Tom Discusses Potential Tax Time Bombs for Investors
Transcript:
Easan Arulanantham:
What are some ways to I guess combat the high tax or income flows from rmds? Is there any, like good strategies that we could use?
Tom Vaughan:
Yeah, well, it’s kind of difficult because there isn’t anything, you know, really, really good. In that sense, one thing you can do is get quite organize on all of your income sources to try to get more unrealized gains, let’s say, for example, so if I have a whole bunch of money sitting around getting interest and dividends and those types of things, and I’m about to become 72, I might want to reposition some of those to reduce the income flow from those if I can, especially if I don’t need it. And I would buy things that have more, you know, long term gains that are controllable, like a lot of these growth, you know, exchange traded funds, don’t pay out their capital gains every year. So I want to control that existing taxes that are coming out of my investments as much as possible first, and then second, I really want to take a look at trying to possibly do some Roth IRA conversions. And so because that even if it’s small amounts, just keep pushing money out of that IRA and convert from the IRA, or Roth, or traditional 401k, to a Roth IRA, even after 72, because it’s just going to reduce that future tax liability that I have. And so anyway, that that those are probably two of the strategies that come to mind on how to try to do that.
But it is difficult, because you can get kind of stuck. And I’ve done some projections where people are looking at very, very high incomes at some point where, you know, they got rid of pensions, and they replaced it with 401, K’s with matches. And so now all of a sudden, we’re starting to see, you know, people retiring with $5 million, you know, in 401 K’s I just read an article the other day that said, there’s more millionaire 401k more 401k is worth a million or more than ever. That’s fantastic. But they’re looking at a tax time bomb, if they really sat down and looked at how much that’s going to grow. And what’s going to happen in their 80s and early 90s. And how much taxable income that’s going to it’s going to be it’s a disaster. So that’s I would be really focusing on my other taxable incomes, trying to reduce those, and then that Roth conversion that you’re allowed to do, you know, you can convert you got to pay the taxes on it, but again, you kind of reduce that future tax liability, at least somewhat