Over the years, I generally tried to put as much money away into both my company’s 401(k) and our personal IRAs. Now, some people (even one banker that I know) do not realize that you can contribute–to the maximum, based on IRA Rules–to both qualified plans and IRAs. Just after I retired, I did a re-configuration.
Realizing that our Tax Bracket would go down in the Tax Year after I retired, I transferred money from my ROTH to my Traditional IRA. Now, here’s where I had to get creative. In February of 2012, I asked the banker if I withdrew money from my ROTH whether I could transfer that to my Traditional, and have the Traditional contribution count for 2011 (my last full year working). I was told “No”. So, rather than do it in a one-step re-configuration, I withdrew the funds from the ROTH, and made a separate Traditional contribution for the prior Tax Year. All the while, the banker didn’t have a clue–as I had expected.
But, that transfer was primarily due to our changing tax brackets, one year to the next, as I retired. Now, however, I am more focused on either withdrawing funds from our Traditional’s or re-characterizing them–from our Traditional’s to our ROTHs. Since both of us are now retired, our Income–and Tax Bracket–have stabilized. So, we are looking to manage our on-going Tax Bracket.
I’m now considering managing our Retirement Income with several goals: trying to keep it from surging upward; take whatever actions that my Wife and I can before we will be required to take our RMDs, and try to reduce, as much as possible, the tax bill that our Daughter will have to pay–considering that she will still be working. But, HOW?
Currently, neither my Wife nor I must withdraw funds from our Traditional IRAs until we reach 70 1/2. Obviously, wives are always much, MUCH younger. But, by starting to withdraw funds now, we will be reducing the amount which must be taken at a later date. Remember that funds withdrawn from a Traditional IRA or other qualified plans are taxable. So, by starting now, we would be reducing the tax spike later on, since we would be spreading the withdrawals over a longer time frame.
Several options are: funding College Funds for Grandchildren or Great Grandchildren; gifting to Beneficiaries now, rather than later; or re-configuring the funds from Traditional to ROTH IRAs, or just taking the Cash ourselves. But, there is one other consideration.
Since I will reach the RMD Age before my Wife, shifting more of my Traditional IRA assets to my Wife provides more flexibility, since she will reach it at a later date. I am currently still receiving a small annual Deferred Compensation payment from my former employer, and my Wife receives a monthly Pension payment from her former employer. We each receive 1099-R Forms, which enables those amounts to be rolled-over into either a Traditional or ROTH IRA.
My Retirement Plans are larger since my Wife took time out to be a “stay-at-home” Mom. She was definitely not on vacation and we are, and were, always equal partners. We were lucky to have had that luxury of her staying with the young children, in a much kinder era. So, as we deposit either my Deferred Comp or her Pension, they will all go into her IRAs. But, again, her age difference also provides more flexibility for us to manage our RMDs.
NOTE: Specific tax questions should be addressed to your own Tax Advisor. You might also refer to the Definitions that were provided at the end of the prior Blog Post: IRA, SCHMIRA… (IRA MANAGEMENT-POST RETIREMENT).