“My husband and I never had a financial planner, we pretty much did everything ourselves.” (Photo subject is a model.) – MarketWatch photo illustration/iStockphoto
I am a widow of about four years. I will turn 70 in 2025. My husband and I had good jobs over the years and have accumulated more than $4 million in assets. The “problem” is that at least $3 million of that is in IRAs.
I realize that when I need to start taking my RMDs, I will be pulling out more than $100,000 a year, which will significantly boost me into a higher tax bracket. The remaining $1 million or so of assets are mostly in a mix of both stock and bond mutual funds, stocks, CDs, and Treasury bills.
My 2023 federal adjusted income was about $87,000 which is mainly Social Security (about $48,000 gross), some pensions, and interest and dividends from investments.
My expenses are also quite low. The house is paid off, I have solar panels and I haven’t paid for electricity for over five years, I have a well water and septic so no water or sewer bills. Just property and auto insurance, oil heat, and other normal living expenses.
My husband and I never had a financial planner, we pretty much did everything ourselves. I do have an accountant for my taxes now since I didn’t want to handle that after my husband passed away.
How can I lower my adjusted gross income so that when I have to take the $100,000-plus RMD I can try to remain in as low a tax bracket as I can and avoid triggering Medicare IRMAA? Should I even try?
My accountant, in broad terms, suggested I continue with my investments for now. When I start to need to take RMDs, he suggested that I convert the stocks and stock mutual funds (in the taxable brokerage accounts) to tax-efficient bonds or municipal bonds that are tax-free.
But I will still have a sizable Social Security income. He also ran some numbers and believes it’s not worth paying the taxes now on a Roth conversion at this point.
Is there anything I should be doing now to offset the huge increase in income in a few years with the RMD? What should I do in a few years?
A Worried Widow
Related: I’m 63 and tried claiming Social Security early, but it was declined because I’m still working. Is that allowed?
First, what a problem to have. You and your husband may not have had a financial planner through the years, but you certainly did your fair share of financial planning to amass such a substantial nest egg.
That said, a bit more planning could have helped you with this RMD issue. If you had invested some of your money in Roth accounts, you’d ease up the taxable income you’re about to fall into. But hindsight is always 20/20, and you’re doing a great job at keeping costs down, with a paid-off mortgage, no electric or water bills and manageable day-to-day expenses. That alone should provide you with peace of mind.
I don’t have all of the numbers in front of me to run like your accountant did, but I will say that some experts don’t think there’s ever a bad time to do some Roth conversions. It depends on who you speak with, I suppose, but Ed Slott, an established certified public accountant and IRA expert, said now’s always the time for a Roth account, whether it’s with direct contributions or through conversions.
You never know what the future holds, and that includes tax brackets. The current tax rates are low compared to the ones before it, thanks to the Tax Cuts and Jobs Act of 2017, but they’re expected to sunset by the end of the year, at which point they’ll revert to the previous, higher brackets.
Prior to the election, it was uncertain what the next administration would do with tax rates. President Trump is back in office — he was the one heading the administration when the TCJA passed — but there’s no word yet what he’ll do about this.
Slott believes that having Roth accounts will get you a better deal in the long run because you’ll pay the taxes immediately, get them out of the way, and then reap the benefits of tax-free distributions. This is, of course, assuming you follow the rules for Roth distributions — you have to be 59 ½ years old, which you meet, but you also have to wait five years from the year of the conversion to take the money out without paying taxes on earnings.
Roth accounts do give you a bit more leverage when you’re ready to start drawing down your account. You can balance withdrawals from Roth and traditional accounts so that you don’t push yourself into a higher tax bracket while fulfilling your income needs. It wouldn’t hurt to ask your accountant to run the numbers again, with various conversion and distribution scenarios, to see if this is a possibility for you.
As for the suggestion to reinvest the money into something tax-efficient or tax-free, that of course is an option as well. Just be sure to vet whatever the investment is at the time and make sure it meets your needs, is in your best interest, helps you attain any financial goals you have and has fairly-priced fees.
If you’re going to pay taxes on the distributions anyway, your options open up. For example, if you have any children or grandchildren going off to college, you can contribute to a 529 plan, which is a state-run tax-advantaged investment account dedicated to education costs.
If you’re charitably inclined, donations are another way to lower your AGI in retirement or satisfy your required minimum distributions. There are a few ways to donate to charities, but one effective way is to take a qualified charitable distribution, which can meet your RMD needs and does good for an eligible group of your choosing. Here is more on tax-friendly charitable giving.
Keep in mind, the Medicare income-related monthly adjustment amount you’re referring to, which affects Medicare Part B and D, is based on the adjusted gross income from two years before, so while you can wait until RMDs kick in to use some of these strategies, try to decide what you want to do sooner rather than later.
RMDs typically begin at age 73, which gives you about a year or so to get a plan in place.
