So, when is the classic time to convert?
Alright, I’m going to pick on Ralph. Ralph is working and his income is way up here. Then he retires―let’s say at 65―and he doesn’t have Social Security, he doesn’t have income from his wages, he doesn’t have Required Minimum Distributions, and his income goes way down here.
That pattern continues until age 70 when he has to take Social Security, and then depending on his birth year, required minimum distributions, and his income is back up here.
When is the best time to convert? Down here when you’re in a low tax bracket, okay?
The Sunset Provision of the 2017 Tax Act, which was effective in 2017―but it was just a temporary tax cut―and in 2026, taxes are going to revert to where they were in 2017. Okay? That is what the law is right now. So, if nobody passes anything, the tax rates in 2026 are going to be the same as the old rates in 2017―which would be a major tax increase.
And by the way the estate exclusion, now we’re back to transfer tax―we’re not back to, but now we’re talking about transfer taxes―right now for married couples, I think it is $23 million and that is going to revert to about $5 million plus inflation for each spouse. So, transfer taxes might be coming back into consideration where before they were not. Alright?
But let’s be specific about it. Here were more or less the old rates, okay? And let’s just say, for example, let’s say $153,000. Alright? You would have been in the 25% bracket, and anything over that would be at the 28% bracket. Well, now that you are in the 22% bracket, the first $40,000 over that would still be in the 22% bracket, and then it would go to the 24% bracket, meaning that much bigger taxes are on the way.
So right now, we are in these brackets―these lower brackets. These brackets are anticipated to grow. What did I say before? Do the Roth conversions when you’re in a low tax bracket. So even if your situation doesn’t change, just the fact that the taxes are scheduled to go up very soon would be a strong argument for Roth IRA conversions.
Now another thing that people don’t think of. How many people here are married right now? Well for all of you, you are filing your tax returns as Married Filing Jointly. Alright? Well, unfortunately, one day―unless you have a simultaneous death which doesn’t happen very often―you’re going to be filing as Single, and your income might not change that much―which means your tax bracket is going to go way up, even if nothing happened other than the death of your spouse. So, the other time I like to make Roth conversions is when you’re both kicking―husband and wife―or husband and husband or whatever. And a lot of people don’t take that into consideration.
But here is the point: There is going to be a massive taxation of these retirement plans, both while you’re alive and after you’re gone. Roth conversions are one of the ways to significantly reducing taxes, okay? Because then both you and your heirs will not have this giant tax bill, and you will have in effect converted the seed and not have to pay tax on the harvest.
Comment from Workshop Attendee
“Because of Jim’s recommendations―my father was a Westinghouse retiree and that is how I was introduced to Jim―I’ve been doing Roth conversions for 15 years while working. Every year the dollar amount of my conversion varies based on how much income I get. It keeps me within the IRS tax bracket.”
Thank you for that little testimonial there.