Pure’s Director of Education, Kathryn Bowie, CFP®, AFC®, breaks down the essentials of IRA planning and shares strategies to help you grow and protect your retirement savings.
Outline
- 0:00 — Introduction & Overview
- 0:29 — Retirement Account Basics & Contribution Limits
- 2:53 — The Three Tax Environments
- 10:23 — Traditional vs. Roth IRA Differences
- 17:06 — Roth Conversion Strategy
- 19:59 — Savings Strategies by Life Stage
- 33:28 — Tax Reduction Strategies & RMD Planning
- 37:46 — Common Mistakes & Q&A
Transcription:
(NOTE: Transcriptions are an approximation and may not be entirely correct)
Kathryn Bowie, CFP®, AFC®: Retire Smarter: IRA Strategies to Maximize Your Savings. Welcome, everyone. We are so appreciative that you are joining us today. I’m honored to be your host. We’re going to talk about building your retirement plan, identify and examine some of the retirement income sources, explore ways to maximize your retirement savings while minimizing the amount of taxes paid, and then we’re going to adjust your plan with retirement strategies to become more financially flexible.
All right, so basics. Let’s talk about just what is a retirement account? So a retirement account is your basically a tax-advantaged savings vehicle. We have deferred our money into an account, and we are hoping for growth faster than inflation. So it’s designed to hold our investments for our post-working years, our retirement years.
We want to be able to have those accounts ready for us when we are in retirement, such as our 401and IRA. We have limits of how much that we can contribute to these in accounts. So your 401, 403, 457, all of those are $24,500 if you’re under 50, and when you’re over 50, you have a catch-up of $8,000 in addition to that.
Now, those are your types of– that I’m deferring it over. Now, many of these have the Roth option as well, but just so you know, if I want the tax write-off, and even if I don’t want the tax write-off, I have the limit of $24,500, and if I’m over 50, I have an additional catch-up opportunity of $8,000. These numbers change annually, but these are the 2026 numbers.
Then you have your individual and self-employed accounts and plans. So our traditional IRA, individual retirement account, and then your Roth IRA. The limits are the same for both. $7,500 is your maximum until you’re 50, and then you get an additional $1,100 if you’re over 50. Now, you need to know if you qualify to contribute.
You can always contribute to your traditional IRA, but it may not be tax-deductible, which we’ll talk about in a moment, and you may not be able to contribute into your Roth IRA if you are over a threshold of income. Now, your SEP IRA, that is the largest amount that you can put away because you are self-employed.
So I’m a self-employed, I can have employees, but I am self-employed and a small business, and my limit is 25% Up to $72,000. I cannot go over $72,000. And then the Simple IRA is for small businesses, and that’s a $17,000 with a $4,000 catch-up. So each one of our savings, what we have saved for and we’ve put money away, they all live in a certain environment.
Many of you have heard us talk about this many times, but you have three basic account types. You have your taxable accounts, your tax-deferred accounts, and your tax-free accounts. We try to get our money and our funds into all these environments so that we have the flexibility of how to take that money out and when it’s best for us to take that money out because they’re all taxed differently.
So you have your tax-free environment, tax-deferred environment, and taxable environment. So our tax-deferred environment is all that, all those accounts that we have been deferring to. So our 401, our IRA, 403, 457, et cetera. If we’re self-employed, it could be a SEP IRA or a Simple if we have a small business, things like that.
But we’ve never paid tax on those dollars. We’ve put them away for the future because we are potentially, we’ve been told that we potentially will be in a lower tax bracket in retirement. So we’re hoping to save money now and pay our taxes later. Now, our tax-free environment would be the Roth accounts, so our Roth IRA or our Roth 401, et cetera.
Now, those accounts, we pay our taxes up front, and then we benefit for our future with tax-free growth forever. So it depends on your situation whether or not you want to defer and save on the taxes today, or do you want to pay your taxes up front and then take benefit of the tax-free save- the tax-free growth from that moment on.
And then lastly, we have our taxable environment. This is where we call this our non-qualified accounts. It’s anything outside of your retirement accounts. You might have a brokerage account somewhere like Charles Schwab or Vanguard, and so you have a brokerage account with stocks and bonds, your real estate.
So your capital assets are taxed at a preferential tax treatment as long as you keep them for over a year. So one year and one day makes that a long-term capital asset. So I am taxed at a preferential tax treatment if I am in this environment. So as an example, my IRA, when I take money out of there, I am taxed at ordinary income, which we’ll talk about in a moment.
When I pull money out of my Roth, as long as I– and by the way, as long as I’m 59 and a half, and there are reasons, and we’ll go into more detail Your Roth, I can pull out money from my Roth as long as it’s a qualified distribution and pay zero tax. In my taxable account, when I sell something, I’m only taxed on the growth, and I’m taxed at a long-term capital gains rate if I keep it for over a year.
