Clients rightly worry about required minimum distributions that could force them into higher tax brackets at age 70 1/2. Nobody likes to be forced into doing anything, especially paying taxes, but too few people ever seem to do the math when it comes to Roths. With the recharacterization of conversions no longer allowed, that math has become even more important.
The first-year required minimum distribution is roughly 3.7% of an IRA when a client hits age 70 1/2. It rises to only about 5% by the time the client is 80. Clients with smaller or conservatively positioned retirement accounts often don’t experience the jump in taxes they feared.
The obsession with the onset of distributions is a bit shortsighted. The more compelling reason to convert would be that a client is confident his or her current tax bracket is lower now than it would be for monies in the future.
Last year, I met with a 75-year-old prospective client who got annoyed when the distributions were triggered on his $250,000 IRA. He was proud that he converted the whole thing that next year and now “pays no taxes” on his IRA. That may be true, but he doesn’t pay now because he has already paid, and paid more than he would have if he’d just taken RMDs. To make matters worse, he’s single with no kids and was leaving everything to charity, so the charity gets less also.
Myth: I Shouldn’t Take Money From Retirement Accounts Before 70½ Unless I Need It
There’s also a danger in ignoring the effects of required minimum distributions rather than fearing them. It’s a common scenario that an early retiree who loves paying little in taxes through his 60s reaches 70 1/2 with a large retirement balance. The resulting RMD kicks him into a higher bracket. When he passes, it will be even worse on his surviving spouse because of the compressed tax brackets single filers face. Ouch.
Myth: If So And So Wins The Election, We’ll Go Broke
I cannot remember a national or even statewide election in which I wasn’t told that the election of a candidate was going to be the end of us all. And just when I thought it couldn’t get worse, 2016 came and the rhetoric and the blame reached new levels. By simply adding this comment about politics to this column, it is almost a sure thing I will get at least one e-mail from someone accusing me of being politically motivated. That’s how polarized we seem to be.
This year’s midterm election is no different from every other election I’ve witnessed. Turn on the TV and all the candidates are accused of being evil people with bad agendas. Now, bashing the competition goes back much farther than my recollection. Check out some of the flowery but vicious rhetoric between Thomas Jefferson and John Adams. We venerate them as Founding Fathers, good friends and patriots, but they called each other many nasty things, including traitors.
I am not suggesting that you dismiss clients’ concerns. They have every right to their viewpoints and feelings. But basing our acts on our feelings about politics or the economy can lead us to make mistakes we cannot recover from.