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Is It Time to Convert to a Roth IRA?

A few years ago, Congress passed a new tax law that created some generally lower tax rates.  These rates are set to expire after 2025. If no new changes are made between now and then, rates are set to return to where they were in 2017.  In other words, they’ll go back up.  

For larger conversions, what’s interesting is that the top of the 24% bracket for married couples is currently more than double what the 25% bracket was in 2017. Back then, every dollar they earned over about $174,000 was taxed at the higher 28% rate (using standard deductions and exemptions) at that time.  But right now, a married couple can earn almost $355,000 and still stay in the 24% bracket (using today’s standard deduction).  So there’s a lot of room at the 24% rate, at least temporarily.  

So some people may be wondering if right now is a good opportunity to take advantage of this temporary window and do a Roth conversion before tax rates potentially go back up to 2017 levels or higher. 

It may seem like a good time to do it.  You’ve got pre-tax money in an IRA, rates have temporarily come down, so why not pay taxes on that money now — as opposed to later, when rates are set to go back up — and stick it in a Roth, where you may be able to take the entire sum out tax free later on?  Not only that, when you hit required minimum distribution age 72, your pre-tax IRA will be smaller after the conversion, meaning your RMD’s are also lower.  Oh, and there’s no RMD from your Roth! 

For some people that may be a great move.  But there are additional factors you have to consider. First, depending on your age and income, if you do a big conversion this year, you might trigger higher Medicare premiums because of something called the IRMAA: the income-related monthly adjustment amounts.  

The IRMAA calculation says that single individuals with a modified adjusted gross income (MAGI) of more than $88,000 this year, or married couples with a MAGI of more than $176,000, will have to pay anywhere from $60 to $356 more per month for Medicare Part B in two years, depending on how large your MAGI is.  And that’s per person. If you have Medicare Part D, you’ll also see higher premiums there as well. 

So that’s one thing to look out for. 

Another potential problem involves taxes on your Social Security. Doing a large Roth conversion could subject up to 85% of your Social Security to ordinary income taxation:  money that may not have been taxed at all if you’d never done the conversion. This calculation depends on what other income you have, plus half of your Social Security. But generally speaking, when you add a substantial amount of taxable income in any given year, you’re likely going to create a bigger tax bill than you expected if you’re already receiving your Social Security benefits. 

And don’t forget about the Net Investment Income Tax, a 3.8% tax on portfolio earnings if your income is over $200,000 as a single taxpayer or $250,000 for a married couple filing a joint return. 

The point here is that a Roth conversion may be a great idea for you while the rates are currently lower, but you do need to be aware of the potential costs of doing a conversion, and not just the potential benefits.  

If you want to know whether a Roth conversion is a suitable move for you, or if you need help in figuring all of this out, just give us a call and we’ll do the calculations for you. It’s all in a day’s work for us here at Lucia Capital Group, and as always, we’re here to help! 

Important Information:

The information provided should not be considered specific tax, legal, or investment advice and is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

Different types of investments and/or investment strategies involve varying levels of risk, and there can be no assurance that any specific investment or investment strategy (including the investments purchased and/or investment strategies devised by Lucia Capital Group (“LCG”)) will be either suitable or profitable for a client's or prospective client's portfolio, thus, investments may result in a loss of principal. Accordingly, no client or prospective client should assume that the presentation (or any component thereof) serves as the receipt of, or a substitute for, personalized advice from LCG or from any other investment professional.

You should always seek counsel of the appropriate advisor prior to making any investment decision. All investments are subject to risk including the loss of principal. This material was gathered from sources believed to be reliable, however, its accuracy cannot be guaranteed.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.

IRA withdrawals will be taxed at ordinary income rates. Withdrawals prior to age 59½ may also be subject to a 10% penalty tax.

Roth IRA distributions of principal from a Roth IRA are tax-free; however, any earnings will be taxed at ordinary income rates and a 10% penalty tax will apply if withdrawn prior to age 59½ or within five years of the date the Roth IRA was established, whichever is longer.

The information provided is based on current laws, which are subject to change at any time. Lucia Capital Group is not affiliated with or endorsed by the Social Security Administration or any government agency.

Social Security rules can be complex. For more information about Social Security benefits, visit the SSA website at www.ssa.gov, or call (800) 772-1213 to speak with an SSA representative.

Rick Plum is a registered representative with, and securities and advisory services offered through LPL Financial, a registered investment advisor and member FINRA/SIPC. The investment professionals are affiliated with LPL Financial and are conducting business using the name Lucia Capital Group, a separate entity from LPL Financial.

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