And so we’ll talk about those rates in a moment. All right, just a quick fact. So 60 million households have an IRA, so there’s a lot of IRAs out there, and which equates to over $19 trillion. That’s in your traditional IRAs. Now, in addition to that, add in the 401s. There’s about 70 million households that have 401-type accounts, and that equates to about $10 trillion.
So there’s about 30, almost $30 trillion out there in tax-deferred accounts. So what do you think the IRS is waiting for? They would like you to start pulling that money out and start paying your taxes. Now, you’re able to start pulling the money out without penalty when you turn 59 and a half, most cases, and we’ll go over some of the exceptions in a moment.
But basically, when we’re 59 and a half, we can start pulling money out of our retirement accounts without the penalty. If they’re in a traditional, we still need to pay our taxes. If it’s in a Roth, we can pull it out tax-free. So why IRAs matter, so let’s just talk about this. So $7,500 is your contribution until you’re over 50, then you have that additional $1,100.
That can be towards your, as I said, the traditional IRA or your Roth IRA. If it’s in a Roth, it’s going to grow tax-free from that moment on because you paid your taxes up front. If it’s in the traditional, you’re getting the tax deferral, and you’re going to pay your taxes later. You’re kicking the can down the road.
Depends on your situation which is better for you. Now, at age 73, if you were born up until 1959, your required minimum distribution age is 73. If you’re 1960 birth year and later, your required minimum distribution age is 75. Now, once those begin, you need to start taking money out of your retirement accounts annually, unless you’re still working.
If you’re still working and you have a 401, you can put that off until you quit that particular job. But even if you’re working, you still have to take your required minimum distributions out of your IRA accounts, just so you know. Now, a 457, for those of you that have a 457, you actually, there’s no penalty if you want to take your money out prior to 59 and a half because a lot of times in military you might have retired, as an example, early before you’re 59 And a half, and so there’s no penalty if you wanna start taking money out of those accounts.
So your traditional, your eligible contributions may reduce your taxable income in the year of your contribution, as well as up to filing date of the following year. Your tax deferred, tax free growth in your Roths, the whatever’s inside your accounts, you don’t get charged any taxes on that until you sell, until you pull, sorry, until you pull the money out.
So there’s no phantom income. Y- you don’t get charged any income tax until you actually withdraw the money or take a distribution. And then your tax-free qualified withdrawals from your Roth IRA, so everything comes out tax-free as long as it’s a qualified distribution because all of your growth has been growing tax-free, but there are some reasons why you’d wanna be sure that you’re not getting charged a penalty if you’re younger than 59 and a half.
But as a reminder, when you contribute into your Roth account, if I contribute into my Roth IRA, I don’t get the tax benefit, correct? So that money, we call that principal or basis, so that money basically I’ve put into my Roth, all the growth is tax-free, but let’s say I’m younger than 59 and a half. I actually can pull the principal out, what I contributed into the piggy bank, I can pull that money out anytime I want because it doesn’t matter that I’m younger than 59 and a half because I’ve already paid the tax on that.
But I may not touch the growth until I’m 59 and a half or five years, depending on when you put it in there, without some sort of a penalty. So we just wanna make sure that you’re taking qualified distributions from any of these types of accounts. All right,
so the differences. Traditional IRA, tax deferred contributions.
Does that work for you? Do you need the tax write-off? Contribution and future growth is taxed at ordinary income, so when we have our, we do our tax brackets, there’s seven tax brackets. You find out where you are in your tax bracket, line 15 of your tax return, that tells you where you are. You find your tax bracket.
That’s what you’re going to be taxed when you do a withdrawal, that based on your ordinary income tax rates upon distribution. Then when you turn either 73 or 75, you’re gonna start being required to take money out of your IRA or 401- 401. Typically they’re turned into an IRA. But you are required to take money out of your IRA annually based on your life table.
So if I’m 75 They’re going to take the full amount of my IRA based on December 31st of last year, and if I’m 75, they’re gonna take that number and divide by 24.6. We all have the same life table, so you can look that up. It’s a uniform life table. Now, for the Roth IRA, and we’ll get the slides back up in a moment, but for your Roth IRA, this is after-tax contributions, so the money’s in there and all the growth is growing tax-free.
So it’s growing tax-free and it upon withdrawal, you’re gonna pay zero tax as long as it’s a qualified distribution, so just make sure of that. And then there’s no required minimum distributions for your Roth accounts, not for your Roth IRA, nor for your Roth 401or Roth 457, et cetera. So there’s no reason that the IRS says, “Well, we’re not getting anything, so we’re not gonna force you to take money out.”
