The Planning Opportunity with Your RMD
One of your largest income sources in retirement will probably be your retirement accounts, such as your 401(k) or IRA. The distributions, or withdrawals, from these accounts can present a planning opportunity.
You can start withdrawing money from your accounts at 59½ without penalty, but you are required to take distributions (better known as RMDs) at 70½. That makes tax planning before 70½ important since you may have the ability to take money out in lower tax brackets.
The key is assessing what your potential tax bracket will be at 70½, especially if you delay Social Security and other income. The goal is to “use up” the lowest tax brackets while assuming you will be in higher tax brackets later.
But what if you don’t need the money that you would be pulling out? You can achieve the same outcome through a Roth conversion. Roth conversions are taxable in the tax year they are created, but they grow tax-free and distributions will not be taxed as long as you follow the rules.
Keep in mind that a Roth conversion is irrevocable, so you should carefully analyze its potential impact on your tax bracket. An experienced financial planner can help you determine whether a conversion would work for you.