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How do I avoid a high tax bracket in retirement?

I have a 401k and Roth IRA. I know that they're taxed differently, so how do I use that to my advantage now that I'm retired?

Apr 09, 2012 by Octavio from Elmore, VT in  |  Flag
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George Cones, JD Level 20
Octavio, Your question does not include some information that would be helpful to this discussion, for example we can't be sure what other assets or income you have, nor do we know your age, so we will attempt to give you an general answer that would include various scenarios. In general, once you reach retirement age (59 1/2), the withdrawals from the 401(k) will be taxed as ordinary income, while the distributions from a Roth will not be taxed as long as you meet all of the qualifications (since you have already paid income tax on this account). If you have other income, such as from a retirement plan that pays monthly benefits, social security, or employment income, you should consider trying to postpone your distributions from both your 401(k) and Roth accounts until you have to take a required minimum distribution (RMD), after you are 70-1/2 years old. If you wait, your assets will continue to grow tax deferred. If you can't wait until 70-1/2, your choice can be driven by several factors: Would the distribution affect your overall federal or state tax bracket? If so, you may want to use your Roth account. What is the treatment of these distributions in your state? Is there a date at which a “senior” tax-credit or other tax reduction kicks in bases on age? If so, which way would give you better tax treatment. If you have taxable assets in another account, the allocation of assets between your taxable account and your 401(K) or Roth can be a way to reduce taxable income, for example you can focus the assets that pay dividends and have large distributions in the 401(k) and Roth portfolio. You can also use tax exempt money markets, and bond fund to further reduce taxasble income. For detailed information of the Roth rules, you can find the IRS factsheet here: http://www.irs.gov/publications/p590/ch01.html#en_US_2011_publink1000230701
Comment   |  Flag   |  Apr 09, 2012 from Wilmington, DE

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