Print Friendly, PDF & Email

 

Roth Conversion is terrific idea this year for Retirees and Pre-Retirees: at most income tax brackets…..

Paying tax now rather than later may make very good financial cents for you.

Yes, this is contrary to normal income tax planning, but may make sense after the great new income tax law was passed with new lower rates and larger tax brackets.

Income tax brackets have not been this low for a long, long time and we may never see them this low again in our lifetime. So, how should you consider taking advantage of this?

If you have an IRA it’s growing income tax deferred, so why should you consider converting a portion or the balance to a Roth IRA in 2018?

There are several reasons:

  1. Income tax rates may never be this low again. For example, if you are a married filer and have an adjusted gross income (AGI) (after deductions) of $50,000, you might want to convert some of your IRA balance such that you would only pay 12% income tax  (see table below) on the converted amount. If you look at the spreadsheet below you can see that if your AGI is $19,051-$77,400 it’s only taxed at 12%. So take the difference from the maximum AGI in your bracket and subtract your AGI – $77,400-$50,000=$27,400. The $27,400 represents the portion of your current IRA that you can convert (& pay tax) to a Roth IRA and pay only 12% income tax on.  This Roth conversion strategy can work very well for higher income tax brackets too.
  2. In this example, converting $27,400 to a Roth IRA would cost you $3,288 ($27,400 x 12%) in additional tax. You can pay that extra tax out of pocket or have it withheld from your rollover amount, so that you would invest the $27,400 -$3,288(tax withheld)=$24,112 into a Roth IRA

What’s the probability that a high income earner/saver will be in a higher tax bracket than the 24% they are in today?

The concept is to pay income tax now at today’s low rate rather than take the chance that income tax rates will be higher when it’s time for you to take your money out.

  1. The beauty of the Roth IRA is that you will not be taxed on the growth OR DISTRIBUTION of your investment after age 59 1/2. So when deciding on where to pull money to meet retirement income needs you would have your Roth IRA account as a source of income tax free money.
  2. There are many other benefits of a Roth IRA. They include the fact that unlike a Traditional IRA, there are no Required Minimum Distribution requirements. You are never forced by the government to take out  distributions.
  3. It’s a great asset to give to heirs as they do not have to pay tax on their distributions. Therefore, by converting the IRA now you are prepaying the tax for future generations.
  4. Not knowing what tax brackets will be in the future, it gives you a pot of money to draw from tax-free. It’s a form of income tax diversification.

Are you likely to be in a higher income tax bracket when you take the money out of your IRA? I don’t know.  What leads me to think this may be more likely than you think?

ENTITLEMENT PROGRAMS ARE FUNDED BY OUR TAX MONEY – AND THEY NEED MORE $$$$

How in the world is our federal government going to fund our broke Medicare and Social Security entitlement programs. HHS concerned about Medicare’s long-term sustainability.  I believe that both will continue, but the taxes needed to pay for them will have to go up substantially in order to pay all the promised benefits. 

There are no longer enough people paying in to the social system to pay the promised benefits. This issue is growing in part thanks to much longer life expectancies. Where will the money come from to pay future social security checks?  Taxes…….

Ratio of
Social Security Covered Workers to Beneficiaries
Calendar Years 1940-2013 
YearCovered
Workers
(in thousands)
Beneficiaries
(in thousands)
Ratio
194035,390222159.4
194546,3901,10641.9
195048,2802,93016.5
195565,2007,5638.6
196072,53014,2625.1
196580,68020,1574.0
197093,09025,1863.7
1985120,56536,6503.3
1990133,67239,4703.4
2013163,22157,4712.8

I have always liked the concept of diversification with my investment portfolio and my tax planning. I don’t want to owe income taxes on my future withdrawals. “No worries” about the uncertainty of future tax rates is attractive to me. Today’s income tax rates are historically low for many people.

This does not need to be an all or nothing strategy. You can do this with any percentage of your IRA.

Always consult your tax advisor before doing the Roth conversion.

 

 

0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *