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At age 60, I recently retired after owning a business. I have been getting health insurance through the marketplace since it started. Currently, my income is only derived from income from my taxable office, including reported dividends and net income of less than $60,000 per year. The beneficial result of this approach is that the government covers almost half of my health insurance costs.
In terms of assets, I have $625,000 in my taxable portfolio, $115,000 in a Roth IRA and $1,500,000 in a traditional IRA. I am the owner of the house, and I have no dependents. A continuous plan involves taking only from the taxable portfolio until I reach age 65 to maintain the current strategy. I’m not sure if this is a wise move or if I should go into other things without worrying too much about health insurance benefits.
– Kevin
In this case, it makes sense to stick with the plan and write down the taxable items. Withdrawals from a traditional IRA containing the same amount of disposable income would create taxable income and a larger tax bill.
When you add health insurance benefits into the mix you get another benefit by not increasing your tax bill, which would happen by switching to another area of your deductions. Additionally, the longer you leave money in a retirement account, the more opportunity you have to grow without tax deductions. (And if you have other tax or retirement questions, consider contacting a financial advisor.)
The Premium Tax Credit (PTC) helps millions of Americans shoulder the burden of paying for their health insurance. You can choose to pay a small amount each month (called an advance premium tax credit) or get a credit for the full amount when you file your taxes. Unfortunately, the changes made to the PTC as part of the American Rescue Plan and increased through inflation. The Reduction Act will expire after 2025. But until then, qualifying for the PTC gives you a big discount on health insurance premiums. Only people buy coverage. through the health insurance market are eligible to receive these credits. PTC payments were previously based on income and household size, and were only available to families earning between 100% and 400% of the federal poverty level. However, those limits will not go back into effect until after 2025, assuming Congress does not. increase the PTC rate as well. Until then, PTC eligibility for households earning more than 400% of the federal poverty level depends on what portion of their income can be used to purchase the benchmark plan (the second-most expensive Silver plan). So, if your household spends more than 8.5% of your income on premiums, you may qualify for PTC. (And if you need extra help finding a tax break, consider working with a financial advisor.)
How you handle retirement account withdrawals affects your total taxable income, and that can affect other areas of your income, including:
Also, the more you pay taxes, the less money you have for yourself. The way you take money out of retirement affects how much tax you end up paying. There are three tax buckets to draw from: taxable, traditional, and Roth accounts. Here’s a quick look at the tax implications of each once you’re over age 59 ½:
Tax accounts: You pay income tax every year on interest and capital gains whether you deduct them or not, and tax on capital gains – which can be lower tax rates – when you sell goods for a profit.
Historical records:Withdrawals from tax-deferred or “traditional” accounts like IRAs and 401(k)s all go to taxable income and you pay income tax on 100% of your withdrawals.
Roth accounts:You don’t pay tax on anything you withdraw so there is no impact on the tax rate (as long as the account has been open for at least 5 years)
Although everyone’s situation is different, there are some ways that can help make the most of your money and reduce your annual tax bill. Talk to an experienced financial advisor to help you develop a tax-deductible plan that fits your unique situation.
There are generally two main schools of thought when it comes to retirement withdrawals: managing the income tax with a balanced withdrawal and keeping the Roth assets intact for as long as possible.
For the first strategy, you would draw down your taxable account until you hit your required minimum distribution (RMD) age. (Assuming you’re now 60, you won’t be required to take RMDs until age 75.) Then, the withdrawal schedule changes. You would take your RMDs, avoid tax penalties, and then take income from all three sources – tax, traditional, and Roth – equally. This approach focuses more on both scaling out and minimizing tax and tax rates.
The second way, you would look to preserve your Roth assets for as long as possible. This strategy doesn’t bother much with reducing the amount paid. Instead, it focuses on leaving the Roth account alone until the rest of your assets are used up. Here, you would delete your accounts in the following order until each one is completed:
Taxes and RMDs
Traditional
Roth
This approach can cause a tax hump during the middle years of retirement, where your income and taxes go up as you withdraw from the retirement account. However, when your traditional IRA is withdrawn, you will no longer face RMDs since Roth accounts are not subject to these mandatory withdrawals.
The strategy you choose can affect your tax return and how long your money will last. Additionally, there are many other factors to consider, which is why working with an experienced financial advisor can help you make the best decision for your situation.
If you’re thinking about getting financial advice from a professional, be sure to read our full guide on how to find and choose a financial advisor.
Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with three financial advisors serving your area, and you can have a free initial call with your advisor match to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
Keep an emergency fund available for unexpected expenses. An emergency fund should be liquid — in an account that isn’t as vulnerable to big swings as the stock market. The tradeoff is that the financial value of water can be reduced by inflation. But the high-interest account allows you to earn more interest. Compare savings accounts from these banks.
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Michele Cagan, CPA, is SmartAsset’s financial planning reporter and answers readers’ questions on personal finance and tax topics. Have a question you would like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in the future. The question can be edited for length or clarity
Please note that Michele is not participating in SmartAsset AMP, and is not an employee of SmartAsset. He was paid for this article.
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