Converting to a Roth account is one of the brilliant ways to reduce taxes in retirement.
“At age 70 ½ you are required to start withdrawing Required Minimum Distributions from traditional IRAs and for 401(k)s if you’re no longer employed,” said Luis F. Rosa, CFP, EA, founder at Build a Better Financial Future, LLC. “These distributions will be considered taxable income, and can trigger tax on your Social Security benefits.”
Currently, if your modified adjusted gross income is between $25,000 and $34,000 as a single individual, you might pay income tax on up to 50% of your Social Security benefits. If it’s more than $34,000, the figure goes up to 85% of your Social Security benefits. For married couples filing jointly, if your modified adjusted gross income is $32,000 to $44,000, up to 50% of the benefits can be taxed, and if income is over $44,000, up to 85% of the benefits can be taxed.
“Consult with your tax advisor and/or financial planner to see if converting certain funds to a Roth IRA over the upcoming years is a smart choice since the converted funds will be considered taxable income in the year converted,” said Rosa. “However, funds withdrawn from the Roth IRA will not be considered income if held at least five years, and the money is withdrawn after age 59 ½. This can potentially save you later by not having that money count toward the formula that determines whether or not your Social Security benefits are taxable, and tax brackets might be higher in the future if the current brackets and provisions are not extended beyond 2025.”