Full Article Link: https://finance.yahoo.com/markets/options/articles/401-k-trap-retirees-high-130006850.html
Quote from Evan Mills
“The best thing to look at is Roth conversions, taking money from those pretax accounts and moving it into Roth. That’s going to lower your RMDs in the long run.”
— Evan Mills, Financial Advising Analyst at Scholar Advising
Key Takeaways
A large 401(k) can create unexpected tax consequences.
Many retirees assume that a bigger retirement account is always better. But once required minimum distributions (RMDs) begin, those withdrawals can push total income higher — increasing the portion of Social Security benefits that are subject to tax.
Roth conversions can reduce future tax exposure.
As Evan Mills highlights, converting pre-tax assets into Roth accounts earlier in retirement can lower future RMDs. This strategy spreads tax liability over time and can help avoid higher tax brackets later.
Planning before RMD years is critical.
The window between retirement and age 73 is one of the most valuable planning opportunities. Taking action during lower-income years can significantly improve long-term tax efficiency.
There are still strategies during retirement.
Even after RMDs begin, tools like Qualified Charitable Distributions (QCDs) can help reduce taxable income. By directing distributions to charity, retirees may lower the percentage of Social Security benefits that are taxed.
Asset location matters more than most people realize.
Placing lower-growth assets in pre-tax accounts and higher-growth investments in Roth or taxable accounts can help manage the long-term impact of RMDs and taxation.