section 1 - The American College Online Learning Center

5. Impactc. Tax rates are low in early retirement in part due to the fact that withdrawals oftaxable accounts are not treated as taxable income—increasing the opportunity todo a Roth conversion.d. A key objective is to minimize the tax rate on tax-deferred accounts.e. A married couple filing jointly can have approximately $80,000 of taxable incomeand still be taxed at the 15% rate.a. Appropriate withdrawal strategies can extend the life of a retirement portfolio.b. The impact can be significant for those with modest accumulations.c. The impact is less profound for those with several million dollars or more.d. Planning requires having at least 2 different types of account (taxable andtax-deferred, for example)6. Planning—look for opportunities to take advantage of withdrawals at a low tax ratea. A year of significant medical expenses (large deductions)b. First few years in a new business with low incomec. Large charitable deductions7. Review tax principalsa. Tax-exempt and tax-deferred both enjoy tax-free growth(1) Example: An individual in the 25% tax bracket has a $750 Roth IRAand $1,000 IRA. Both grow by 100%. The individual receives the sameafter-tax distribution ($1,500) from both accounts.b. Taxable accounts have lower after-tax returns. So these should generally bewithdrawn first.c. Withdrawing taxable accounts first can have the most impact on how long theportfolio will last.d. Countervailing consideration is that the government owns a portion of the principalof tax-deferred accounts based on the individual’s tax rate.(1) Try to minimize the government’s share by taking withdrawals at a lowtax rate.(2) Opportunities for taking withdrawals at a low tax rate:(a) Taxable withdrawals are a return of principal.(b) The period before Social Security benefits begin may have a lowerincome and lower taxes.(c) The period before required minimum distributions begin may havelower income and a lower tax rate.(3) Taxpayers can have significant income and still be taxed at a 15% effectivetax rate.(a) Taxable income for a married couple filing jointly can exceed$80,000 of income that is actually taxed and still have an effectivetax rate of 15%.(b) Considering that in 2012, $19,500 is taxed at a zero rate countingpersonal exemptions and the standard deduction, a couple canactually have more than $120,000 of taxable income and still havea 15% effective tax rate.4.17