Are You In The Retirement Sweet Spot?

Are you in the retirement sweet spot (RSP)?  No, it’s not a trick question.  The RSP refers to that time after you retire and before you take any required distributions from your 401k or traditional IRA at age 70 1/2. In addition to IRA’s, there are several other financial planning moves to consider in this time period.  A recent article by Sarah O’Brien, appearing in CNBC online, reviews the RSP and what you might want to learn about these wealth-preserving ideas.

Why the Sweet Spot is so Sweet

For many career workers, their highest earnings years are just prior to leaving career employment. Because of that, they often find themselves in higher tax brackets. Upon leaving work their income commonly decreases, pushing them down to the lower brackets.

Being in a lower bracket makes some financial decisions particularly advantageous:

Convert to a Roth IRA

Is it a good idea to consider converting your traditional IRA or 401K to a Roth IRA?  The sweet spot years may be a perfect time to effect such a conversion. Because you will probably be in a lower IRS bracket, the tax due will be minimized on any gains in your qualified investments.

Keep in mind that a Roth has many benefits that are not part of the rule-structure governing traditional IRA’s an 401k’s, especially when you withdraw money: Roth withdrawals are generally tax-free! There are other benefits as well including that there are no required minimum distributions. This makes Roth IRA’s a perfect vehicle for passing wealth on to loved ones when you die.

Be sure you are aware of the Roth 5-year rule. This rule states that in order to receive tax-free withdrawals, you must have your contributions in a Roth IRA for at least five years. Otherwise, you may be liable for taxes on your gains as well as a ten-percent penalty. Ouch! Be sure that you will not need to withdraw from your Roth conversion for al least five years.

Sell Stock Winners

Again, because you are now probably in a lower IRS bracket upon leaving full-time work, take a look at any stock holdings you may have in your taxable, non-qualified accounts. If you have some big winners, consider selling them. Your profits will now be taxed at your lower tax-bracket rate.

This is especially neat for long-term (greater than 1 year) holdings. You may end up paying zero taxes on your long term gains if you are married filing jointly and have up to $77,200 in income (up to $38,600 if single), courtesy the Tax Cuts and Jobs Act of 2017.

Unload Employee Stock Options

Some employees were fortunate enough to receive employee stock options as part of their total compensation plan. If any of these are in-the-money, take the gains while you are in the sweet spot. Again, you’ll probably be taxed at a lower rate.

Sell Savings Bonds

Over the years, many folks have systematically purchased savings bonds as part of their retirement planning. If you have some, the RSP may be a good time to cash them in. Again, the idea is that you’ll now probably be paying less to the IRS during this time.

We can help you with these strategies and more as you plan for the years ahead in retirement.