The new tax law passed last year created some generally lower tax rates that are set to expire at the end of 2025. Not only that, but the top of the new 24% bracket for married couples this year is more than double what the 25% bracket was in 2017. So, for some, this might be a good opportunity to take advantage of this window and do a Roth conversion before tax rates potentially go back up to 2017 levels or higher.
It seems simple, right? You’ve got pre-tax money in an IRA, and tax 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 tax‐free Roth? When you hit age 70 1/2, your IRA would be smaller after the conversion, which means lower required minimum distributions (RMD) and no RMD from your Roth!
But there are additional factors to consider. First, depending on your age and income, doing a big conversion this year could trigger higher Medicare premiums because of something called income-related monthly adjustment amounts (IRMAA). IRMAA calculation says that single individuals with a modified adjusted gross income (MAGI) of more than $85,000 per year, or married couples with a MAGI of more than $170,000 per year, will have to pay anywhere from $54 to $295 more per month for Medicare Part B, depending on how large your MAGI is. If you have Medicare Part D, you’ll also see higher premiums there.
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—and remember, this is money that may not have been taxed at all if you hadn’t converted. Again, this depends on what other income you have plus half of your Social Security. But generally speaking, adding a substantial amount of taxable income in any given year will likely create a bigger tax bill than you expected if you’re already receiving Social Security.
So are we saying you should never do a Roth conversion? Not at all! It might be a great idea for you. You just have to be aware of the costs and potential benefits of doing a conversion. 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.
Information presented should not be considered specific tax, legal, or investment advice. 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.
No client or prospective client should assume that the information contained herein (or any component thereof) serves as the receipt of, or a substitute for, personalized advice from Lucia Capital Group, its investment adviser representatives, its affiliates, or any other investment professional.
IRA withdrawals will be taxed at ordinary income rates. Withdrawals prior to age 59 1/2 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 59 1/2 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.
Raymond J. Lucia Jr. is chairman of Lucia Capital Group, a registered investment advisor, and CEO of its affiliated broker/dealer, Lucia Securities, LLC, member FINRA/SIPC. Registration with the SEC does not imply a certain level of skill or training. Advisory services offered through Lucia Capital Group. Securities offered through Lucia Securities, LLC.