So you’re only touching your Roth account when it’s right for you, when it makes sense for you to do that. You have your options, and if you have money in funds in all three of the environments that we discussed, then you have the flexibility to say, “Okay, I wanna take money out of this environment and pay tax on it.
I wanna take money out of this environment, pay no tax.” So those are the differences between the traditional and the Roth IRA. All right. Your traditional, we went over this, but this is just a reiteration of $7,500 is your limit. Remember, you must have a job. You must have taxable income. You must make at least $7,500 to contribute $7,500.
If you don’t make… Let’s say you know somebody, one of your kids is a part-time worker and they only make $5,000, they may contribute up to $5,000 into their IRA that year. They can’t go over what they’ve actually earned. Though you don’t have to contribute the maximum, you can contribute whatever works for you.
If you’re over 50, you have that additional $1,100, and if you want to pull that money out before you’re 59 and a half, that’s where that 10% withdrawal penalty, you’re gonna pay your tax as what, as well as a 10% withdrawal penalty. But there are exclusions. If you have unreimbursed medical expenses, you can take money out and not be paid the 10%…
not pay the 10%. If it’s certain student loans, disability first-time home buyer up to $10,000 and actually, I believe that we have a slide that’ll talk about all this. But there’s some exclusions where you will not pay the 10%. And then you’ll see here in this deductibility phase-out. So when we talk about that you’re allowed to contribute into your IRA or your Roth IRA, here you see the, in, for the traditional IRA, you have deductibility phase-outs for the whether or not I get the tax deduct- deduction.
So if I am married filing jointly and we both have a plan, I can’t make more than $149,000 if I still want the tax deduction. I can still contribute the money, but I won’t get the tax deduction. If I, if only one of us has a plan, they l- allow you to make more money, $252,000, but if I make more than that, I’m unable to get the tax deduction.
That’s where we talk about the backdoor Roth conversion. By the way, if you’re a member of the Pure family, if you’re on this webinar and you’re part of our t- our family, one, hello. Two, talk to your advisor and when, if you have very detailed questions, they know all of this. Your advisor is very up to date on all of this and then you can ask them about, “Okay, well, I heard Catherine talking about this or that, so what does that mean to me?”
If you’re not a part of the Pure family, take advantage of our free consultation. We have a free assessment. See what we can do for you, if we have any suggestions, if we can add value to your situation, or just get your questions answered. All right, so the Roth is funded with after-tax dollars. You’ll see this five-year holding period, as well as the contributions can be withdrawn at any time penalty-free.
As I said, if I’m contributing, like putting money in the piggy bank, I can pull that money out any time I want to, no matter what age I am, without penalty. I may not touch the growth until I’m at least 59 and a half or the money has been in there for five years. That’s that five-year holding rule. Let’s say I contribute today.
We’re in May. The clock starts on January 1st of whatever year you’re in. So I could do it on December 20th, December 30th, the clock starts on January 1st. Now, when I contribute, the first time I contribute to my Roth, the five-year clock starts and that’s it. After five years, that particular clock for any of my contributions is done.
Now, when we talk about a conversion, if I’m moving money from my traditional IRA into my Roth IRA, every time I convert, the clock starts. Now, it starts on January 1st, so I could convert three times in a year and that all of those are considered the same year and it, I just have to wait five years before I can touch the principal.
So just be aware that there are certain details that you want to talk to your advisor about. I wouldn’t worry too much about the five-year rule, but know that it’s there and that when you hear about it, really truly if you’re not gonna liquidate your Roth, you probably don’t have anything to worry about.
But that’s something to talk to your advisor about. And these are the phase-out limits. So if you see, single is $168,000 and married filing jointly is $252 If I make more than that, I may not even contribute to my Roth. Therefore, I might still want to contribute to my IRA and then ask my advisor about a backdoor Roth conversion.
All right, so here we go with the Roth conversion strategy. You have a traditional IRA or 401. You decide that it works for you, and we have all different ways of looking at and deciding whether or not it’s good for you or, if that’s something that you want to do. It’s not right for everybody and at every stage of your life.
But if we decide together that this might make sense for you, then you could decide to convert from your 401or your IRA into a Roth IRA. You’re going to pay your taxes on whatever you convert, so we want to make sure that we do this strategically. And then now it’s in your Roth IRA, and all the growth from that moment on is tax-free.
So when a Roth conversion might make sense to you. Here are some little bullet points. If you expect to be in a higher tax bracket in retirement. You’re in a lower income year. Like, I’ve retired, but I’m not quite, taking Social Security or I’m not at an RMD age, so maybe this might be the time.
You want to reduce your future required minimum distributions. So this is something that we look at very detailed. We try to see what potentially your accounts are gonna look like when you get to be 73 or 75, and then what is that tax ramification going to be for you? So we want to mitigate taxes as much as possible.
