Reardon's clients typically delay taking Social Security until age 70. That gets them a much higher monthly benefit than if they'd taken it earlier. It also means Social Security benefits—which are taxed to a degree—don't add to income while clients are trying to fill their 15 percent “tax bucket.”
You Must Convert!
Here's an example of how the strategy could work, courtesy of certified financial planner John Shanley of Pinnacle Investment Management in Simsbury, Conn. His firm worked with a married couple, 67 and 59 years old, who are retiring later this year. The older client is deferring Social Security until 70, and the couple will have $17,000 in income coming from a pension starting in 2017. The couple's spending needs in 2017 and 2018 will come from taxable accounts. Since they have low income for two years, they'll convert $75,000 of a traditional IRA to a Roth in both years. A small part of that conversion falls in the 10 percent bracket and the rest in the 15 percent bracket. By lessening future RMDs, the client won't be bumped into the 25 percent tax bracket in 2019 or the 28 percent bracket they might have hit in later years, said Shanley.
A helpful way to look at the savings is to compare the tax bill generated by a conversion today with what it would likely cost down the line, he said. For instance, a $75,000 move from an IRA to a Roth now at a 15 percent rate costs $11,250 in tax. The same transfer later, while in a 25 percent tax bracket, would cost $18,750.
The conversion’s tax benefit in later years may be diminished if new income streams start, say from another pension or more RMD income, but it’s still a way to take advantage of a few years at a lower rate, Shanley said.
And finally, if you’ve done so well that the RMDs aren’t needed, you can make "qualified charitable distributions" of up to $100,000 a year. That way, RMDs won't be included in gross income. You have to be careful, though—the company holding your tax-deferred account must send the money directly to a qualified charity.