Last week I discussed an example of using a Roth conversion ladder as a strategy for early retirement. However, this does not make sense for everyone, especially for those with higher earnings and thus higher tax brackets prior to retirement.
This week I am discussing using Roth IRAs as a tool for accelerating conversions during years of low income. Two of the more common situations are during a job transition and in retirement before Social Security. I am going to play out the latter in the example below.
Jane and Bob have $2,000,000 in 401(k)s, are both 60 and plan to retire this year. Their combined taxable income is $350,000, but when they retire, starting at age 61, they expect it to go down to $40,000 because they won’t be drawing Social Security yet and do not plan on making withdrawals from their tax-deferred retirement accounts.
- Age 60: They both continue to max out 401(k)s, allowing them to lower their taxable income at the marginal tax bracket of 32%.
- Age 61: They convert a total of $37,400 from their 401(k)s to Roth IRAs. If properly planned, this conversion will likely be taxed at the 12% rate.*
- Couples, filing jointly have a marginal tax rate of 12% for income between $19,051 - $77,400 in 2018. The $40,000 + $37,400 in conversions keeps them under $77,400.
Disclaimer: Alex Voorhees and Reston Wealth Management do not provide legal, accounting or tax advice. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified investment, tax or legal advisor. The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) or strategies may be appropriate for you, consult your financial advisor prior to investing. No strategy assures success or protects against loss. You should consider the investment objectives, risks, charges and expenses of any investment carefully before investing.
*Roth Conversions/Retirement Planning for Life Events. 2010, www.irs.gov/pub/irs-tege/forum10_roth_conversions.pdf.