Subscribe
Share
Share
Embed
Welcome to How to Retire on Time, a show that answers your retirement questions. Say goodbye to the oversimplified advice you've heard hundreds of times. This show is about getting into the nitty-gritty so you can make better decisions as you prepare for retirement. Text your questions to 913-363-1234 and we'll feature them on the show. Don't forget to grab a copy of the book, How to Retire on Time, or check out our resources by going to www.retireontime.com.
You're preserving the balance in your IRA. So dollar for dollar, you're not you're just paying less in taxes. And because the dollar amount in that situation might be slightly higher, you may actually have more money left over or that can grow throughout retirement. Welcome to how to retire on time, a show that answers your retirement questions. Say goodbye to the oversimplified advice you've heard hundreds of times.
Mike:This show's all about the nitty gritty. That said, remember this is just a show, not financial advice. Do your research. And now, with me in the studio is David Frantz, and today we're gonna read your questions. As always, you text your questions to (913) 363-1234, and we'll answer them on the show.
Mike:David, what do we got today?
David:Hey, Mike. I have both a traditional IRA and a Roth IRA. Which one should I pull from first in retirement?
Mike:Most people are gonna assume that you pull from the IRA first to lower your r RMD potential. Mhmm. And why would you touch the Roth? You want to grow, grow, grow, grow. Mhmm.
Mike:Though I agree with the sentiment of that, I do want to acknowledge some potential tax brackets.
David:Okay.
Mike:So let's say just for simplistic sake
David:k.
Mike:That you have your 10% bracket, you've got your 12% bracket, and the 12% bracket in your situation ends at a 100,000.
David:Alright.
Mike:That's not the real tax brackets. We're using real numbers as in just we're using simple numbers. Okay? Just wanna make this easy. And what if you need, I don't know, $10,000 or a $110,000 a year for the income that you want.
David:Right. To support whatever retirement plan you have. That requires one ten. Yeah. So you but you're 10,000 over that Yeah.
David:So now what?
Mike:So you wanna start to look at a couple of things. First off, the standard deduction. Does the standard deduction or the one big beautiful bill deduction or the senior deduction lower your your AGI, your adjusted gross income, so that you're within the the bottom brackets? In this situation, maybe the $10,000 you need with the standard deduction, assuming it's, you know, 30,000 or so, puts you or keeps you in the the lower tax bracket. Therefore, in that situation, you don't really need to pull anything else pull anything out of anything else other than the IRA.
David:Okay.
Mike:Because you're in the lower tax bracket. Now, let's assume you're at a 150 k, and the standard deduction gets you to a 120 k, the bracket ends at a 100,000 for simple math. Yeah. I know it doesn't there's there's gonna be people in the comments saying, oh, this guy doesn't get tax law. Look, I'm making an evergreen video to teach a point.
David:Okay.
Mike:Yep. Or audio clip, if you will. Yeah. So so you've got this little bridge. In my mind, you want to be cognizant of not just the income that you need, but the amount of money that's going to taxes.
Mike:What if RMDs weren't gonna be an issue in the future? What if just by taking, let's say, a 130,000 from your IRA, the standard deduction then brings you to a 100,000, so all of your IRA assets are taxed at 12%, and you took a little bit from your Roth. What you're doing is you're preserving the balance in your IRA. So dollar for dollar, you're you're just paying less in taxes. And because the dollar amount in that situation might be slightly higher, you may actually have more money left over or that can grow throughout retirement.
Mike:So taking a little bit from the Roth just to navigate in tax brackets may be appropriate. May is the keyword here because if you're going deep into a tax bracket, maybe the Roth the the the Roth distributions to just bridge the gap, it's too much burden on the Roth.
David:Oh, in what way? Yeah. Well, how does that manifest itself?
Mike:Well, if you drain too much from your Roth and then it's eventually gone, were you really addressing the issue? Or were you just kind of avoiding taxes altogether? Yeah. And then you also wanna acknowledge what's your tax rate or your effective tax rate versus the effective tax rate of maybe who's gonna receive the assets. Because if you're if you're in the 12% tax bracket and that's it, and the assets are going to your son or daughter, and they're in the 22, 24% bracket, I don't know.
Mike:You might you might do some more conversions. You might keep things in that bracket. You might say, the heck with it. I'm gonna go a little bit into the 22% tax bracket because I want them to have the Roth assets so that doesn't add to their 22 or 24% tax bracket.
David:So the Roth carries over to to the heir. The heir gets to keep that nontaxable basis. It doesn't
Mike:Yeah. So let me just say what I did differently.
David:Okay.
Mike:We weren't just looking at how to preserve assets, how to minimize our taxes in the tax brackets by looking at every dollar and the taxation of each dollar, we were also looking at where the money would go after Mhmm. You passed.
David:That's longer range view here.
Mike:And sometimes it makes sense for you just to pay slightly more in taxes now because of your legacy intentions. It's just kind of a multifaceted question, but Yeah. I I believe it is good to have an openness to blending Uh-huh. When it makes sense, while acknowledging what you need now, what you might need in five or ten years, and where you want the money to go later on in life. I know the tax brackets are tactically permanent, but that's only as permanent until the next administration and they change the taxes.
Mike:Mhmm.
David:So it sounds like then maybe the semi default answer is, oh, let's pull from traditional IRA first, but be open to dipping into the Roth if needed. Yeah. And would there ever be a case where you'd say, Roth first? Can you can you build a case for that and make an argument for it?
Mike:There there has to always be a case for something. In finance, there has to always be a case. So let me try and build one. So if you're 64 years old
David:Okay.
Mike:All of your assets are in qualified accounts. So that means it's in an IRA or in a Roth. Uh-huh. And there is there are significant health care subsidies.
David:Okay.
Mike:So you can either take income from the IRA and pay an arm and a leg for your insurance for the age of 64, just right before Medicare. Or you could take most of your money from Roth and then look like you're very, very poor and then qualify for all these subsidies. Maybe that could work for you. I doubt it. I doubt it.
Mike:Let's see. What are some other I mean, it's what you're trying to do is avoid taxes for a certain situation. That's really it. And based on current tax law, I mean, there really isn't many other situations like that. There there has to be a benefit for having a low ten forty, a low adjusted gross income or modified adjusted gross income for coming from your 10 to 40 Mhmm.
Mike:So that you're able to qualify for certain benefits. Mhmm. But you you you don't qualify for Medicaid that way, so that wouldn't be it. Yeah. I think it's it's just to manipulate your tax return.
Mike:So in the future, if something comes up, it's something to be aware of.