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Many Americans are shocked to see their taxes in retirement are considerably higher than anticipated. The culprit is often called the retirement "tax cliff" -- an unintended result of maximizing tax-deferred accounts that may lead to an abrupt increase later in both income and income taxes.
Since the late 1970s, clients have used tax-deferred plans like 401(k)s and IRAs to save a substantial amount of their wealth for retirement. Early in retirement, many retirees tap taxable accounts for income, allowing their tax-deferred assets to continue to grow.
Yet as more wealth is deferred, required minimum distributions may become larger. Now, as baby boomers approach age 70½, they must begin taking RMDs from their tax-deferred accounts. But they should closely evaluate their potential tax burden as they begin to withdraw their retirement savings.
To help financial advisors address the tax cliff with clients, the J.P. Morgan Individual Retirement team wanted to consider three questions:
- Is the old rule of thumb -- withdraw from taxable assets first and then from tax-deferred accounts -- the best way to access retirement income?
- Are there advantages to tapping retirement assets sooner than age 70½?
- Could a Roth conversion help clients minimize...