Most people by this time of the year probably have a good idea what their 2015 income will total. But if you’ve been wondering what tax bracket you are in, you should look at your 2014 tax return. This will give you a good amount of insight of what you need to be doing right now to max out savings.
It will also show you how to tap your IRA, tax-efficiently.
But why do this? Well it can turbocharge your retirement planning for one. Here’s an example of how that might work for you. Let’s suppose that there is a couple James and Julie are ages 62 and 60 years of age.Their reported 2014 taxable income was around $200,000. This means they expect their 2015 income to be about the same since they know there were no huge differences this year.
This places them in the 28% tax bracket. In 2015, it covers taxable income that is $151,201 to $230,450.
What this tells them is that they could withdraw up to $30,000 from their IRAs as income by year-end and still remain in the 28% bracket. It’s also easy to show what they owe in taxes or about $8,400 in tax on that $30,000 withdrawal.
But why on Earth would they do this? Why not leave the money there? They might think they’ll face a higher tax rate in the future if their taxable income shoots up.
That could happen after they reach age 70-1/2, when they must take required minimum distributions from their traditional IRAs. But here’s the thing, if they begin tapping their traditional IRAs now, at a 28% rate, they will reduce future taxable RMDs.
If they don’t need the money now, they can move the $30,000 to Roth IRAs for safe keeping. They’d still owe tax on $30,000 of IRA distributions, but they’d still have the rest of the money. Then after five years and after age 59-1/2, all of their Roth IRA distributions will be tax-free.
In this example, the couple are older than 59-1/2. They won’t owe a penalty on the $30,000 IRA distributions. Those under 59-1/2 may owe a 10% penalty when tapping their IRA.
But there are exemptions. For example, IRA distributions up to the amount spent on college costs this year will be taxed but not penalized, regardless of your age.
What you need to know is taxpayers with somewhat lower incomes also can benefit from year-end bracket planning. In 2015, the 10% and 15% tax brackets cover single taxpayers with taxable income up to $37,450, or up to $74,900 for couples filing jointly.
What’s more, long-term capital gains taken by such taxpayers qualify for a 0% tax rate. A couple with $60,000 of taxable income this year could sell stocks and consequently realize nearly $15,000 of cap gains by Dec. 31 without owing federal tax on those gains.