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Integrated Wealth Management

Should You Pay Higher Taxes Now to Avoid Higher Taxes Later?

If you’ve recently retired, are under the age of 70.5 and have a large portion of your net worth in retirement accounts, your taxable income may have fallen below the top of the 15% tax bracket which is $73,800.

If this is the case, what should you do with any deferred capital gains you may have in your taxable portfolio? The obvious answer is to realize enough capital gain to bring your income up to the top of the 15% bracket. You would pay zero federal income tax on these gains. See this graph which illustrates the ordinary tax rates as well as the capital gains tax rates.

Once you reach age 70.5 you will be forced to begin taking distributions from your retirement accounts and this opportunity will be lost forever. If you do not have any capital gains to take, you should do a Roth conversion to fill up your 15% bracket even though you would have to pay 15% tax on this money. If you don’t use up the 15% tax bracket now with a Roth conversion, you will end up paying 25% tax on the distributions once you are forced to begin mandatory withdrawals.

The same strategy applies at the higher income tax bracket levels. You need to do multi-year projections based on anticipated retirement account withdrawals to see if these distributions will force you into a higher tax bracket. If they do, consider making additional Roth Conversions while you are still in a lower tax bracket. These conversions will help to lower your future distributions and prevent you from pushing yourself into a higher tax bracket. For further information on Roth IRA conversions see the attached information.

The goal is to pay the least amount of tax over the long term and sometimes this can only be accomplished by paying more now so that you will remain in a lower tax bracket later.