Should You Roth Convert into the 32% Bracket for a More Tax Efficient Retirement?
As individuals plan for retirement, one of the most important decisions they face is how to manage their tax strategies. With the complexities of tax brackets, changing legislation, and varying retirement income needs, understanding when and how to take advantage of tax-efficient strategies, such as Roth conversions, becomes critical. One question that often arises is whether it makes sense to convert traditional retirement accounts into a Roth IRA, particularly if that conversion pushes you into the 32% tax bracket.
Understanding Roth Conversions
A Roth conversion involves transferring funds from a traditional IRA or other pre-tax retirement accounts into a Roth IRA. While this process requires paying taxes on the converted amount, the benefit is that future withdrawals from a Roth IRA are tax-free, provided certain conditions are met. Additionally, Roth IRAs do not have required minimum distributions (RMDs), allowing account holders to retain control over their funds for longer periods.
The 32% Tax Bracket: The Current Landscape
As of 2023, the 32% federal tax bracket applies to individual filers with taxable income between $182,101 and $231,250, and to married couples filing jointly with income between $364,201 and $462,500. If your taxable income is approaching or within these thresholds, a Roth conversion could result in being taxed at this higher rate on the converted amount.
Timing the Conversion: Current vs. Future Tax Rates
One of the most significant considerations when contemplating a Roth conversion is the question of future tax rates. Tax rates are historically low at the moment, making a conversion during this period appealing. Several factors suggest that tax rates could increase in the future, including rising national debt, potential policy changes, or the expiration of temporary tax cuts.
By converting funds to a Roth IRA now, you lock in the current tax rate, potentially saving money in the long term. However, the consideration of whether to convert into a higher bracket, such as the 32% bracket, complicates this decision.
Evaluating Your Current and Future Income Needs
Before deciding to convert, evaluate your current and projected income needs in retirement. Roth IRAs can be particularly advantageous for those who anticipate higher income in retirement or who desire to leave a tax-efficient inheritance to heirs. If you believe your income will remain above the 32% bracket during retirement, paying taxes at that rate now rather than later may well be justified.
Conversely, if you foresee a significant decrease in income in retirement, it may be more beneficial to stay in a lower tax bracket and defer taxes by keeping your funds in a traditional IRA. Before making any decisions, consider consulting with a tax professional to analyze your personal financial situation.
The Benefit of Partial Conversions
For those who are concerned about crossing into the 32% bracket, partial conversions may be a viable option. This strategy involves converting portions of your retirement savings over several years to spread out and manage your tax liability effectively. By taking gradual conversions, you can remain within a more manageable tax bracket while still benefiting from the long-term advantages of a Roth IRA.
Conclusion: Weighing Pros and Cons
Ultimately, whether to Roth convert into the 32% bracket involves weighing the pros and cons based on your unique financial situation. Consider your current tax bracket, projected income levels in retirement, and long-term financial and estate planning goals.
A Roth conversion could provide significant benefits in terms of tax-free growth and flexibility in retirement spending, but it also requires careful planning to avoid unintended tax consequences. As such, consulting with a financial advisor who understands your personal circumstances can be a vital step toward achieving a more tax-efficient retirement strategy.
As you consider your options, keep the big picture in mind: a well-structured retirement plan is not just about maximizing current income, but about ensuring your financial wellness for years to come.
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I performed my very first Roth conversion this weekend. I expect to pay 28.8% combined taxes on the conversion. I am still working, and I expect my income to increase overtime. I may hit the Roth IRA income phase out zone, so today’s conversion will make my traditional IRA balance zero dollars. Meanwhile, I am contributing to both a traditional and Roth 403B. I am straddling the edge of the 22% federal bracket on the lower side. What I can get into Roth at 12% federal is excellent, but I want to make sure that I exceeded the 22% bracket start with each year.
You need to take down this (and similar videos) because the TAX RATE INCREASE IS ESSENTIALLY DEAD with Trump’s victory!
One thing you did not mention is the Widow’s Tax Trap. If a spouse dies the single widow or widower would still have a large IRA to withdraw and would now have to file single, thereby jumping up at least one or two brackets.
The 32% bracket is not 8% higher than 24% it is 33% higher.
Analysis excludes the fact that reducing RMD source and RMD will get you 87th a lower bracket.
I can’t imagine a 32% conversion makes sense for most. Even an income over $1m can have an effective tax rate of less than 30%. The RMD on a $5m IRA is $200k so you would need a whole lot of other income before even considering converting at 32%.
IRMA is in the noise range for those in higher tax brackets with large traditional IRA’s, taxable accounts and 401K’s who only have a few years to convert before taking RMD’s. In addition, your analysis excludes the challenges facing high net-worth retiree’s that live in high tax states like California.
What if 100 percent of your retirement money is in a Roth?
You are lucky to have such well heeled clients, your tax bracket charts must be for top 5-10% 3:06 ?
Hello, Do you need to look at total NPV of expenses in order to find the optimal plan?
Very good information! What about converting so that your spouse will have less taxes when he/she is the sole survivor? She will have to file as single and pay higher tax rates at much lower income levels. Since the female outlasts the male by an average 7 years, and there isn't a firm death date for the male, faster conversions in late 60's, early 70's at married filing joint rates seem to be the way to go. Thoughts?
