Delaying Taxes in Retirement Isn’t Always Best, Award-Winning Paper Shows, Ep #288

Do you want to know how you can fully utilize your biggest advantage over the IRS? Listen to this episode to find out.

Today, we explore a ThinkAdvisor.com article that turns traditional retirement tax thinking on its head. Then, Bret helps me answer a listener’s question about opening a Roth IRA when your salary is too high. Bret has a great tip that you may not have thought of before. Finally, you’ll hear from Mike in Tuscon who is engaging in his love of music in retirement. Don’t miss out on this episode to hear how you can plan to improve your retirement.

Outline of This Episode

[1:22] Delaying taxes in retirement isn’t always the best
[5:10] My thoughts
[7:42] What about opening a Roth IRA and only making Roth conversions
[12:45] How Mike is investing in himself

The common rule of retirement account withdrawals

I love it when an article confirms what I have been saying all along. Delaying Taxes in Retirement Isn’t Always Best, Award-Winning Paper Shows was written by John Manganaro at ThinkAdvisor.com. This article discusses a new theory from two financial experts and reconsiders a common rule of retirement account withdrawals.

The common rule is that retirees draw required minimum distributions from tax-deferred accounts first and then from taxable accounts until these accounts are exhausted. While this rule is useful for some, the authors of the paper discover that it isn’t optimal for everyone. They found that it may make sense to pay taxes earlier than required.

An optimal strategy is more personalized

The optimal strategy would be to consider your net worth, your desired retirement income, and your estate goals. More efficient tax planning could be realized with careful Roth conversions in pre-retirement or early retirement.

Since large financial firms often provide planning tools using the common rule strategy, a future retiree can compare those results to reach another level of tax optimization.

Your advantage over the IRS

You may not realize this, but you actually have a huge advantage over the IRS. You can plan your taxes over the course of decades whereas they can only see income one year at a time.

With the passing of the SECURE Act 1.0 and 2.0, it is clear that the IRS would like us to delay taxes as much as possible to get you to pay out the most that you can in your lifetime. However, with careful planning, you don’t have to fall into that trap.

If you would like to learn more about reducing taxes in retirement and using your advantage over the IRS, check out Retirement Income University. In addition to income planning and investing in retirement, we have an entire module on taxes!