You’re never gonna not pay taxes. However, if we can make sure and find ways to actually lower your taxes and make it more of an even keel rather than, we call it the tax time bomb, when you turn the required minimum distribution age and all of a sudden that’s when you’re finally not spending a lot of money and now you have to take that money out.
So we want to go over that. And you have no income limits for your Roth conversions. You can be working, not working, doesn’t matter how much money you’re making. It just depends on how much your heart can take of taxes. All right. These are just, the annual contribution limits. We’ve gone over them, but your traditional IRA, $7,500, an additional 1,100 if you’re over 50.
Same goes for your Roth. Now, just as a reminder, you… If one spouse is not working, you have the opportunity to continue or start saving into an, a spousal IRA based on the working spouse’s income. So that’s very important that even if you you might be a stay-at-home parent, you still have the opportunity to save into an IRA for yourself And these are the phase outs.
As I said for the Roth, I, we went over them, but basically the phase outs when I’m able to put money into my Roth or when I’m unable to, but I’m still allowed to contribute into my traditional IRA. I just might not receive the tax deduction, and so I want to talk to my advisor about that.
I don’t know anybody who’s ever said, “Gosh I just started saving too early.”
None of us believe that we have enough. No matter what your amount is, what your number is in your retirement accounts, I don’t know anyone that says, “Oh, I have too much,” because we’re humans. We- that’s just not the way humans think. We always just want a little bit more. So if you are in your early career or you know somebody that’s in their early career, that might be a great time for them to just open up a Roth IRA.
This is where they can put the money away, they pay the taxes up front, and then they have years of tax-free growth. My daughter, who’s 31 years old, has been doing this, and she’s just getting ready to purchase her very first town home, and she’s utilizing the opportunity to take the principal out of her Roth and use that money.
Now, she can’t touch the growth, but she’s able to use the principal, the basis of what she contributed. So they have years to make up. Remember, it’s your time horizon, so how much time do you have? And then even $100 a month. If you put away, if you put away $100 a month, I actually wrote this down. So if you put away $100 a month for 15 years when you’re young, that’ll be about 32 to $33,000.
You can stop right then and there, and then all that compounded growth until you’re 65 would make that all the way up to about $227,000. But if you started saving $100 a month at the age of 36 and went all the way to 65, 29 years, you’d have half as much as the person that started early. And the person that started early ended, stopped.
So it’s very important to talk to our young people about compound interest. Okay, now you’re in your peak years, when you are working in your 40s, and that’s when you need to decide, is it right for me to start doing conversions or not? You might find that you’re in a high tax bracket. Maybe it’s not right for you.
We’ve all heard that we’ve been deferring because we might be in a lower tax bracket in retirement. It’s a misnomer, but we might. So there are some certain things that might happen. If you pay off your house in before retirement or in, so when you’re in retirement you no longer have a house payment, that’s a huge expense.
Let’s say you had children, and now they’re adults, and so your children are off the payroll. I don’t know if children are ever off the payroll, but but still you can- there are ways of lowering your expenses. But as a reminder, we talk about this in different webinars, but as a reminder, what you spend today is typically what you’re going to spend later, unless you’ve decided on what you’re going to give up, because we’ve all grown accustomed to a certain lifestyle.
So just be min- mindful of how much are you spending now, and you’re most likely gonna be spending that as- when you’re in retirement, and then you start to spend less as you get comfortable in retirement. So in your peak years, that would be an amazing thing if in your peak years you were maxing out your contribution limit, that you were truly putting away the most amount as possible because you’re funding yourself for your future.
Not everybody does that, but we would really recommend you do. Okay, so now you’re f- in your 50s and maybe 62. I’m 62, so this is right at this age where we’re going, “Oh, wow. I wish I would’ve saved more.” So you can use the catch-up opportunity if you feel like you haven’t saved enough. This might be when is- it’s a good time to start doing Roth conversions.
It depends on you. It’s different for everybody. That’s w- you wanna just do some calculations. What is my tax bracket? How far do I have to get to the top of the next tax bracket? And then we discuss. You wanna think about your future required minimum distributions. As I said, we wanna map that out. You wanna look at, what are my required minim- minimum distributions potentially going to be?
And you might be surprised because of compounded interest, and by the time you get to 75, what are your accounts potentially could be, and then what does that look like for you? And then you always wanna review your beneficiaries. We will drive this home because if birth, death, marriage, divorce, change of wealth, you wanna be sure that your beneficiaries are up to date.
You’ve heard too many horror stories of when they haven’t been up to date, so it’s very important to make sure that you’ve talked about your beneficiaries and you have supplemental beneficiaries. Okay, now we’re in retirement. We’re 63 above. We might not have retire- I’m probably not gonna retire till I’m 70, but who knows?
