Tax Bracket & ROTH Conversion
Does it make sense to do a ROTH Conversion on a 67 year old single guy when it will push him from a 28% TAX BRACKET TO A 33% BRACKET? He makes $176,000 taxable. The contemplated conversion amount is $71,000. The marginable bracket goes up to 33% over income of $189,300. I figure he will pay $22,765 in Fed Tax due to conversion & some amount taxed at 33%. He does not itemize. Reasons to Convert: 1) reduces large & growing taxable income at age 70 and beyond. 2) Creates choice in Tax Effect Diversification for retirement income. 3) Probably will not need ROTH money for a long time, if ever. 4) In-kind $71,000 stock transfer on a growth stock currently down in value.
Permalink Submitted by Alan - IRA critic on Thu, 2016-09-15 20:36
It may or may not make sense. The key factor is comparing the marginal rate he expects to pay in retirement if he does not convert with the current rate on the conversion reflecting any phaseouts of exemptions etc as a result of higher AGI, plus expected IRMAA surcharges in 2018 as a result of a 2016 conversion. If the current rate is lower or in some cases equal, it tends to make sense. If the 176k of taxable income includes earnings from salary or SE which will stop in the next few years, and his current TIRA is not too large, it may make sense to wait until the income comes down before converting. If still on the fence, he could always convert less than 71k and at least stay out of the 33% bracket. Also, remember to factor in state incomet taxes.
Permalink Submitted by David Mertz on Thu, 2016-09-15 23:01
Given that the taxes will be paid with non-retirement funds and that there is a long time horizon to when distributions from the Roth IRA would be made, with prudent investing it’s reasonably likely that the tax free growth going forward will more than make up for an extra 5% paid now in taxes (the difference between 28% and 33%) and the lost time value of the money used to pay the taxes. If increasing income at age 70 and beyond due to RMDs and beginning to receive Social Security would otherwise result in being in the 33% tax bracket anyway, then it’s an even easier decision to do the conversion.
Permalink Submitted by MIKE KRUCHTEN on Thu, 2016-09-15 23:36
Making the client aware the Roth conversion may become extinct at some point or AGI amount back to 100k or near to perform conversion Should be weighed. We can only make decisions on today’s laws and tax brackets.