effective v marginal v actual rate for IRA RMD

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  • BP.
    Senior Member
    • Oct 2005
    • 1750

    #1

    effective v marginal v actual rate for IRA RMD

    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
    Junior Member
    • Feb 2008
    • 10

    #2
    smart client

    you must have trained the client well

    Comment

    • kathyc2
      Senior Member
      • Feb 2015
      • 1945

      #3
      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.

      Comment

      • BP.
        Senior Member
        • Oct 2005
        • 1750

        #4
        Originally posted by kathyc2
        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.

        Comment

        • kathyc2
          Senior Member
          • Feb 2015
          • 1945

          #5
          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.

          Comment

          • JohnH
            Senior Member
            • Apr 2007
            • 5339

            #6
            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.
            "The only function of economic forecasting is to make astrology look respectful" - John Kenneth Galbraith

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