So everybody has a different idea of what age they want to be, but now you’re in retirement. Your RMDs, if you were born before 1959 and before, it’s 73, after, it’s 75, but you wanna start coordinating that and figure out, okay, what are my RMDs going to be? The Roth IRA, as a reminder, your Roths, you do not need to take money out.
There are no required minimum distributions. Basically, if you think about those environments, your Roth environment, you never have to touch while you’re alive nor while your spouse is alive most likely. Your taxable environment, your real estate, your brokerage accounts, et cetera- You never have to touch that unless you want to.
When you die, you never have to- your heirs don’t ever have to touch that unless they want to. You could have your home in your, for generations. So nobody ha- there’s no 10-year rule there. Your Roth, they have to deplete within 10 years, however, it’s growing tax-free. It’s in your traditional IRA that you have the least amount of control and are paying the highest level of taxes, ordinary income, 10 to 37%.
Your capital assets, 0, 15, or 20%. Your Roth, 0%. So we want to look at these and try to figure out what makes the most sense for you. Now, good point here on this bullet, QCDs, qualified charitable distributions. Let’s say on down the road you decide, “I do not need this money.” Wouldn’t that be nice? But you still, maybe you’re n- you don’t need the amounts you’re required to take out go higher and higher every single year potentially.
You realize that you don’t need that full distribution. If it makes sense for you, you could do all or some of your distribution and have it go directly to a qualified charity, and it’s no taxes for them and no taxes for you. So you don’t have to pay the tax on your donation, now you don’t get the, a double dip, but you don’t pay taxes on that money, so it might make sense for you to do a qualified charitable distribution.
And then you can continue doing Roth conversions if you want to, if it makes sense when you’re in the low income years to shrink your future RMDs. Do we have any questions? I haven’t been keeping up on the questions.
Paulene De Mesa: Michael asked, when taking out RMDs at 73, can that money after being taxed be reinvested?
Kathryn Bowie, CFP®, AFC®: It may be reinvested, but in the taxable environment. You cannot just put it in your Roth because you’re taking it out as a distribution. But you may go into your taxable and maybe go to a brokerage account or maybe real estate or something and buy something in the taxable environment and then your growth is at the preferential tax treatment of long-term capital gains, as long as you keep it for over a year.
Paulene De Mesa: Good to know. Someone asked, so their wife is a stay-at-home parent- … but has a side business, a side hustle. Can the spouse contribute to that spousal IRA you mentioned?
Kathryn Bowie, CFP®, AFC®: Most likely. Okay, so a side hustle, I will first tell you it’s a jo- so we never want to have hobbies. We talk about that because a hobby, you will be taxed on your income, but you don’t get the benefit of any write-offs on your expenses.
So you always want it to be a small business. But depending on how she’s being paid- You still have the opportunity to have a spousal IRA because you may not have a, if you don’t have $7,500 in income in your side hustle, you still have that opportunity most likely. Depending on the situation, I’d have to see what kind of income you have and what you’re categorizing it, but for the most part I would say most likely yes.
Paulene De Mesa: That’s why it’s important for a financial advisor to look at your- Yes … situation because- Definitely … it has to be curated in that way. I am retired and receive a pension. Can I contribute some of that pension monies into my IRA or Roth IRA?
Kathryn Bowie, CFP®, AFC®: A pension is… Your pension is in your tax-deferred environment.
So when you’re receiving your pension, you might not have been the person to contribute anything, let’s say you were in the military, or you could have been a partial contribution. But either way, when you’re receiving a pension, that is coming out at ordinary income tax and it’s coming out from that environment.
It’s not considered earned income, so you can’t necessarily use it to contribute into your Roth unless you have another source of income. Now, you could get your pension and then continue to do maybe a conversion, but not with the same monies. So it’s a typically you can’t use the same money.
Now, you could take your pension, let’s say you didn’t need it all, and then go over to that taxable environment and purchase something that is a capital asset so that you can benefit from the growth of that and pay the preferential tax treatment when you sell that. And remember, you never have to touch your capital assets if you don’t want to.
Paulene De Mesa: Okay. Cool. Next question. Just realized that I had a auto-transfer into my Roth IRA, but have not been working, so had to stop- … that monthly transaction. Now, if I start taking money out before 73, is there an RMD?
Kathryn Bowie, CFP®, AFC®: Very good. Okay, so let me try to unpack that. First of all, you may take distributions any time after 59 and a half without the 10% penalty.
You will need to pay your taxes, but you can start pulling money out if you need it. Once you turn 73 or 75, that’s when you’re required to take X number of dollars out, and that’s when the life table is going… They’re gonna take what you own, divide that by a number, and tell you what you have to take out.
