A Study of Taxes for Retired Couples
In 2017 the standard deduction for married filing jointly (over age 65) is $15,200 and the personal exemption is $4,100 per – so a couple can make $23,400 and pay no income taxes. Since our tax code is progressive that same couple can add $19k to their income and pay only 10% tax – then the next $58k would be taxed at 15%. That would equate to a couple with income of $99k paying tax of only $10k – a marginal tax rate of about 10.5%. This same progression continues. Taking it all the way up – a couple that reports $176k of taxable income pays only $30k of taxes – or about 17%.
ROTH IRA conversions are a popular technique to reduce the amount of pre-tax retirement funds (called the “forever taxed” bucket) and move them into a “never taxed” bucket. There is a cost to these conversions – namely the cost of the tax that will be due in the year of the conversion. With careful tax planning (see the paragraph above) a couple can move funds slowly – year by year – and pay a very small amount of tax along the way. This will also help in reducing the amount of RMDs (Required Minimum Distributions) that they need to withdrawal starting at age 70 ½. Lastly – the heirs will be thrilled to receive an inheritance of ROTH funds vs. an inheritance of Traditional IRA funds.