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Tax Experts: 7 Ways Retirees Accidentally Pay Too Much in Taxes
Yahoo Finance· 2025-10-02 12:13
Core Insights - Retirees face significant risks not only from market fluctuations but also from avoidable taxes due to mismanagement of retirement accounts and distributions [1] Group 1: Required Minimum Distributions (RMDs) - RMDs are mandatory annual withdrawals from certain tax-deferred retirement accounts that begin at age 73 under current law [3] - Failing to take an RMD incurs a steep penalty of 25% on the missed amount, which can be reduced to 10% if corrected quickly [4] Group 2: IRA Withdrawals - Excessive withdrawals from IRAs can push retirees into higher tax brackets since retirement account income is fully taxable as ordinary income [5] - Tax diversification is crucial for retirees to balance tax-deferred and tax-free assets effectively [5] Group 3: Social Security Taxation - Many retirees mistakenly believe that Social Security benefits are tax-free; however, up to 85% of benefits can become taxable if provisional income exceeds $44,000 for joint filers [7] - A single RMD or modest capital gain can trigger double taxation on both the distribution and previously untaxed Social Security benefits [7] Group 4: Roth Conversions - Roth conversions are often overlooked by retirees, yet they can be a powerful long-term tax reduction strategy, particularly for those not reliant on RMDs for living expenses [9]
I'm 67 With $680k in My 401(k). Should I Convert to a Roth IRA to Avoid RMDs?
Yahoo Finance· 2025-09-25 12:32
Group 1 - The article discusses the implications of Roth conversions for retirement funds, highlighting that while paying taxes on a conversion may not be beneficial for immediate living expenses, it can be advantageous for long-term growth and tax-free income for heirs [1][2] - Required Minimum Distributions (RMDs) are mandated by the IRS for pre-tax retirement accounts, with the starting age raised to 73 in 2023 and set to increase to 75 in 2033 under the SECURE 2.0 Act [3] - The purpose of RMDs is to ensure that taxes are eventually paid on pre-tax retirement accounts, while Roth IRAs are exempt from RMDs during the owner's lifetime, and Roth 401(k)s will also be exempt starting in 2024 [4][9] Group 2 - RMD calculations depend on age and account balance, with an example provided showing that a 75-year-old with a $1 million balance would have an RMD of $40,650 for the following year [6] - Roth conversions are considered by retirees to avoid RMDs, allowing for tax-free growth and withdrawals for beneficiaries, who must still adhere to distribution rules under the SECURE Act [9]
I'm 65 With $750k in an IRA and Already Taking Social Security. Is a Roth Conversion Still an Option?
Yahoo Finance· 2025-09-24 17:00
Core Insights - The article discusses the feasibility and implications of converting a traditional IRA into a Roth IRA for individuals aged 65 and older, emphasizing that there are no legal restrictions based on age or income [2] - It highlights the tax implications and benefits of Roth conversions, particularly the potential for tax-free withdrawals in retirement [3][4] Group 1: Roth Conversion Basics - A Roth IRA conversion involves transferring funds from a traditional IRA to a Roth IRA, requiring the payment of income tax on the converted amount now, but allowing for tax-free withdrawals in retirement [3] - Traditional IRAs are subject to required minimum distributions (RMDs) starting at age 73, which can increase tax liabilities in retirement, while Roth IRAs do not have RMDs [4] Group 2: Timing Considerations - The timing of a Roth conversion is crucial; converting sooner allows for more years of tax-free growth in the Roth account [7] - Converting a large IRA can push individuals into higher tax brackets, potentially incurring a top marginal tax rate of 37% on the conversion amount [8] - Gradual conversions can help manage tax liabilities by spreading the income increase over several years, thus avoiding the top marginal tax rate [9] Group 3: Withdrawal Rules - Funds from a Roth IRA cannot be withdrawn without penalty within five years of conversion, and each gradual conversion restarts the five-year rule for that portion [10]
5 Roth IRA Secrets You Need To Know, According to a Top Expert
Yahoo Finance· 2025-09-23 15:56
Core Insights - The discussion emphasizes the importance of Roth IRAs as a tax-efficient retirement savings option, particularly in light of anticipated tax increases [2][5][7] Group 1: Roth IRA Insights - Ed Slott describes IRAs as a "ticking tax time bomb," indicating that withdrawals during retirement will be taxed at potentially higher rates in the future [3] - The Congressional Budget Office projects that the "One, Big Beautiful Bill Act of 2025" will increase national debt by $3.4 trillion, suggesting that tax rates may rise to offset this debt [4] - Slott advocates for paying taxes now at current low rates by utilizing Roth IRAs, which allow for tax-free growth since they are funded with already taxed income [5][7] Group 2: Employer-Sponsored Plans - A significant majority of employers (94%) offer Roth 401(k) options, yet only 16.2% of eligible employees are contributing to these plans [6] Group 3: Conversion Strategies - Individuals with traditional IRAs or 401(k) plans have the option to convert to a Roth IRA, but should act promptly to avoid required minimum distributions (RMDs) that cannot be converted [8]
I'm Turning 73 This Year. How Can I Lower Taxes on My RMDs?