Appreciate this video. A comment regarding IRMAA considerations, it would be better to view the actual dollar amounts instead of percentages. Converting $50,000 more into IRA may result in $500-$1000 difference in Medical part B and IRMAA payments. This while savings many thousands of dollars of taxes down the road.
Hey, great analysis of all the details but it come in to play when you’re dealing with taxes and Erma, Medicare, part THE, etc. but when you talk about the state taxes, why don’t you guys ever bring up ways to get out of that like trust put everything into a trustbypass probate, no estate taxes, etc. tell me if I’m wrong
Excellent content. I've been binge watching your videos.
We're about 10 years from retiring.
I think there also a good chance that a Democrat controlled government in the near future will substantially raise tax rates.
I think there is more than just tax rate to look at. What about avoiding IRMA ans extra medicare premiums. I have the money now so why not make retirement tax free?
Is there a way to estimate what the 12 and 24 percent bracket threshold might be in 20 years? Can we just assume a 2.5 percent inflation and adjust acordinging for the time frame ($*1.025^20)?
How do you account for the inflation factor of paying taxes in todays dollars vrs gradually thru RMD's over next 20-25 yrs? Future dollars are worth less than todays dollars, so savings is reduced. Another factor may be recent history of the stock market, like 2022. Converting after the market has dipped is more favorable as when the market rebounds you get the gains tax free in your roth.
I was confused by the graph at 3:24 showing a drop in income threshold in 2026 for the 32/33 percent brackets, until I realized the drop only applies to joint filers. For single filers I believe it does the opposite, as the 33/32 threshold dropped from $191,650 to $157,500 in 2018, and therefore should jump back up when the TCJA expires. So the yellow line jags in the opposite direction for single filers.
Missing Reason #6: An inheritance increases your income during retirement.
Another great video. You have the most educational financial videos on youtube
I really like your presentation method, lack of intro, music, and execution. You just get straight to it.
I also appreciate your deep dives and analysis of the interrelated effects of RMDs on the whole of retirement tax planning.
Do you know my buddy Josh at Heritage Wealth Planning? I appreciate specifically your addressing the widows tax trap.
Well done!
How are you calculating the Marginal Tax Increase percentages in the table that you show beginning at 5:20 in the video. For example, how do you calculate the +4.2% value for the second row in the table. I assume that you divide the annual extra Medicare Part B premium amount ($816 for that row) by some value but I can't figure out what that value is. You don't seem to mention what the denominator is in the video. If anyone can inform me (us) in reply to this comment it would be greatly appreciated. I will check back.
Question that you maybe able to answer for me. I am 63 now, and retired 7 years ago. Just started last year converting some of my 401K into a roth. My issue is that I was required to take SSDI to get my pension. This means I am on medicare part A and B. My AGI is approximately 65000 and I would like to convert as much of my 401K to a roth, as I ccan afford. Since I am on SSDI will the ERMA apply to me? If you don't know the answer would you know where I can possibly find the answer. Thanks.
Examples of moving from a lower to a higher taxed state is when a retiree is widowed/divorced and moves closer to their children or when a retired couple moves to help with grandchildren until they get older.
Forgot another major issue. A spouse dies and now the surviving spouse is paying taxes at a higher single rate will increase their taxes significantly.
If a person is pre 65 years old and receiving ACA tax subsidies on an ACA health insurance policy, it is worth it to do Roth conversions and forfeit the ACA tax subsidies? The Roth conversions would add to the person’s income and possibly not qualify for an ACA tax subsidy.
My considerations
Paying a premium now for a known future tax rate (0%)
The reduction of Medicare costs after conversion
When one spouse passes well before the second, a long time of filing single
The likelihood of higher taxes in the future (lower, not so much)
A stock market downturn is an excellent time to convert (do not try to "time" the market).
Yeah. Don't forget taxable Social Security payments that can kick in later such as at Full Retirement Age.
Basically, the minute you stop working, your ability to pay taxes on RMDs, drops dramatically at exactly the most vulnerable time of your life. If you are a retired federal worker or military, getting a pension + IRA distributions + SS at 67 yrs of age, then you will get totally slammed, and you will spend your golden worrying about finances. You are better off rolling over to Roth the amount of $100 to $150 thousand ( assuming you have $1 million + in the IRA) and using it incrementally to get you RMDs just under the 34% bracket in the future.. Think of this expense as you would buying a new car, and aggressively paying it off via cash reserves + aggressive extra payments each month. It's not ideal, but I do not want to be left without tax relief at 72.
I’m making the assumption that tax rates will go up in 2026, not a big reach. So iI will make the TCJA permanent. With that in mind I am doing aggressive Roth conversions up through the 24% tax bracket married filing jointly, which you get about 100,000 more to convert in that 24% bracket for the next 4 years. 100,000 of that 24% bracket will be at 32% in 2026. Not to mention the tax torpedo (when one spouse passes), Irma, no RMD‘s,
The current market downturn is giving us a gift of Roth conversions right now.