Financial decisions may impact your income and taxes at certain retirement milestones. A key milestone is the window between your retirement date and the year you begin taking required minimum distributions (RMDs).
Strategic planning for this window may extend your retirement dollars, so continued support from your financial advisor is essential. Here are several key areas to discuss with them.
Social Security is income you cannot outlive. Unlike some other income streams, it has the backing of the federal government and is adjusted annually to reflect inflation.
Your Ameriprise advisor will help you evaluate the Social Security benefit options that support your financial goals and factor in your personal situation. For example, they may consider the impact of taxes on Social Security income, capital gains and IRA withdrawals, health issues and life expectancy in your family history.
Although you can begin receiving Social Security as early as age 62, your monthly benefits may be reduced up to 30% for life. Conversely, each month you delay collection increases your eligible benefits, up to a point. Your advisor will help you consider the tradeoffs.
Roth IRA conversions
During your retirement window, your advisor can evaluate whether it makes sense for you to periodically convert money to a Roth IRA from a 401(k) account and/or a traditional IRA. Doing so may provide flexibility to manage taxes (you would be able to draw cash from a tax-free asset) and pay for potentially higher health care costs later in retirement.
You would pay income tax on conversions of pre-tax contributions and earnings. But once the money is in the Roth IRA, you won’t owe on it again and the growth is tax-free (if conditions are met).
Your modified adjusted gross income — known as MAGI, which for these purposes is generally your adjusted gross income plus tax-exempt interest — determines your premiums for Medicare. This includes Part B premiums for medical insurance and Part D premiums for prescription drug coverage.
Your Medicare cost for 2021 is likely based on the tax return you filed last year, for 2019 earnings. As an example, here are two current thresholds for Medicare Part B:
- Standard premium. If your MAGI in 2019 was less than or equal to $88,000 (individual filers) or $176,000 (married filing jointly), you would pay the standard part B rate for 2020: $148.50 per month.
- High-income surcharges. Medicare premiums are higher for higher levels of income (to a maximum of $504.90 per month if your MAGI is higher than $500,000 (individual filer) or $750,000 (married filing jointly)).
If you have a life-changing event such as a marriage, divorce, death of a spouse or loss of income, you may be able to request a lower premium amount.
Health insurance before age 65
If you retire before age 65, you could consider medical coverage through the federal Health Insurance Marketplace. In doing so, it’s important to consider your planned level of adjusted gross income as that factors into what you pay for coverage. In some cases, a modest increase in taxable income can result in a significant increase in your insurance premium.
Capital asset sales
Selling stocks and real estate investments you’ve owned for more than 12 months will generally generate a long-term capital gain or loss. Compared to short-term gains, long-term gains have a more favorable tax rate of 0%, 15% or 20% based on your marital status and taxable income.
During your retirement window, you may want to consider an asset sale that creates a net long-term gain, which along with your other income, results in no or little tax. Your financial advisor and tax professional can make recommendations based on your financial picture and tax situation.
Strategic planning for your retirement window
Your financial advisor knows you best and can recommend actions that may extend your retirement income. Consider discussing the options with your advisor and your tax professional.