Yahoo Finance· 2025-09-23 14:00
Core Points - The IRS mandates required minimum distributions (RMDs) from retirement accounts starting at age 73, which can lead to tax liabilities for retirees [1][2][3] Group 1: RMD Calculation and Implications - RMDs are calculated based on the account balance at the end of the previous year and the IRS life expectancy tables, designed to deplete account assets by the estimated end of life [3] - For example, a 73-year-old with a $500,000 IRA balance would have an RMD of $18,868 for the year, which is added to ordinary income and taxed accordingly [3] Group 2: Strategies to Manage RMDs - Retirees can minimize RMDs by drawing down tax-deferred assets early, postponing pension or Social Security payments to maximize benefits [5] - RMDs can be paid from any one IRA account, while 401(k) RMDs must be calculated and paid from each account, prompting consolidation into a rollover IRA [6] - Individuals must manage RMDs separately for their own accounts, and financial advisors can assist in structuring retirement income effectively [7] Group 3: Charitable Contributions - Retirees not needing RMD cash for living expenses can donate to qualified charities through a Qualified Charitable Distribution, which allows the donation to be tax-free [8] - It is important to ensure the charity is IRS-qualified to avoid tax liabilities, and cash cannot be withdrawn and then donated to receive the tax benefit [8]
I'm 62 With $1.5M in an IRA. Should I Move $150k Annually to a Roth IRA to Reduce RMDs?
Yahoo Finance· 2025-09-22 14:00
Core Insights - The article discusses the benefits of converting traditional IRA funds to Roth IRAs to avoid required minimum distributions (RMDs) and manage tax implications in retirement [1][2][4]. RMD Rules - The IRS mandates that account holders must begin taking RMDs from tax-deferred retirement accounts at age 73, with the minimum withdrawal amount based on account balances and life expectancy [3]. - The SECURE 2.0 Act has adjusted the RMD age to 73 for individuals who turn 72 after December 31, 2022, and will further increase to 75 for those who reach age 74 after December 31, 2032 [4]. Roth Conversion Strategy - Strategic Roth conversions allow individuals to transfer funds from RMD-susceptible IRAs to Roth IRAs, which are not subject to RMDs, thus preserving tax flexibility [6][7]. - While converting traditional IRA funds to Roth IRAs requires paying taxes on the converted amount now, it can lead to lower overall lifetime taxes compared to unpredictable RMDs later [8][9].
Ask an Advisor: I Don't Need My RMDs Right Away. What Are My Best Options?
Yahoo Finance· 2025-09-22 11:00
Core Insights - Retirees facing required minimum distributions (RMDs) have various options to manage their cash without necessarily depositing it into a checking account [2][4] Group 1: RMD Management Options - In-kind distributions allow retirees to transfer or withdraw assets while keeping them invested, which can be beneficial for those who want to wait for investments to recover [4][5] - Qualified charitable distributions (QCDs) enable taxpayers to donate directly to charities, avoiding taxes on the distribution and potentially reducing taxable income [6][8] - Converting traditional IRA funds to a Roth IRA can provide strategic benefits as retirees approach RMD age [9][10] Group 2: Tax Implications - Handling RMDs can have tax consequences, making it essential for retirees to consider the tax implications of their choices [3][6] - Utilizing QCDs can lower Medicare premiums and reduce future RMDs by decreasing the overall value of tax-advantaged retirement accounts [8]
‘I feel overwhelmed’: I’m a widow in my early 40s with 3 children. My IRAs are worth $330K. Will we be OK?
