For over 20 years, I have advocated “pay taxes later, except for loss.” This was applied even at the accumulation stage when you were accumulating money for retirement, the distribution stage when you were deciding which asset to use first, and even the real estate planning stage. I’ve always said that there are some exceptions to this rock basic principle, but this was a great starting point for general advice.
Since the SECURE Act came into force on January 1, 2020, the exceptions to this general rule have become much larger for many IRA and retirement plan owners.
The following comes from our latest book, Retire safely For the professor, This has great information for all IRA owners. Non-professors can also get a lot of value from this book by skipping the TIAA chapter.
The following is an excerpt from Retire safely For professors:
The next big question is in what order should you spend the money you have saved for retirement. With exceptions, you should spend your after-tax dollars before your retirement plan or IRA dollars.
Please see the graph below. Both couples start with the same amount on a regular intermediary account (I call it after-tax dollars) and their retirement plan. The graph below shows, with exceptions, that most readers should use the after-tax dollars first, then the IRA and retirement plan dollars. The solid line shows what happens to the first couple who first use the after-tax dollars and withdraw only the minimum amount from the IRA when needed (RMD is discussed in detail in the next section). ..they Pay taxes-later.. The dashed line shows what happens to the second couple who spend the IRA first.they Pay taxes-now..
Graph 1.2: Spend the right amount of money first *
The only difference between the dashed and solid lines in this graph is that the first couple held more money in the tax deferred IRA for a longer period of time. The decision to postpone income tax as long as possible, even from age 65, gives an additional $ 625,591 if the first couple lives to age 87. If one of them lives longer, paying taxes later is even more valuable to them.
With exceptions, I generally prefer not to use a Loss IRA dollar unless there is a compelling reason to do so. Roth IRAs grow without income tax for the rest of your life, your spouse’s life, and the decade after you and your spouse are gone. In addition, there is no minimum distribution required for you or your spouse to use RothIRA.
So, in general, the last dollar you want to spend is your Loss IRA dollar. Of course, there may be times when it makes sense to spend your loss dollars before the dollars of other retirement plans if it keeps you in the lower tax rate range.
However, with exceptions, you and your spouse realize profits by deferring the income tax levied on your retirement plan as much as possible, and generally postpone your loss IRA spending. To do. And now that the SECURE Act is part of the law, your children and grandchildren (subject to minor children, people with disabilities, and some exceptions to other exceptional factors) , You will have to pay income tax on the traditional IRA inherited within 10 years of death.
New wrinkles on the bedrock principle
Since the enactment of the SECURE Act, compliance with later tax rules at the distribution stage has not always been the best advice. For some professors, plan to move from a taxable world (most TIAA accounts, IRAs, retirement assets, etc.) to a tax-exempt world (Roth IRA, 529), as income tax rates can rise. It may make more sense. Plans, life insurance, child loss IRA, etc.). For best results, it is best to analyze each situation on a case-by-case basis.
In short, safety legislation dramatically accelerates taxes on your retirement plan after your death. For your child, losing a lifetime stretch on an inherited retirement account can be a huge tax burden.
One rational strategy for some professors who have significant IRA and retirement plans and are unlikely to spend all their money is to make taxable withdrawals and pay taxes from retirement plans and IRA. , To give a net income. Gifts can be invested in things that grow tax-free, such as 529 plans, children’s loss IRAs, life insurance, and more. This serves the purpose of withdrawing some money from real estate and allows children to grow tax-free.
As a result, for many faculty members, an early transition from a taxable world to a tax-exempt world may work better than the standard rule of “pay tax later.”