So you’re allowed to take money out prior to that, but if you have been automatically contributing without being without working, we’d want to look into that because you might have some penalties. I’d have to look, we’d have to look at it, but again, this comes into play- If you are already a client of Pure Financial, you have an advisor.
If you’re not yet a client, this is when I would really recommend coming in or you can see us via Zoom, like you are right now, and talk to a qualified financial professional to see what does this mean and do I have any penalties? So we could go over that personally with you.
Paulene De Mesa: Wonderful. A question just came in, is there an annual limit to traditional IRA to a Roth IRA conversion?
Kathryn Bowie, CFP®, AFC®: No. Very good question. There is absolutely zero limit. You can put as much money, whatever you have in your IRA. You could move a million dollars. Do you want to? Probably not, because that it’s going to be a tax. Yeah you’re starting your ta- You have to pay taxes on whatever you convert. So that’s gonna bump you up to the very highest tax bracket, so there’s strategy.
That’s when we talk about our tax brackets. Where are you? If I was a married, filing jointly couple, and we make $250,000 is our line 15 taxable income. So we’re in the 24% tax bracket. So if I’m at 250 and the top of the t- 24% tax bracket’s approximately, let’s just say, $400,000. I have about $150,000 in that scenario to work with without jumping myself into the 32% tax bracket.
So I have $150,000 that I could work with. Do I want to put the whole $150,000 and do a $150,000 conversion? Maybe. Do I only want to do 50? Maybe. It completely depends on how much of the tax can I handle. I always say, it’s like what your heart can take. So how much money do you, comfortably want to spend in taxes and that will probably help us figure out how much you want to actually convert in any given year.
Paulene De Mesa: Final question, are RMDs considered ordinary income?
Kathryn Bowie, CFP®, AFC®: Yes, it’s taxed at orient- ordinary income, 10% to 37%, but you can’t use your RMD as, okay, now I’ve got $20,000, I’m gonna take s- 80, 100 of that and contribute into my Roth. You cannot do that. Unless you … You must have income, earned income in order to do contributions.
All right, so let’s talk about strategies to reduce taxes. Roth conversions. You’re converting now, paying your tax upfront so that later you don’t have to pay tax and you never have to touch that money unless you want to. Tax diversification. So when we have money in all three- of those environments, we can choose what makes sense.
Okay, I’m in retirement and I need to have money to pay all my bills. It might make sense for me first to pull money out of my IRA and I may or may not be at my required minimum distribution age or not. But either way, I am either going to take my RMD or I might decide that I need to take money out from there first ’cause I’m trying to lower the balance.
And then the second place I might look at is if I have a brokerage account and I look at my brokerage account and I say, “Okay, I can sell something and I have a gain.” Typically our investments go like this, right? We’re always trying to, some are going up, some are going down, but that’s the beauty of diversification.
So we want to look at our situation and say, “Okay, I can sell this at a gain but I want to sell that at a loss.” Then I’m going to offset my gains, pay less if not zero of long-term capital gains depending on where I am in the tax brackets. But then I’m going to put the money from the loss right back into the market, not in the exact same what I sold because that’s the, against the wash rule, but I want to go into maybe a similar yet different sector so that I can take advantage of when that finally does start to rise again.
Because there’s, it goes up, it goes down, but we can never fully time the market. Okay, and then I talked about the QCDs, the qualified charitable distributions. As I said, it counts as your RMD so I’m in my RMD age. I really feel like I don’t need the full amount that they’re telling me that I need to take out.
I’m tired of paying these high taxes. I am charitably inclined. I’m going to put all or some of that and I’m going to give it to a charity. They pay no taxes. I may pay no taxes on that portion and it goes towards my amount of my quali- my RMD. And then the RMD planning. As I said, when we do a comprehensive financial plan for all of our clients, every single client has a comprehensive financial plan.
We have done many scenarios. What is life going to look like? When are you buying that RV that you talked about? When are you buying that second home? When are you selling your home? When are you moving out of California? Whatever the cases might be. When are you taking Social Security? When is your RMD age?
Now we’re going to look at all of those scenarios and see how much you’re going to have to start potentially taking out and what tax bracket therefore you’re going to be in and we’re going to look at, how can we mitigate those taxes to help you not have that tax time bomb. So is an IRA right for you?
There’s all different o- am I doing the traditional or the Roth? Things that we had talked about, but will your tax rate be higher now or in retirement? So you might need to reduce your taxable income. You might wanna defer taxes. Your employer plan doesn’t even offer a Roth. Most, about 90% of employee, employers now offer Roth option, but there’s still some outliers out there that don’t.