Yahoo Finance· 2025-09-21 22:26
Group 1 - The article discusses the implications of inheriting an IRA, particularly focusing on the tax consequences and options available for managing inherited assets [1][5] - It highlights the importance of Required Minimum Distributions (RMDs) and how they apply to inherited IRAs, emphasizing that individuals must start withdrawing a certain amount once they reach age 73 [1] - The article provides a financial overview of a widow's situation, indicating she has approximately $1.3 million in assets, including her late husband's IRA valued at $270,000 and a paid-off home worth $590,000 [2][3] Group 2 - The article outlines the potential growth of inherited and Roth IRAs, projecting that with a 7% annual return and $7,000 annual contributions, the inherited IRA could exceed $1 million in 20 years [8] - It discusses the financial considerations of rental properties, questioning whether to keep or sell a rental property valued at $428,000, and the potential returns from investing in the S&P 500 [9] - The article suggests planning for future care of a special-needs child through maximizing Roth IRA contributions and exploring special-needs trusts to protect eligibility for federal aid [10][12] Group 3 - The article mentions Social Security survivorship benefits, explaining that a surviving spouse can receive a percentage of the deceased worker's basic benefit amount, depending on their age [13] - It emphasizes the need for careful financial planning and the importance of taking incremental steps towards achieving long-term financial stability [13]
Should we drain our $200,000 savings for Roth conversions on $2.3 million in our 60s?
Yahoo Finance· 2025-09-20 16:54
Core Insights - The article discusses the implications of Required Minimum Distributions (RMDs) and Roth conversions for individuals nearing retirement age, particularly focusing on tax strategies and income management [1][3][9]. Financial Planning Considerations - Individuals with a combined income of approximately $130,000 have the potential to execute Roth conversions before reaching the RMD threshold, which could significantly increase their retirement savings from $2.3 million to an estimated $3.7 million by the time RMDs begin [1]. - The RMDs for a couple could amount to around $140,000 annually, assuming a 7% average growth rate on their investments [1]. - The Medicare Income-Related Monthly Adjustment Amount (IRMAA) surcharges will apply starting at $212,000 for married couples in 2025, which could affect financial planning strategies [2]. Roth Conversion Strategies - Financial advisers recommend considering Roth conversions even before age 63 to optimize tax implications and manage future income levels [3]. - The current tax rate is crucial in determining whether to proceed with Roth conversions, as future tax rates remain uncertain [7][8]. - A Roth conversion up to the top of the 22% tax bracket (currently $206,700 for married couples) could save on tax liabilities, with potential conversions around $75,000 incurring approximately $17,000 in taxes [9]. Cash Flow and Tax Efficiency - Paying taxes on Roth conversions from the conversion amount itself is deemed inefficient, as it reduces the amount transferred to the Roth IRA [11]. - Continuous withdrawals from savings to cover taxes on conversions could impact cash flow over time, especially if done repeatedly [11]. Estate Planning Considerations - Decisions regarding the nearly $4 million accumulated assets should consider whether the funds will be spent, left to heirs, or donated to charity, as each scenario has different tax implications [12][13][14]. - If leaving assets to children, future tax rates must be considered, which complicates planning due to the long time frame before inheritance [14].
I'm Taking My First RMDs and Don't Need the Funds. What Are My Options?
Yahoo Finance· 2025-09-17 17:00
Core Insights - The article discusses the requirement for individuals with tax-deferred retirement accounts to start taking required minimum distributions (RMDs) at age 73 starting in 2024, with the age increasing to 75 in 2033 [2][3] - It highlights the tax implications of RMDs, including ordinary income tax on withdrawals and potential increases in taxes on Social Security benefits and Medicare premiums due to higher income levels [4][5] Tax Minimization Strategies - Charitable donations can be made through Qualified Charitable Distributions (QCDs), allowing individuals to donate up to $105,000 in 2024 directly to charities without incurring taxes on the amount [6] - Continuing to work and maintaining a 401(k) with the current employer can defer RMDs, as individuals are not required to take RMDs from that specific account [7]