Older clients face special challenges in preserving wealth and maintaining income to live on. The trick, according to advisors, is optimizing distributions from various accounts to fund living expenses as tax efficiently as possible.
A key component to all this is the Roth IRA, advisors say.
Roth conversions involve rolling money from a pretax retirement account such as a traditional IRA into a Roth, which incurs no income taxes on RMDs in retirement.
“The tradeoff is that you are potentially [realizing] income in a higher marginal income tax bracket today because you anticipate higher taxes in the future,” said Eric Herzog at Prime Capital Investment Advisors in Fargo, N.D. “You need … the cash to pay the additional tax with dollars outside your IRA.
“If you’re approaching the next marginal income tax bracket and additional withdrawals from your IRA push you into the next bracket, you may want to pull those withdrawals from a taxable account, such as a taxable brokerage account or savings account,” Herzog said.
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