Mark recently sat down with David McKnight to discuss all things related to Roth Conversions. Listen to the podcast here and don’t forget to subscribe if you like what you hear!
We know for sure that we currently have three more years of historic tax rates, however, the good news is that it’s fairly likely that those tax rates will be extended for another eight years, giving us a wider window of opportunity.
Congress has essentially removed the limits on how much money you can convert to a Roth IRA. All you have to do is decide how much tax you want to pay.
Most people assume that the 0% tax bracket is David’s favorite, but it’s actually the 24% tax bracket. For only an additional 2% in tax, you can convert an extra $170,000 to tax-free each year. The 24% tax bracket is the sweet spot in the Trump Tax Cuts. The 24% tax bracket is still lower than the future level of the 22% tax bracket.
The average American is going to end up in the 40% to 45% tax bracket when everything gets settled, which will be a significant change for people in a negative way.
Denmark has a 50% tax rate, but in exchange, the population gets universal health care, paid sick leave, paid maternity leave, and more. When the US gets to that point, it will all go to service the national debt. David’s least favorite tax bracket is the 32%. Even if the tax cuts aren’t extended, which is unlikely, the future version of the 24% tax bracket is 28%, which is still lower than the current 32%. Don’t preemptively bump up into the 32% tax bracket because you think you’ve got all the heavy lifting done before 2026.
Everybody’s situation is different so it’s very important to work with a financial advisor and go through the financial planning process to find what’s right for you.
When doing a Roth conversion, the ideal method is to pay taxes from an account other than the conversion itself, preferably the taxable bucket. If you don’t have enough money in your taxable bucket, withholding is your only other real option but you have to take into account the additional tax on withholding.
Mentioned in this episode:
David’s books: Power of Zero, Look Before You LIRP, The Volatility Shield, Tax-Free Income for Life, and The Infinity Code
PowerOfZero.com (free 3-part video series)
@mcknightandco on Twitter
@davidcmcknight on Instagram
David McKnight on YouTube
Get David’s Tax-free Tool Kit at taxfreetoolkit.com