Never let it be said that an old dog can’t be taught new tricks! Old Dog = Me.
I learned something mind-blowing from Michael Kitces at a conference in August that backtracks on a “rule” I have followed for years.
In my month-long September rant about RMDs and not freaking out about them, I said that you should only do Roth Conversions if you have the money in a non-retirement account (i.e., savings account, taxable brokerage account) to pay the taxes on the conversion.
This is what I have been taught ever since Roth Conversions became a thing in the 90s when I worked at Fidelity.
But no! Turns out that using IRA money to pay the Roth Conversion taxes is still okay when you consider the overall potential benefits of the conversions over a long retirement.
The key is to make sure the conversion amount PLUS the taxes withheld are low enough not to knock you into the next tax bracket.
But what tax bracket should you avoid? Now, this isn’t new to me, but it may be food for thought for you.
If you are in the 12% bracket, avoid Roth-Converting (sounds like a fun line dance) yourself into the 22% bracket. But if you are in the 22% bracket and Roth Conversions would put you into the 24% bracket, that’s not such a big deal.
What you really want to avoid is Roth-Converting yourself into the 32% bracket from 24%.
All this to say, if you have room in your tax bracket (or one very nearby) to do some Roth Conversions in early retirement, it probably makes sense to do so. Even if you pay taxes using IRA money.
According to the esteemed Mr. Kitces (and other financial planning nerds), the long-term benefit of tax diversion outweighs the early tax bill and even temporarily higher IRMAA Medicare surcharges.
Ask your financial advisor (potentially me) to model a series of Roth Conversions at your next annual review.
