If, like most people I talk to, your answer to all three questions is yes, then now may very well be the right time to explore converting some of your traditional IRA dollars to a Roth. Because, thanks to the 2017 Tax Cuts and Jobs Act, taxes are on sale.
No matter what you think about these tax reforms and what the long-range consequences will be for the country, the fact is that many people will pay less in taxes this year and until at least 2025. All the marginal tax brackets have been lowered except for couples and singles in the $400,000 range. And standard deduction amounts have increased to $12,000 for individuals, $18,000 for heads of household and $24,000 for married couples filing jointly and surviving spouses.
Fill Up Your Tax 'Buckets'
Which means it's time to take another look at your nest egg and how it's built around the three tax "buckets" with taxable, tax-deferred and tax-free investments and savings.
If you're like many savers, your tax-deferred bucket has been filling up slowly but surely over the years, as you've contributed regularly to a 401(k) , 403(b) or some other workplace plan. And that's great -- except, depending on your future income, you could face weighty tax bills in the future, when you start withdrawals. Meanwhile, your tax-free bucket -- which holds Roth accounts , most municipal bonds and properly structured cash-value life insurance -- is likely lacking.
By converting some of the money in your tax-deferred bucket to your tax-free bucket, you can even things up. Yes, you'll pay taxes now on the money you move, but with today's lower tax rates, the bite might not be nearly as bad as it could be later. And in exchange, your Roth will give you tax-free growth and withdrawals going forward.
Your advisers may have preached before about eventually diversifying across all three tax buckets, but with these recent tax reforms, the concept takes on a bit of urgency. There are no limits on how much money you can move to a Roth IRA each year, but with careful planning you can avoid bumping yourself into the next tax bracket as you convert those savings. (Retirees also will want to be mindful about what extra withdrawals could do to the cost of Medicare.)
As a member of Ed Slott's Master Elite IRA Advisor Group, I'm always trying to help people create tax-efficient strategies with their retirement income savings. Looking at a Roth conversion now is just one more way to do that. Take some time, do the math and see if it fits with your plan.
Kim Franke-Folstad contributed to this article.
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