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At the age of 60, I recently retired from being an entrepreneur. I have purchased health insurance through the marketplace since its inception. I currently derive my income solely from withdrawing money from my taxable portfolio, consisting of reported dividends and capital gains totaling less than $60,000 per year. An advantage of this approach is that the government reimburses approximately half of my healthcare costs.
In terms of assets, I own $625,000 in my taxable portfolio, $115,000 in a Roth IRA, and $1,500,000 in a traditional IRA. I am a homeowner and I have no additional dependents. The plan for the future involves drawing exclusively from the taxable portfolio until I am 65 to maintain the current strategy. I’m not sure if this is a wise approach or if I should consider tapping into other assets without worrying too much about health insurance payouts.
– Kevin
In this case, it makes sense to stick with the plan and include regular taxable assets. If you were to draw from a traditional IRA to have the same amount of available funds, that would result in higher taxable income and a larger tax bill.
When you add health insurance subsidies to the mix, you get another benefit by not increasing your taxable income, which would happen by simply switching to another source for your withdrawals. And the longer you leave money in a retirement account, the more likely it is to grow without a tax burden. (And if you have additional tax or retirement questions, consider contacting a financial advisor.)
The Premium Tax Credit (PTC) helps millions of Americans bear the burden of paying for their own health insurance. You can choose to pay lower premiums each month (the so-called advance premium tax credit) or you will receive a credit for the full amount when you file your tax return. Unfortunately, improvements were made to the PTC as part of the American Rescue Plan and expanded through inflation. The Reduction Act expires after 2025. But until then, qualifying for the PTC will give you a bigger discount on health insurance premiums. Only people who purchase coverage through the health insurance marketplace are eligible for these credits. PTC amounts previously depended on income and household size, and were only available to families earning between 100% and 400% of the federal poverty level. However, these limits won’t go back into effect until after 2025, assuming Congress doesn’t. extend the PTC improvements again. Until then, PTC eligibility for households earning more than 400% of the federal poverty level depends on what percentage of their income would be used to purchase the benchmark plan (the second-cheapest Silver plan). So if your household spends more than 8.5% of your income on premiums, you may qualify for the PTC. (And if you need extra help finding tax benefits, consider working with a financial advisor.)
How you handle withdrawals from your retirement account affects your overall taxable income, and that can impact other parts of your finances, including:
Furthermore, the more you pay in taxes, the less money you have for yourself. The way you withdraw your pension affects the amount of tax you ultimately have to pay. There are three tax buckets you can draw from: taxable accounts, traditional accounts, and Roth accounts. Here’s a quick look at the tax implications of each once you pass age 59 ½:
Taxable accounts: You pay income tax every year on interest and dividend income, whether you withdraw it or not, and tax on capital gains – which can have lower tax rates – when you sell assets at a profit.
Traditional accounts:Withdrawals from tax-deferred or “traditional” accounts like IRAs and 401(k)s all go toward taxable income, and you pay income taxes on 100% of your withdrawals.
Roth Accounts:You don’t pay tax on anything you withdraw, so there is no effect on taxable income (as long as the account has been open for at least five years)
While everyone’s situation is different, there are some strategies that can help you get the most out of your money and minimize your annual tax burden. Speak with an experienced financial advisor to help you create a tax-advantaged withdrawal plan that suits your unique situation.
Generally, there are two main schools of thought when it comes to retirement withdrawals: managing taxable income with proportional withdrawals and keeping Roth assets intact for as long as possible.
For the first strategy, you would deduct your taxable account until you reach the required minimum distribution age (RMD). (Assuming you are currently 60 years old, you won’t need to take RMDs until age 75.) Then the withdrawal order will be changed. You would take your RMDs, to avoid tax penalties, and then take the withdrawals from all three sources—taxable, traditional, and Roth—proportionately. This method focuses more on leveling and minimizing taxable income and taxes.
The second approach involves trying to hold on to your Roth assets for as long as possible. This strategy is not so concerned about minimizing taxable income. Rather, it focuses on leaving the Roth account alone until the rest of your assets are depleted. Here you would empty your accounts in the following order until they are all exhausted:
Taxable plus RMDs
Traditional
Rot
This method can cause a tax increase in the middle years of your retirement, when your taxable income and taxes are at their highest as you draw from the traditional retirement account. However, once your traditional IRA is emptied, you will no longer have to deal with RMDs, as Roth accounts are not subject to these mandatory withdrawals.
The strategy you ultimately choose can affect both your taxable income and the life of your money. Plus, there are more variables to consider. That’s why working with an expert financial advisor can help you make the best possible decision for your situation.
If you’re thinking about getting financial advice from a professional, be sure to read our comprehensive guide on how to find and choose a financial advisor.
Finding a financial advisor does not have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can have a free introductory meeting with your advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Have an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But with a high-interest account, you can earn compound interest. Compare savings accounts from these banks.
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Michele Cagan, CPA, is a financial planning columnist at SmartAsset, answering reader questions about personal finance and tax topics. Do you have a question that you would like answered? Email AskAnAdvisor@smartasset.cand your question may be answered in a future column. The question may be edited for length or clarity
Please note that Michele is not a participant in SmartAsset AMP nor an employee of SmartAsset. She received compensation for this article.
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