Thoughts and musings from my desk to you.

Challenging the Status Quo

We get puzzled looks from new clients when we explain our position on taxable fixed income (bonds) in IRAs. Traditional planning advice recommends placing your highest growth assets in an IRA to maximize the tax deferral. We usually recommend the complete opposite approach, which becomes more and more preferable the higher the income of the current or future retiree.

Roth Conversions

Roth conversions remain one of the most underutilized tax planning strategies around.

Imagine the limited benefits of continued tax deferral for a 90-year-old retiree with a $500,000 IRA and an income of $100,000 a year. That income is comprised of pension distributions, IRA required minimum distributions (RMD), and some dividend income. Let’s say she has two grown children in their 60s, each earning $600,000 a year in a 41% tax bracket. Since Mom’s tax bracket peaks at 24% (up to around $170,000 worth of annual income), it would make perfect sense for her to do annual $70,000 Roth conversions, whittling down her $500,000 IRA and avoiding that next bracket of 32% above $170,000 in gross income.

Estate Taxes & IRAs – Collision Course

There are very few tax issues more complicated than the intersection of estate taxes, income taxes, and IRAs. Very few couples exceed the $24million exemption amount to begin with, and even fewer get this part of their planning correct. If not navigated well, this confluence of factors can conspire to cause 80% of an IRA or 401k to be lost to taxes. There are solutions, including going back three years to amend returns if this causes an aha moment.