Now, if you want to do a Roth, it’s because you believe that you’re in a lower tax bracket now, higher later. You’re young, you have a long time, your time horizon is long, and so you have time to weather through the ups and downs, and you’re trying to eliminate those future RMDs. In addition to that, remember, we’re talking about flexibility.
If you have money in all three locations, that gives you the flexibility to be able to choose, where am I going to take the money that I need for retirement? All right, these are those tax brackets, the income rates that I was just talking about. So this is, we talk about the seven brackets.
You find where your line 15. You look at your tax return, look at line 15, that’s gonna tell you where you are, and I talked about that, fictitious couple of in joint, the center column. They make $250,000 on line 15. They’re right there in the 24% tax bracket because they’re between 211 and 403.
All right, here are some common mistakes. Contributing more than the annual limit. You just wanna be sure that you’re paying attention because, as I said, no- the IRS is not going to remind you how much you have to take out with your RMD, but they’re also not gonna tell you that you’re putting away too much.
They just, there’s gonna be potential penalties involved, so you wanna make sure you’re not contributing more than the annual limit. Number two, missing your contribution deadline. So when we are contributing to our IRA, we have until April 15th, or tax day, of the following year to actually make that contribution into our IRA, either Roth or traditional.
So if it’s February and I write my check for $7,500, I need to tell the IRS, basically, I’m contributing to, let’s say it was this year, I’m contributing to 2026, or I’m contributing to 2025 ’cause I never, I don’t I was under or whatever the case might be. But once the April 15th deadline goes away now everything I contribute is just in 2026.
Now, as one more reminder, your conversions happen when they happen. So if I’m converting on Febru- February 2nd from my traditional IRA to my Roth IRA, that’s happening in the year that it’s happening. I don’t have until April 15th for that. All right, so botching a rollover. Basically, real quickly, a 60-day rollover the only way you botch this is if you decide to take the money into your own hands.
So I say, “I’m going to rollover my money, and I’m gonna move it from my 401into my IRA,” because maybe I’ve left that 401or whatever. I’m rolling it over, but they give me the check. Now, money that comes out of your company retirement account, they are required to take 20% out of that distribution for potential taxes.
So when they give it to you, let’s say I was going to rollover $100,000, they’re going to give me a check for $80,000. Now, I have 60 days to get that into my IRA, but I need the entire $100,000 in order to make it a full rollover. So that’s why we really recommend trustee-to-trustee. Don’t touch the money.
There’s no reason, really, if you’re just doing a rollover, to touch it. So again, talk to your advisor or talk to us if you don’t have an advisor. Number four, not naming or updating your beneficiaries. Please have updated beneficiaries. I’ve heard too many horror stories, so we just wanna make sure birth, death, marriage, divorce are the biggies.
Ignoring the pro rata rule. We talked about this backdoor Roth conversion. Talk to your advisor. And then missing your RMDs. As I said, the IRS does not send you a notice saying, “Okay, this year is how much you need to take out of your account.” It’s your responsibility, and if you have a financial advisor, they’re working with you and they’re gonna help you.
But if you don’t take that money out, then you’re going to pay a penalty if you let it go more than six months. And k- the way of thinking about it is when we make mistakes, the IRS makes us pay. Now, when the IRS makes mistakes, the IRS typically makes us pay . So we wanna be very careful that mistakes may, can be costly.
You wanna talk to your advisor. You wanna get your questions answered to be sure that you’re not making any of these very easy mistakes that could be costly. All right. These are just as a reminder, 73 if you’re born up to 1959 is your RMD age, 75. There’s that 25% penalty. Remember I said if I took $20,000 out but I was o- I was supposed to take 20, but I only took 10?
I don’t know if I said this already, but if let’s say I was supposed to take $20,000 out and I only took 10 for whatever reason, if I wait that six months and I don’t take it out, the IRS will eventually send me a notice saying, “Hey-” Take out your additional 10,000 that you’re supposed to because we want our taxes, and in addition to that, we will penalize you 25% on the 10,000 of your very own money that you did not take out.
So it can be very costly. That’s almost ha- If I was in the 24% tax bracket, that would be almost half of my $10,000. So you need to be very clear about… Yeah, and then by the way, that came down from 50% after the SECURE Act 2.0. We used to be penalized 50% if we did not take out the right amount. Okay just some more essentials.
So RMDs apply to all of these accounts. Your, if you’re self-employed, your IRAs, your SEP, your SIMPLE 401. Now, except if your 40- if you h- are still working. So if I have a 401and I’m still working and I am 76 years old, and I s- love my job so I’m still working, that particular 401I do not have to take my RMD from until I retire from that job.
