We have been diligently working on a plan with the client to produce sufficient capital for income bridging from her retirement date until she claims Social Security in order to maximize her SS benefits. She has been working to build a three-year cash bucket for retirement income using a high-yield savings account. This will allow her to live comfortably and not have a drastic drawdown on her portfolio.
In addition, during those three years post-retirement, living on her savings will significantly drop her taxable income, enabling us to execute strategic Roth conversions. We anticipate her Roth conversions will be taxed at a rate between 10% and 15%. She is currently in a 32% bracket, with an anticipated 25%+ bracket once Social Security benefits and RMDs commence.
Each year, we review the best deferral options for her 401(k) between pre-tax and Roth. When income and itemized deductions allow by keeping her in the 24% marginal bracket, she builds her non-tax bucket by deferring income to her Roth 401(k).
In years that she takes the standard deduction or that her income is especially high, placing her in the marginal 32% bracket, she defers income to her pre-tax 401(k) for tax mitigation purposes. We also work the gap between tax brackets to complete appropriate Roth conversions from her Traditional IRA account.
By building out her Roth bucket, she gains access to non-taxable income in retirement should any emergencies arise. This will prevent her from increasing her tax bracket or getting stuck with a higher Medicare B premium in years she needs to draw more heavily from the portfolio.
