(PUB) Investing 2015

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17 Morningstar FundInvestor March 2015
Situation: You want to convert traditional IRA assets
to Roth.
Tactic: Favor lower-tax distributions from Roth or
taxable accounts.
Converting traditional IRA assets to Roth can jack up
a tax bill, as you’ll owe ordinary income tax on the
converted amounts that consist of deductible contri-
butions and investment earnings. Thus, one of the
best times to consider converting all or a portion of a
traditional IRA or 401(k) kitty to Roth is after retire-
ment (and, thus, there’s no salary income coming in
the door) and before that traditional IRA or 401(k) is
subject to RMDs. To limit the total tax bill, the retiree
can take the lowest possible distribution that year,
favoring distributions from Roth and taxable accounts.
Situation: Your deductions are unusually high.
Tactic: Favor tax-deferred distributions.
If you find yourself with unusually high deductions
in a given year—for example, you’ve made large
charitable contributions or incurred extensive tax-
deductible health-care expenses—that can be
an ideal time to take more from your tax-deferred
accounts than might otherwise be the case. You’ll
be paying taxes at a lower rate for the year, and expe-
diting your tax-deferred distributions can also serve
to reduce the amount that will be subject to RMDs in
the future. (The opposite tack is also reasonable:
Favor distributions from Roth and taxable accounts if
you find yourself in a high-tax year and have few
available deductions.)
Situation: Your RMDs are unusually high.
Tactic: Favor lower-tax distributions from Roth or
taxable accounts.
Once RMDs start after age 70 1/2, you lose some
of the control over your tax situation that you had
before. And because the percentage of your required
minimum distribution will depend on your age,
and the actual amount will be based on the size of
your tax-deferred portfolio, there may be some
years when your RMDs could leave you with more
income subject to ordinary income tax than would
otherwise be desirable. In those years, favoring addi-
tional distributions from taxable or, ideally, Roth
accounts will be preferable to taking those additional
distributions from your tax-deferred account.
Situation: One spouse is still working.
Tactic: Favor lower-tax distributions from Roth or
taxable accounts.
As the above examples demonstrate, retirees have
some flexibility to use withdrawal sequencing to
finesse the amount of taxable income they receive in
a given year. But if one partner in a couple is still
working and the other retired, the couple may have
reason to favor lower-tax distributions (from Roth and
taxable accounts) in the years in which one partner
is still drawing a salary. After all, the salary will be
taxed as ordinary income, whereas the portfolio distri-
butions don’t necessarily have to be.
Situation: You have substantial tax losses.
Tactic: Favor tax-deferred distributions.
The ability to take tax losses on depreciated invest-
ments can be a silver lining in a difficult market, espe-
cially if you wanted to sell the investment anyway or
can swap into a similar investment. You can use those
losses to offset up to $3, 000 in ordinary income or
an unlimited amount of capital gains; what losses you
don’t use in a given year can be used in future years.
In years they’ve taken tax losses, retirees might give
preference to distributions from their tax-deferred
accounts, in that they can use the losses to offset at
least a portion of the distribution. œ
Contact Christine Benz at