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February 27, 2020 Highlights - Financial Independence: When Work Becomes Optional

Highlights from February 27, 2020 Wine Talk

Financial Independence; When Work Becomes Optional


We looked at why using Roth-IRAs was an efficient way to save money for retirement.   In particular, why converting existing IRAs over multiple years into Roth-IRAs allow you to choose when you want to pay the income taxes that will be required to be paid by the IRA owner or their beneficiary – there’s no free lunch!  

With this in mind, and with the Tax Cuts and Jobs Act of 2017 that took effect for the 2018 tax year that lowered tax brackets and widened the income range in the different tax brackets, it makes Roth Conversions very attractive.  Once converted and the taxes paid on the conversion (remember, they need to be paid by someone someday), all the earning are tax-free to the Roth-IRA owner, their spouse and up to 10-years once they pass it on to their beneficiaries.

 We reviewed the order of retirement spending. In general, the optimal order to spend assets in your portfolio is;

1st After-Tax Dollars   -           2nd IRA or Pre-Tax Dollars                  -           3rd Roth IRA Dollars

If you follow this order, your first bucket will be more tax-efficient than the pre-tax bucket, and some of your Roth will likely be passed on to the next generation.  It is highly unusual for people we see to spend all their assets before passing on.  Your children or grandchildren will be grateful for this tax-free gift!

 Regarding Social Security, married couples need to think about Social Security as a team.

 For married couples, the spouse with the highest earnings history should wait until age 70 before applying for SS benefits.  

 The decisions and choices you make when applying for SS will have a direct effect on the benefits that your spouse will receive while you are alive and after your death.  

It is critical to consider not only your own income needs but also the needs of your spouse during your lifetime and after your death.

Q: What happens to a couple’s SS benefit after one of you dies?   

 A: Couples lose one SS check – the lowest, and your household income decreases.  That is why it’s important to make smart decisions while you are both alive. 


A couple points from The SECURE Act

 Required Beginning Date becomes April 1 of the year after reaching age 72. If your 72nd birthday falls before April 1, you could be 73 when you take your first RMD! 

Effective only for those who turn 70 ½ in 2020 or later (born after June 30, 1949)

  1. If 70 ½ or older as of December 31, 2019, old RMD rule still applies

 Are you working past age 70 ½?

A person age 70 ½ or older can contribute up to $7,000 each year as long as you have earned income (or 100% of your taxable compensation if you make less than $7,000 during the calendar year)  

10-Year Rule

  1. Non-spouse beneficiaries will have to exhaust the entire amount of the inherited IRA the tenth year after death. 

There’s a lot more to The SECURE Act and next month, I will be going into more details at our March Wine Talk – stay tuned

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