I have $2.3M in IRAs. How Do I Minimize Taxes in Retirement?
Retirement planning can be complex, especially for those with significant assets. As you shift from accumulating wealth to distributing it, key factors like Roth conversions, IRMA surcharges, and managing income for health insurance subsidies become crucial.
Case Study: Andre and His Wife
Andre and his wife, both in their mid-50s, are planning to retire in five years with over $2.6 million in pre-tax accounts. Their main concerns are taxes, especially Required Minimum Distributions (RMDs), and managing IRMA surcharges and health insurance before Medicare eligibility.
Transitioning from Accumulation to Distribution
The shift to drawing down assets raises questions like when to start Roth conversions and how to manage IRMA surcharges while keeping health insurance affordable.
Roth Conversions
Strategic Roth conversions allow Andre and his wife to pay taxes now at lower rates, reducing future RMDs. Timing is critical to avoid pushing them into higher tax brackets and triggering IRMA surcharges.
Managing IRMA Surcharges
By converting pre-tax assets to Roth IRAs during lower-income years, they can stay below IRMA thresholds and reduce future tax liabilities.
Health Insurance Planning
Managing income strategically between retirement and Medicare eligibility can help Andre and his wife qualify for ACA subsidies, lowering their health insurance costs.
Projecting Income and Expenses
Accurate income and expense projections are key. Their monthly expenses are estimated at $12,000, but with their mortgage paid off in five years, costs could drop. Adjusting for hobbies and travel helps refine projections.
The Retirement Spending Smile
Expenses typically peak in early retirement, decrease mid-retirement, and rise again due to healthcare costs. Accounting for this helps plan long-term spending.
Managing Large Expenses
Timing large expenses, like vacations, to spread out withdrawals can help minimize tax impacts. Aligning Roth conversions with low-income years is also beneficial.
Andre and his wife must continue refining their plan to align with their goals. Strategic decisions will help them minimize taxes and maximize wealth for a secure retirement. Working with a skilled advisor ensures they stay on track.
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⏱Timestamps:⏱
0:00 - Andre and his retirement prep
3:37 - A blueprint of income and expenses
7:08 - Expected gifting, SS, inheritance
10:17 - Cash flows
13:09 - Anticipating taxes
19:29 - Required distributions
22:41 - Portfolio projection
27:29 - Projecting expenses, revisiting Roth conversions
33:59 - Other tax components
36:11 - Employee purchased stocks
38:51 - Summary of action items
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