Navigating Retirement Tax Milestones: Required Minimum Distributions
Transcript
[00:00:03] Then we have the required distributions that kick in later in life. Now this is a different milestone because you'll have your social security that's kicked in and then these required distributions that from the 401k and IRA account, many clients will be in a very high tax bracket once this happens, we need to be mindful and project what your tax situation looks like in the future, there may be opportunities for us to reduce the taxes that this phase by taking advantage of your low income tax bracket at this phase.
[00:00:35] Here's an example. So we talked about Carol. She retired at 60 say she retired with 2, 000, 000 in her 401k account. If this grows at 5. 5 percent a year, that 2, 000, 000 would grow to over 4, 000, 000 by the time she's 73. This is the age right now when you're required to take money from your 401k account. So it doubled in 13 years, right?
[00:01:01] The 401k is a tax time bomb because oftentimes it is growing very quickly because the law of large numbers is applying to it. Most people have tried to put a lot of money in those 401k accounts. But you may not need all of the money when you're required to take it out So basically you're taking money out of here and it's putting you in a different tax bracket So when she's 73 she delayed her social security She's going to be getting over four thousand dollars a month in social security.
[00:01:32] This is going up with inflation So her social security is over fifty thousand dollars But her required distribution is also over 146, 000. So her gross income is 197, 000 in year one in retirement. That's going to put her in the 32 percent tax bracket. And it increased her Medicare premiums. So your Medicare premiums are income based.
[00:01:56] So if your income is less than 103, 000, you pay 174, 000 a month if you're single. Once you get over 193, 000, Your monthly Medicare premiums go up to five 59, right? So we want to try to reduce your income in retirement as much as possible so that we can keep these Medicare premiums as low as possible and also have you in a lower tax bracket.
[00:02:19] So alternatively, if we had not 2 million in the 401k, but say we had a million in the 401k and a million in the brokerage account, the non retirement account, she still has 2 million. 2 million. But now the 401k only grows to 2 million. She still has the same social security payment, but this required distribution is cut in half.
[00:02:41] So that reduces her income from 197 down to 124. It reduces her tax bracket. So she's paying less in taxes. It also cuts her Medicare premiums per month by over two. So again, these are things that are in our control. Right. I rather have the money in Carol's account than in Uncle Sam's account. And by doing these things, by being smart about how we place our assets, how we start to structure these different accounts, how we start to draw these assets down, we're able to prolong the useful life of the assets by a number of years.
[00:03:17] And that makes a big difference when we're planning for the risk in retirement.