It’s Roth Conversion Season, Ep #111

It’s Roth conversion season! What does that mean for you, and how can you take advantage of the current tax cuts to get the most out of your money? On this episode of Retirement Starts Today Radio we’ll get down and dirty with Roth IRA’s and find out what happens if you earn even $1 too much. We’ll also answer some listener questions from last week. You’ll want to hear all you need to know about Roth conversions and how they affect your taxes and Medicare so press the button above to listen in now.

On this episode of #RetirementStartsToday Radio we’ll get down and dirty with #RothIRA’s and find out what happens if you earn even $1 too much. Click To Tweet

Outline of This Episode

[1:22] Why do we wait so long to convert our Roth IRA’s?
[3:44] What happens if I go over my tax rate?
[6:40] What about Medicare?
[13:15] Why are Roth IRA conversions such a big deal?
[15:48] How do Duane’s earnings this year affect his Medicare premiums?
[17:15] Should Don put 100% of his portfolio in stocks?

Why is it Roth conversion season?

The reason we wait until the end of October to convert our Roth IRA’s is that we have a good idea of how much we will have earned during this year. So why do we bother with Roth conversions anyway? A Roth conversion is when we voluntarily take more out of our IRA than we would need for our distributions and thus we pay taxes on these funds. When we are guesstimating our income for the year we are trying to figure out how much more room we have in our current tax bracket to fill it up with a Roth conversion. This way we take full advantage of the current tax cuts that we’re in.

It’s #RothConversion season! Click To Tweet

What happens if I go $1 over?

Will I mess everything up if I go $1 over my tax bracket? Before I answer that first I need to explain marginal income tax rates.

If you earn $79,000 with your spouse you’ll be in a 22% tax bracket for federal income tax. But not all of that $79,000 is taxed at 22%. The first $0 to $19,400 is taxed at 10%. Income from $19,400 to $78,951 is taxed at 12%. Only the remaining $49 is taxed at the 22% level. This is called marginal income tax which ensures that any raise earned will not decrease your net income.

So knowing about marginal income taxes helps you understand that if you do miscalculate and go over by $1 or $100 then only that little bit will be taxed at a higher rate.

What about Medicare?

Medicare has an income-based premium system and it is not as forgiving as the tax bracket is. If you make $1 over $170,000 for married couples and $85,000 for singles then you’ll receive a letter that your Medicare part B premiums will be deducted from your Social Security payment. The standard Medicare premium is $135.22, if your income is over $170,000 or $85,000 then it will be that standard premium plus an additional $54.10 for Medicare Part B as well as an additional $12.40 for the Part D drug plan.

You'll want to hear all you need to know about #RothConversions and how they affect your taxes and Medicare so listen in to episode 111 now. Click To Tweet

Why are Roth IRA conversions such a big deal?

If you are retired and in your 60’s and not taking at least 4% of your portfolio each year for your living expenses then you are spending less than what your future required minimum distributions (RMD) would be. At 70 ½ you must take 1/27th of your total IRA balance. So if you underspend throughout your 60’s you will experience a forced increase to your income beginning at age 70 ½. These increased IRA distributions will spike your income and likely spike any associated taxes. This is why it is so important to voluntarily pay a little bit more in taxes today rather than being forced to pay a lot more in taxes later.