Will keeping my income low prevent me from being taxed too heavily?
I have significant assets and my home is paid for. Will keeping my income (dividends, IRA distributions, and SS) low prevent me from being taxed at all? Will dipping into my Roth be excluded from reportable income?
You should always keep in mind that on the federal level, a certain amount of your income is exempt. This is the sum of your personal exemption and your standard deduction. A couple over 65 years old will have the first $23,200 dollars of taxable income exempt. The 10 percent bracket would allow you to add about $18,450 to that number. A Roth distribution does not have any impact on that number, nor does any return of capital from an annuity or other investment.
In the 10% and 15% brackets, qualified dividends, and capital gains are not subject to tax but are included in the AGI calculation. I would suggest that each year you plan ahead and determine what level of taxation is comfortable for you and keep within that limit. Keep in mind that if you are married, when you or your spouse pass away, the following year, the tax brackets will shrink dramatically and the surviving spouse may be forced into a higher bracket.
It seems to me that you do like to plan ahead and good luck!
Although keeping your income low can help keep you in a lower tax bracket, every earned dollar is subject to income tax. Of course, you have exemptions and deductions on your tax return that could cause a net effect of no income tax owed; however, the IRS has created some requirements that make your described strategy difficult.
For example, if you choose to invest in growth stocks rather than dividend paying stocks, you likely will owe capital gains tax when you sell your investments. Now, currently if you are in the bottom two income tax brackets, you don't have to pay long-term capital gains tax, so that might be a tax strategy, but you will want to keep up with tax code to make sure those rules don't change. Additionally, that may have you in an investment portfolio that is entirely to risky for your risk tolerance level. Interest paying investments (like bonds or bond funds) or dividend paying stocks (that are often large cap and well established) are frequently used to manage portfolio risk, and you wouldn't want to let a tax "tail" wag the risk tolerance "dog."
Further, the IRS will require that you take required minimum distributions from your pre-tax retirement accounts (like traditional IRAs). The IRS provides you with the formula for what the require that you take. Once you turn 70, you can no longer postpone taking your Social Security, and relatively low income levels cause at least 50% of that benefit to be taxable. Taking distributions from your Roth are income tax free assuming the Roth has been opened for at least ten years, and you are 59 1/2. However, remember that taking the Roth doesn't eliminate the RMD requirements.
I would recommend looking at the tax brackets, and if you have a timing option of taking taxable income, try to stay inside lower brackets rather than taking large distributions that throw you several brackets higher than you would otherwise pay. Good luck as you keep it organized!
If you have a qualified Roth IRA, meaning you've held it for at least five years, it will be excluded from your taxable income. Paying no taxes may not be the best strategy. You want to work with an advisor who engineers your tax return in advance. Income tax planning is one of the most neglected aspects of financial planning.
The short answer is yes! There are different ways to make this happen, and it all depends on what you're comfortable doing. More specifically, it will depend upon your willingness to pay taxes now, to reduce your taxable income in the future.
You mentioned dividend income. You might consider selling the stocks that are producing the dividends, and reinvesting the money in municipal bonds, that pay tax exempt interest.
You also mention that you have a Roth IRA. You can take income from that plan without having to pay taxes on it.
But you also mention IRA distributions. You can do a Roth conversion of the funds in your IRA into a Roth IRA. You will have to pay income tax on the amount converted to the Roth, but once you do, the distributions that you take from the Roth will be free of income tax.
The advantage of lowering your investment income is that less of your Social Security benefit will be taxable. But it's one of those situations where you'll have to pay now, to get the benefit later. Unfortunately, there's no way to make this happen without incurring some sort of tax liability in the process.
Reading between the lines, I hear your question as, "Can anything be done to keep my taxes low?"
Tax planning can go a long way to keep your tax bill as low as possible. This strategic planning can occur over many years and may reap many more years of benefit. I don't know the specifics of your circumstances so I will mention some ideas that may or may not apply to you.
In a non retirement account, fluctuations in the market may result in losses in some holdings. While we would love to see every holding always go up, reality is not that way. Rather than look at this as a negative, you can turn it into a positive. One can sell the holding to capture the loss for tax purposes and use that to offset gains as well as carry forward the unused loss to future tax years if large enough. On top of that, $3,000 of this unused loss can be used on your tax return to reduce your taxable income. Tax loss harvesting can go a long way to help you reduce your taxable income.
Being proactive with Roth conversions for those prior to age 70 can eliminate or reduce the Required Minimum Distribution (RMDs) from IRAs that starts at age 70.5. RMDs can be painful in the tax department as you might be forced to withdraw and pay tax on money you didn't really need and this might push you to a higher bracket.
Fully funding a properly invested HSA (assuming a high deductible health insurance plan was in place) in the years leading up to age 65, but not paying the medical bills with those funds is another technique that could provide tax free "income" in retirement. It would be necessary to keep a running list as well as receipts for all medical bills incurred during that time. Then, in retirement, submit for reimbursement and receive the funds from your now appreciated assets tax free. Reimbursement for medical expenses in retirement can occur as well.
These are just some strategic tax planning ideas that might be put in place to stem the tax tide.