Should you stop your Roth conversions at the 22% tax rate, or push into the 24% bracket?
David McKnight responds to a viewer's detailed case for stopping early, revealing why optimizing this year's tax bill can be the wrong retirement planning move over a 30-year horizon. You'll discover his "rip the band-aid off" approach and why saving money on taxes today isn't a victory if it costs you more tomorrow.
In a recent video, David McKnight explained why he believes the 24% tax bracket is the sweet spot in the current tax code for Roth conversions.
In this episode, he addresses a viewer's comment that laid out a pretty detailed case for why he believes it makes sense to stop at the 22% bracket.
The main difference between these approaches, David stresses, is that his viewer is optimizing the tax bill in the year of conversion – while David tries to optimize your tax bill over the balance of your lifetime.
David illustrates why those two approaches can lead you in two entire different directions.
Depending on the size of your IRA, the amount you're spending every year, your expected rate of return, and how many years you have before RMDs begin, you may simply not have enough space in the 22% bracket to get any meaningful amount of conversion done.
Most of David's clients don't have $100,000 per year of taxable investment income coming out of a brokerage account.
The lion's share of their retirement savings tends to be sitting in IRAs and 401(k)s, and they're generally taking distributions from those accounts to support their lifestyle.
David discusses his so-called "rip the band-aid off" approach to Roth conversions.
The biggest problem with his viewer's argument is the focus on calculating what it costs to convert the money today, without asking what it's going to cost if we don't convert it.
The choice may be between paying a somewhat painful tax rate today or allowing that money to compound inside the IRA for another 10-15 years.
That may lead you to deal with larger RMDs, potentially higher tax rates, more taxation of social security, potentially more IRMAA, and the eventual death of one of the spouses.
David wonders whether, with the approach suggested by his viewer, you're actually solving the problem or just postponing it.
"Because saving money on taxes today isn't much of a victory if doing so ultimately causes you to pay even more over a 30-year retirement", he concludes.
Mentioned in this episode:
David's national bestselling book: The Guru Gap: How America's Financial Gurus Are Leading You Astray, and How to Get Back on Track
PowerOfZero.com (free video series)
@mcknightandco on Twitter
@davidcmcknight on Instagram
David McKnight on YouTube
