Death, taxes and required minimum distributions (RMD): Bob, 68, has $800,000 in his traditional NYCE IRA. He knows that at age 72, he will be subject to taxable RMD.
Barbie, 69, is Bob’s wife and the sole beneficiary of his traditional NYCE IRA. If Barbie survives Bob, she will continue to take RMDs. His income tax will be based on his “single” status. As a single taxpayer, she will pay taxes at a higher rate than when she and Bob were married.
Also, as Bob’s beneficiary, she must use the one-life life expectancy table, which requires a higher withdrawal rate than the uniform life expectancy table that Bob used before his death.
Example: The single life expectancy table requires a 72-year-old IRA beneficiary to withdraw 5.81% of the account balance. The Lifetime Level Table requires, at age 72, an IRA owner to withdraw 3.65% of the account balance.
These facts represent additional reasons to stop investing before tax in favor of investing after tax in a Roth account. For those of you with large balances in your pre-tax 457(b)/401(k) accounts, a Roth conversion plan is highly recommended. To that end, New York State and New York City Deferred Compensation Plans give you the ability to convert these large pre-tax balances using the “in-plan” conversion benefit.
These conversions are federally taxable events and may be subject to state and local taxes. Check with your tax preparer for the best way to pay the tax. Remember that conversions are irrevocable transactions.
Mr. Frank is a paid retirement financial planner and a retired accounting teacher at a high school in the city. He can be reached by phone at (732) 536-9472 or by email at [email protected]t.
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