that households spend differently across sources of wealth. Retirees spend a much higher percentage of their lifetime income (about 80%) and spend about half the amount that they could safely spend from other sources.' The study also found retirees spend a higher rate of their savings after the federal government requires distributions from their retirement savings accounts. Retirees seem to view the forced asset distribution – known as Required Minimum Distributions (RMDs) – as income and spend it at a higher rate than they spend from other savings. RMDs are the minimum amounts people must withdraw annually starting at age 73 from qualified investment accounts to avoid penalties to the IRS. Accounts subject to RMDs include traditional IRAs, SEP IRAs, and most employer-sponsored retirement plans like 401(l)s. 'Overall, these findings have important implications for the current and future state of retirement in the United States given the rise of defined contribution (DC) plans as a more prevalent funding source for retirement,' the authors say. 'DC plans are principally focused on growing assets and typically are not explicitly focused on generating income. Therefore, unless steps are proactively taken to ensure retirees effectively use savings to fund spending, this analysis suggests households are likely to continue under-consuming in retirement potentially at even greater levels.' Blanchett and Finke point out steps can be taken to help retirees view their savings as income and therefore feel freer to spend: 'Financial institutions that are aware of the tendency to bracket investment decisions differently than lifetime income can focus on reframing wealth as income or automatically liquidate investments to create the appearance of income. For example, managed payout funds designed to distribute a percentage of wealth each year can help retirees frame savings as income.' The Fear of Knowing How Much You Can Spend Part of the reason retirees are reluctant to spend more freely is the complexity of navigating a retirement system designed with a focus on saving and investing (accumulation) rather than spending (decumulation of assets). 'Estimating how much income can be withdrawn from investments in retirement is far more complex than receiving a monthly pension payment,' the study notes. Complicating factors for retirees trying to determine how much to spend every year include a 'limited financial knowledge, an unknown lifespan' and 'an array of available financial resources to consider, including Social Security, pension, wages, and investment assets inside and outside of retirement accounts…" To better understand how people 65 and older are spending money, the study's authors analyzed data from the Health and Retirement Study, which is an ongoing nationally representative survey of approximately 20,000 Americans over 50 and supported by the Social Security Administration and National Institute on Aging. In the new RII study by Blanchett and Finke, two broad categories of available financial resources or assets were considered – income and savings: Income was separated into three groups: lifetime income (Social Security, pensions, and annuity income), earnings (wages and salaries for those who have not fully retired), and capital income (which includes income from businesses, rental property, dividends and interest, and trust funds or royalties). Savings were broken into qualified (defined contribution balances, IRAs, etc.) and non-qualified monies held in taxable accounts. 'Our analysis found much higher spending rates from lifetime income sources than from wages or capital income,' the study noted. 'Roughly 80% of lifetime income is spent, while less than half of wage income and capital income are spent. In addition, 65-year-old couples were found to be spending just 2% of their savings, which is roughly half of the commonly cited '4% rule' and even lower than most recent estimates, suggesting 5% is a more reasonable starting place.' 'Unless people purposefully want to leave behind a large bequest when they die, many retirees are denying themselves the opportunity to enjoy life by spending more of their savings,' said Blanchett, Head of Retirement Research at PGIM DC Solutions. 'I don't think people purposefully want to horde their savings; they are just finding it difficult to view savings as a potential form of retirement income,' added Finke, Professor and Frank M. Engle Chair of Economic Security Research at the American College of Financial Services. 'They are able to make that adjustment when they receive annuity and RMD payments, so there is a path to getting over this behavioral barrier.' RII's Previous Research into Spending in Retirement In a June 2024 study, Guaranteed Income: A License to Spend, Blanchett and Finke, determined that retirees with assets that annuitize income spend twice as much as retirees with an equal amount of non-annuitized savings. Blanchett and Finke find that every $1 of assets converted to guaranteed income could result in roughly twice the equivalent spending compared to money left invested in a portfolio. This effect suggests that the explanation for under-spending of non-annuitized savings among retirees is likely both a behavioral and a rational response to longevity risk. Their analysis corresponds with findings in the Alliance's 2024 Protected Retirement Income and Planning (PRIP) Study, in which 46% of the 2,516 consumers aged 45 to 75 surveyed acknowledged that spending their savings gives them anxiety. About The Alliance for Lifetime Income The Alliance for Lifetime Income (ALI) is a non-profit (c)(6) consumer education organization based in Washington, D.C., that creates awareness and educates Americans about the value and importance of having protected income in retirement. The Alliance provides consumers and financial professionals with unique educational resources and interactive tools to use in building retirement income strategies and plans. We believe annuities – one of only three sources of protected lifetime income – can be an important part of the solution for retirement security in America. The Alliance's Retirement Income Institute houses the leading retirement scholars and experts who create evidence-based research and analysis, with practical ideas and actions to help protect retirees.
