effective v marginal v actual rate for IRA RMD

[BP.]

A client said her financial advisor asked that she provide her 2014 effective tax rate so he could figure federal tax withholding on her RMD, which will start this year.

I initially thought the marginal rate would be more instructive for that purpose.

For 2014 she was nearly at the top of the single 15% bracket. Projecting the additional RMD income for 2015 demonstrated that she'd actually need about 35% withheld to cover the additional tax!

Additional income nearly all taxed at 25%; additional SS taxable; and, not insignificantly, capital gains tax rate moving out of 0%.

The client took careful notes about the anticipated outcome, and her advisor might be a little surprised, but at least they thought to ask the question.

[FredcpaAZ]

smart client

you must have trained the client well

[kathyc2]

Results like you described are not at all uncommon. That's why, with a few exceptions, I recommend clients in 15% marginal contribute to a Roth instead of a traditional. If clients want to be more proactive with longer term planning, I also calculate if it makes sense for them to convert some traditional to Roth during their working years.

[BP.]

convert some traditional to Roth during their working years.

This has been super fun when income drops temporarily but significantly, like during a layoff or re-careering or a back-to-school phase, and underutilized non-refundable credits can then be more fully used against the taxes on the Roth-conversion-increased income.

[kathyc2]

The one that drives me crazy is seniors that effectively have negative taxable income. I try to explain how either taking additional distibutions or converting to Roth will be tax free for federal and likely save their heirs tax. Very few of them get it.

[JohnH]

Anyione with ngative TI and money in a tradtional IRA should convert as much as possible to Roth. I thiknk they should convert enough to move them slightly into the 15% bracket. And if they aren't yet drawing Social Security, in some instance it even makes sense to fill up the 15% space entirely. It can reduce some headaches when they reach 70-1/2.