## 25 Aug Smart tax planning beginning at age 50…

###### Are you surprised at the size of your retirement accounts?

Have you projected what their balance will be when you turn seventy-two, the year you must begin withdrawals? Compound growth calculators available online or a financial calculator make this easy. The SEC (Securities & Exchange commission) even provides one: Compound Interest Calculator .

Choosing a growth rate to use is harder. U.S. investment grade (high quality) bonds have a historical growth rate of 3% and the S&P 500 index (large US stocks) had an annual compound growth rate of 12% from 2011 to 2021 and a 7% rate from 2001 to 2020. Your portfolio allocation to stocks vs bonds can help you arrive at a number for yourself. If we assume a 50-year-old has a \$1,000,000 retirement portfolio and chooses a 5% compound growth rate their portfolio is projected to be \$2,925,260 in 22 years.

While a good problem to have, the projected RMD’s (Required Minimum Distributions) may have significant tax consequences.

The IRS uses an age-based formula based on the value of your retirement accounts on December 31st of the prior year. Simplifying the formula, if your retirement accounts have a value of \$2,925,260 on December 31, 2020 and you are seventy-two then you multiply the 2,925,260 x 3.59%. The result is an annual RMD of \$105,016 for the first year. The percentage rate increases each year until age ninety. Here is a link to the IRS worksheet for calculating your RMD. There is more than one worksheet depending on the age of your spouse.

In 2021 a married couple filing jointly with annual taxable income of \$105,016 are in the 22% Federal tax bracket before deductions and the 8% bracket for California state taxes. Your social security and other income may permanently push you into higher tax brackets. You can download your projected social security amount at SSA.gov.

Adding up your projected social security, RMD and other income you realize the RMD amount is more than you need and will lock you into a high tax rate starting at age seventy-two. You followed the rules to be financially successful, but now find yourself looking at a large tax bill when your tax rates were supposed to be low.

A couple of other looming surprises may be the high- income surcharge for Medicare parts B and D and the inherited IRA rules effective January 1, 2020.

After January 1, 2020, a non-spouse who inherits an IRA, must remove the balance within 10 years. Previously the balance could be paid over the beneficiary’s lifetime. If your children are high wage earners, your retirement account assets may be taxed at rates up to 50.3% (37% federal and 13.3% CA) when passed to them. In other words, your children may only receive ½ of your IRA balance.

Typically, starting at age 50 you have opportunities to change your future income tax exposure. You may even change your work life balance plans. For example, you may start working part time before you retire or change to a career/job which will give you more fulfillment but less income. You may even decide to take your Social Security earlier or withdraw some funds from your IRA (after 59 ½) so you can travel more.

Before you begin making early retirement plans, the other half of the equation is expenses. Projecting what your expenses will be in 20 years is typically done with the help of a financial planner or advisor. The cash flow based financial planning software available today can be immensely helpful in projecting future expenses. It is superior to a spreadsheet, so please consult with an advisor. After you have a clear picture of your projected expenses and income, you can begin exploring strategies to reduce your future taxes. Below are five strategies to explore. If you have cash outside of your retirement accounts and will have some low-income years, the Roth-IRA conversion strategy may be the most beneficial to you.