Retirement Taxes On Required Minimum Distribution

[RusticBohemian]

My mom is 65 and retired with an income of $42,700.

She also has 401k accounts from which she will have to take required distributions in five years which will amount to aprox $25,000 a year.

That means her current tax bracket is the 25% one, which stretches from $37,650 to $91,150

People are often advised to take distributions early and stick them in a Roth IRA to avoid being bumped to a higher tax bracket when distributions are forced at age 70, but as far as I can tell, doing so would not lower her tax bracket at all because she's already in the 25% one and is in no danger of being bumped up above $91,150

Is this correct?

[Frankies Girl]

I don't believe you can put anything into an IRA (traditional or Roth) without actual earned income. Pensions, social security or distributions and dividends/cap gains don't count as earned income. I think her only choice would be to have a taxable account, and she'll need to make sure it's very tax efficient to prevent throwing off even more taxable events. Bonds would be a poor choice in a taxable, but something like VTSAX would be decent in there.

Same situation with my mom but she's already taking her distributions. I help her with all of her accounts, and this past year was her first year. She is also in the 25% taxable bracket.

She set her distributions up for December, so the money stays in the market (in the sheltered accounts like an IRA) for as long as possible. She has it set up to auto distribute into her taxable account after they withhold 20% federal taxes. It worked out just fine; we figured we might have to adjust her withholdings, but she was within $100 (owed) on her taxes this year, which we both consider a big win considering there were multiple accounts with a pension and social security besides.

The distributions land in her taxable account, and I have that account's cap gains and dividends set to not reinvest, so we can do all of that cash in a lump sum towards the end of the year (and create less lots throughout the year).

Will be interested if any of the more knowledgeable forum members have any further suggestions.

[seattlecyclone]

My mom is 65 and retired with an income of $42,700.

She also has 401k accounts from which she will have to take required distributions in five years which will amount to aprox $25,000 a year.

That mean her current tax bracket is the 25% one, which stretches from $37,650 to $91,150

Be aware that tax brackets are based on taxable income, which is your income after deductions and personal exemption. The standard deduction for a single person over 65 is $7,850 this year, plus a personal exemption of $4,050 means the 25% tax bracket doesn't start until after $49,550 of gross income (or potentially more if your mother itemizes). Also, be aware that only 85% (or less) of social security income counts as "income" for federal tax purposes, so this might put her current taxable income even lower if she has started taking social security.

People are often advised to take distributions early and stick them in a roth IRA to avoid being bumped to a higher tax bracket when distributions are forced at age 70, but as far as I can tell, doing so would not lower her tax bracket at all because she's already in the 25% one and is in no danger of being bumped up above $91,150

Are you talking about converting existing traditional IRA savings to Roth? This can be a good idea to fill up your current tax bracket if you expect your tax bracket to go up once RMDs start. If your mom is actually in the 15% bracket right now (as I suspect is the case), she would definitely benefit from converting up to the top of that bracket each year until she turns 70. It wouldn't reduce her traditional IRA balance by a whole lot converting just $5,000 or so each year, but every little bit helps.

She could even convert a bit more than this in the 25% bracket if she wanted; there's no real difference between paying 25% tax on that money now versus later. I might suggest converting as much as she can afford to pay the tax on out of any non-retirement income and assets she has, while staying in the 25% bracket.