If you’re about to enter retirement or you’re already retired, you can save on your long-term taxes by utilizing a strategy known as “Fillin’ up the bucket.”
As people retire, their income drops, and if they want to wait a few years before taking Social Security, that creates a timeline where they have to live off their life savings. It’s perfectly fine to do this, but instead of potentially worrying about this income gap, you can actually take advantage of it.
Most of you will have some kind of tax-deferred account such as an IRA or a 401(k) that you didn’t pay taxes on but you will at some point in the future. You can use the money you live off of between the time you retire and the time you take Social Security to do a Roth conversion, which means you take a portion of your IRA and convert it into a Roth IRA and pay the taxes for that specific year.
Remember, since you don’t have any income, you’re in a really low tax bracket, and some of those Roth conversions may not be taxable at all. From that day forward, your Roth IRA is going to grow tax-free for the rest of your life. Use your low tax bracket to your advantage rather than worry about not having enough income.
It takes comprehensive financial planning to figure out what your tax bracket will be when you retire, so you may need to look at your estimated cash flow for the next several years and develop a strategy that fits with your income and your tax-deferred accounts. After that, you can take advantage of every tax deduction you can get your hands on.
The thing is, once you reach the age of 70 ½, you’re required to start taking out minimum distributions from your retirement fund, but that’s not required with a Roth IRA. This means the more you can convert into your Roth IRA before you turn 70, the more you’ll be able to lower your taxes in retirement.
This strategy doesn’t apply to every situation so if you’d like to know more about it or see if it can work for you, just give us a call, send us an email, or message us on our website. We’d love to help you.