Are you debating if you should convert some of your Traditional IRA money to a ROTH IRA this year? Today, I will tell you three very important factors to consider before making the decision.

So, here are the three factors to consider before committing to a ROTH conversion…

You can no longer reverse the ROTH conversion.

Before the new Tax law, if you did a ROTH conversion in a tax year, and realized it was NOT the best financial move, you could reverse it before October 15th of the following year.

Well, this is history now with the new Tax law – Once you convert your traditional IRA to a ROTH, that is FINAL. There is no going back – even if you made a mistake

Also, be aware that the ROTH Conversion deadline is December 31st, not April 15th of the following year.

So, be extra careful before converting to ROTH. Most importantly, talk to your tax advisor before committing to a ROTH conversion.

Know your taxable income and tax bracket

For example, let’s say you are a married couple and your taxable income for the year 2019 is $325,000 – before you do the ROTH conversion. This puts you in a 32% federal tax bracket. Any additional income is taxed at 32%.

That means, the amount you convert to ROTH – in this situation – is taxed at 32%.

On the other hand, let’s say your taxable income before the conversion was $250,000 instead of $320,000. This puts you in a 24% federal tax bracket. Any additional income is taxed at 24%.

That means you will be able to convert almost $70,000 to ROTH at 24% tax rates – before the 32% bracket kicks in.

That’s right

$320,000 current taxable income – You pay 32% for the conversion

$250,000 current taxable income – you pay 24% for the conversion

8% difference – a lot of money, right?

So make sure you know your taxable income and tax brackets accurately. If not sure, don’t hesitate to take professional advice.

Review your current year income vs expected income in retirement

Again, let’s look at this with an example.

I was working with a couple in their early fifties. Each spouse has more than $1M in their retirement nest egg. Wife quit her job last year – making their current year income to be much less than a year before.

We did an analysis to see if ROTH conversion is right for them. Here is what we found:

Even if the tax laws stayed exactly the same as they are today, we found their retirement tax brackets are likely to be higher than their current tax bracket.

Why?

Because their expected Social Security, expected pensions, and the required minimum distributions pushed their retirement income to be higher than their current year income.

So, if you have accidental low-income years, those years are, in fact, an opportunity to consider a ROTH conversion.

Hope all this made sense. For more financial tips like this, please subscribe to my YouTube channel or follow me on Social Media. Thank you!

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