Should You Be Worried About a Tax Bracket Jump With Roth IRA Conversions?

In this segment of “Financial Planning Q&A” on Motley Fool Live, recorded on Dec. 1, retirement expert Robert Brokamp shares his thoughts on moving to a higher tax bracket when making a Roth IRA conversion.

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Robert Brokamp: Retiree asks with tax rates probably going up in the future, is there much difference if you convert more into a Roth and go into the next tax bracket, 22% to 24%.

That’s a great point Retiree because if you’re converting, it moves you up into that tax bracket, it’s actually not that big of a deal. If you think the Roth makes sense to you and you expect to be in that same or higher tax bracket in retirement, then it’s probably not that big of a deal.

The big difference is when you go from the 12% tax bracket to the 22% tax bracket. Because that’s a big jump. Then going from 24 to 32 is another big jump. If you’re just going from 22 to 24, that’s probably not that big of a deal if you feel like the Roth makes sense to you.

I will say that just yesterday, in my Motley Fool Answers podcast published an interview with Michael Kitces, who’s a financial planning guru. He talked about how it may be that the Roth is oversold these days. There are other ways for the government to raise revenue besides raising tax brackets.

Tomorrow, I’m interviewing Ted Benna, who is the father of the 401k, he came up with the whole thing by interpreting a tax code in 1980. It’s a funny story. The government did not intend to create this retirement account that is now used by tens of millions of people. He just found basically a loophole, he calls it a fluke, and then it took off from there.

But anyway, he just came out with a new book. Dummies Guide to 401(k)s and IRAs and he thinks Roths are completely oversold. He thinks that tax brackets are not so likely to go up in the future. I’m just throwing that out there.

I personally think that the Roth makes sense for a lot of people. I would rather have more Roth money than not these days, but I’m just throwing that out there. But just to get to answer your question, I think I would not be too concerned if a conversion pushed me from 22% to 24%.

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