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People who have neglected retirement planning for most of their lives have one last chance, starting at age 69, that could determine how they spend their later years and whether they leave something to their heirs, some financial advisers said.
Advisers say age 69 is the last stage before mandatory minimum distributions (RMDs) begin at age 73, but is still early enough to take steps to keep taxes low. For example, Americans may find the period between ages 69 and 73 to be the best time to convert to a Roth, the advisers said. Withdrawals from a Roth account are tax- and penalty-free as long as you are age 59 1/2 or older and the funds have been in the account for at least five years.
According to Citizens Bank, taxes are one of the biggest unexpected expenses for retirees. Withdrawals from traditional IRAs and 401(k)s count as taxable income. Depending on how high it is, you could also be taxed on Social Security or end up paying thousands of dollars more each year in Medicare premiums, so planning is important.
Sheena Gray, CEO of the African American Financial Advisors Association, said these years will be the “last window to manage your taxable income and manage your future taxes.” “They can determine whether your wealth is preserved or lost for generations.”
What steps can you take to keep taxes low in retirement?
Experts say a Roth conversion is at the top of the list of smart moves.
If you’re retired from age 69 through the years before your RMD, “you have the opportunity to do a Roth conversion at a lower tax rate,” Gray said. Since the converted amount will be taxed, the conversion will be spread out over several years, starting from age 69. You can avoid competing with higher taxes or being stuck with one huge tax bill, she says.
Since you won’t be receiving a paycheck, you can replace your W-2 income with a Roth conversion, said Jordan Mangaliman, CEO and fiduciary wealth advisor at Goldline Wealth Management. For example, if you earned $150,000 a year before you retired, but now only receive a $50,000 annual pension, you can convert about $100,000 into a Roth and stay in your regular tax bracket, he said.
Roth accounts are also beneficial from a legacy and generational wealth perspective, Mangaliman said. Because Roth accounts are not subject to RMDs, the surviving spouse does not have to continue receiving RMD income, immediately pushing widows and widowers into higher tax brackets when filing a single rather than joint tax return.
Additionally, while most beneficiaries who inherit traditional retirement accounts are required to liquidate the account within 10 years and withdrawals are taxed, Roth withdrawals are not taxable, even to the heir.
Other tips include:
- Income plan: Identifying your source of income before you have to take RMDs is “very important,” Mangaliman says. “Look at what’s generating income,” he said. “Dividends or bonds? Are you selling stocks? If you sell, is it sustainable? If the market takes a downturn, there’s no time to recover, so a properly allocated portfolio is important.” “Every dollar has a role. It’s not just a bunch of money.”
- Financial expert: If you haven’t worked with a financial advisor or CPA before, now is a good time to try it out. “A financial advisor is the best person to guide you and help you create a withdrawal plan for your investment income,” Gray said.
How do you find the right financial advisor?
There are many resources available to help you find the right financial professional and create a plan so you don’t run out of money in retirement. Make sure the financial planner is qualified and trustworthy. The fiduciary is legally and ethically bound to work in your best interests.
Lists like USA TODAY’s ranking of the best financial advisory firms exist on many reputable media sites.
You can also find local advisors using our searchable database. For example, the National Association of Professional Advisors’ site includes only fiduciaries. The nonprofit Association Of African American Financial Advisors, of which Gray is CEO, also has a searchable database of financial advisors vetted based on need and location.
“A lot of the mistakes people make include waiting too long to develop a strategy,” Gray says. “Once you’re 73, it’s too late. If you don’t have a plan, the IRS is planning your taxes, which you probably wouldn’t have chosen,” she says.
Medora Lee is USA TODAY’s money, markets and personal finance reporter. Please contact us at mjlee@usatoday.com. Subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday.
