Roth Conversion Myths
Myth 1- “I’ll be in a Lower Bracket!”
So your accountant yelled at you. They may go on and on about how you may spend too much in tax money doing a conversion. They have no idea what your future will be and neither do we. But, let’s look at a few things:
Will you be in a higher bracket when you retire? If you are, even your accountant will agree to convert now. But, you are told you will be in a lower bracket when you retire… Possibly.
-If you don’t have any more deductions like mortgage interest and kids when you retire, you may actually go to the standard deduction. This then shoves you into a higher bracket.
-The government just collected historic amounts of tax revenue recently. Yet they still spent more. This will require more taxes in the future. Even if they borrow the money, taxes will be needed to pay in the interest on that debt. In fact, I would argue these are the good old days of low taxes. If you look at a history of the top tax brackets over time, we're kind of in a gully. Do you think taxes will go up, stay the same, or go down? If you think taxes will drop significantly, then don’t convert. Good luck with that!
-What if the standard deduction goes down. This one is obvious, you’ll pay more in taxes all things being equal.
-Have a big IRA? That puppy will start kicking out Required Minimum Distributions at age 72. What if your 86 years old? The percentage that you need to take out keeps climbing like crazy. If you have a $1,000,000 in an IRA, start RMDs from age 86 to 96, with 0% growth, you will take out over $595,000 dollars over that time. You’ll take out even more if it grows at all! Imagine that money showing up on your taxes over the next 10 years. Remember, you have to take it whether you want or not! Roth IRAs do not have RMDs.
-Here’s the one no one want to talk about. Married? The government penalizes you for losing your spouse in the tax code. A single person has different brackets and they're much higher. If the widower or widow lives 10 years longer, that'll be 10 years in higher taxes.
Roth Conversions can be confusing and its not a product that can be advertised and purchased off a shelf.