However, that does not pertain to my IRAs. If I have an IRA, I still must take my required minimum distribution out of the IRA bucket. I just don’t have to take it out of my 401bucket if I’m working. Roth IRAs are not subject to RMDs for you, your surviving spouse, or those other designated eligible beneficiaries.
But if it’s your non-designated beneficiaries, they have 10 years to liquidate everything in your IRA as well as your Roth IRA. Roth 401s are exempt from RMDs as well. And as I said, the traditional IRA, even though, your SEP, SIMPLE, even if you’re still working, you must take your RMD from those account types.
This is just at a glance. This gives you an idea. If you’re self-employed you’re looking at that $72,000 that you can put away, yes, you are self-employed. These are really common or popular with a individual self-employed person because they’re trying to get as much possible put away for their retirement because they don’t have a company that’s doing any matching for them.
But you can see here that your traditional, your Roth are both the same. Then your 401, your SEP… I’m sorry, your 403, 457, those are the 24,500, and then they go up to 32,500. There’s also an added bonus that right now if you’re between the ages of 60 and 63, you can actually go up to 38,000-something for your 401.
That’s an added catch-up. But then your SIMPLE IRA, if you have are the owner of a small business with less than 100 people, that’s where your maximum of $17,000 or $21,000 if you’re over 50.
Paulene De Mesa: When we die, what are the tax implications of our IRA to our heirs?
Kathryn Bowie, CFP®, AFC®: Very good question. So they have, when you die- And you’re married, your spouse, it’s just as if it’s their own IRA.
If you are single or if both spouses pass away and now you have an inherited IRA that goes to your beneficiaries, they have 10 years to take every, basically take all distributions from your IRA. Unless they’re minors, then they wait till they’re 21, then they have 10 years. But you have to take all the money, your heirs have to take all the money out of your traditional IRA as well as your Roth IRA within 10 years.
So the traditional IRA needs to be done strategically because it’s based on your heirs’ taxable income.
Paulene De Mesa: The next question is, when are taxes due when you convert monies from an IRA to a Roth?
Kathryn Bowie, CFP®, AFC®: Your taxes are due on April 15th. If you’re moving money from an IRA to a Roth IRA, you can tell them to take money out.
Now, if it’s a 401to a Roth, they’re going to automatically take 20% out. But you can choose to have that money taken out, but your taxes are due on April 15th of the following year. So it just depends on the situation, and it depends on how much you want to be, what your tax bracket is, but typically April 15th.
Paulene De Mesa: Does it make sense to do a direct rollover from a 401to an IRA, and over time move that to an IRA to a Roth?
Kathryn Bowie, CFP®, AFC®: So if you le- leave your job, as an example, because when we have a 401, we are given the options of what we get to invest in, typically the mu- mutual funds, and this is what we get to invest in, period.
If we roll it over into an IRA, we have the world is our oyster, and then we have an IRA that we’ll, we have strategically start planning on moving into a Roth. So that is a very good typically way of having the most control over your money and your investments that you can have. Those are great questions, and all of those ques- questions are fantastic, and I know we didn’t get to all of your questions.
However, that’s why we offer this free financial assessment. I really hope that you’ll take advantage of it. I hope that you’ll come in and see us or talk to us via Zoom and just get those very detailed questions answered. So thank you all for joining us. We really appreciate you being here with us, and for those of you that are members of our Pure family, we appreciate you being here, and I hope to see you all soon.
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- Neither Pure Financial Advisors nor the presenter is affiliated or endorsed by the Internal Revenue Service (IRS) or affiliated with the United States government or any other governmental agency.
- This material is for information purposes only and is not intended as tax, legal, or investment recommendations.
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- Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC an SEC Registered Investment Advisor.
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- Neither Pure Financial Advisors nor the presenter is affiliated or endorsed by the Internal Revenue Service (IRS) or affiliated with the United States government or any other governmental agency. This material is for information purposes only and is not intended as tax, legal, or investment recommendations.
AFC® – Individuals who hold the Accredited Financial Counselor® designation can educate clients on financial principals, assist clients with paying off debt and help identify and improve money management habits. All designees must complete coursework from a regionally accredited college or university in the United States in Personal Finance, Financial Planning, Financial Counseling, Consumer Sciences, or equivalent. The designee must also pass the AFC exam and meet the Association for Financial Counseling and Planning Education (AFCPE) experience guidelines, which are to complete at least 1,000 hours of financial counseling and submit three reference letters. Designees renew their designation every three years by completing 30 hours of continuing education.
CFP® – The CERTIFIED FINANCIAL PLANNER® certification is by the CFP Board of Standards, Inc. To attain the right to use the CFP® mark, an individual must satisfactorily fulfill education, experience and ethics requirements as well as pass a comprehensive exam. 30 hours of continuing education is required every 2 years to maintain the certification.
