How to get money out of a Large IRA in most tax efficient manner?
I have a 60 year old married client who is retiring this year. He has $4.5 million in his retirement plan, among other assets in a Trust and RE. If he draws income from Trust and lets IRA grow for 15 years, it will be so large the RMD’s will put him in the top tax bracket on everything.
Q: What is the most tax efficient manner to get money out of his IRA? Thoughts welcomed… Thank you.
Permalink Submitted by Alan - IRA critic on Mon, 2021-05-03 16:44
Distributions will all be taxed, and QCDs are not allowed prior to 70.5. But client can convert measured distributions to a Roth IRA each year until 72, which will reduce his TIRA balance prior to the start of RMDs at 72. The Roth will generate tax free income, which will save the beneficiary of the surviving spouse from the tax impact of the 10 year rule. Each year, starting in 2022 he should plan a conversion that stays within the targeted tax bracket, and SS should be delayed until 70 to create more taxable space for conversions until that time.
He should also check his 401k (if the retirement plan is a 401k) for highly appreciated employer shares, which could be distributed as part of a lump sum distribution. If the cost basis is low enough he could take advantage of NUA and pay the lower LT cap gain tax when he finally sells the shares. This will keep the value of any such shares out of his IRA rollover.
Keep the fixed income portion of his investments in the TIRA, and equities in either the Roth IRA or the trust. That will restrict further growth of the IRA, and keep qualified dividends and cap gains out of accounts in which they would be taxed as ordinary income.
All the above is more urgent if one spouse is quite likely to outlive the other since filing single will increase the marginal rate for the surviving spouse.
There are also possible life insurance solutions purchased using IRA distributions.
Permalink Submitted by craig kelley on Mon, 2021-05-03 18:40
Thank you.
Permalink Submitted by Bruce Steiner on Mon, 2021-05-03 22:38
Alan is correct — he should consider Roth conversions.
If he’s confident he won’t have a taxable estate, it may make sense to take distributions from the trust so as to continue to defer (and possibly convert) the IRA. However, if he might have a taxable estate, he may want to consider taking distributions from his IRA rather than the trust so as not to throw money from the trust into his estate (assuming it’s not a marital trust which would be included in his estate).
Permalink Submitted by Joel Frank on Wed, 2021-05-05 17:24
Age 72 is when RMDs begin so why not start a 12 year conversion plan to get some money into a Roth IRA?