topic is roth conversions specifically how much tax are you going to have to pay if you do a
roth conversion i find roth conversions to be a very effective strategy but when i look at roth
conversions there are two things that stick out to me number one how do you feel about tax rates
going forward in other words do you think taxes are going to be higher in the future number two
and this may be a little bit more important where am i now in terms of my income and would it be
cost prohibitive to pay the tax now and i'm going to show you in today's video how that all
works out how income tax is calculated and also what happens when you throw income right on top
to create a roth conversion this is a tax rate cylinder you may remember this from chemistry
class i think you'll know as i start to explain it we have what's known as a progressive tax system
we pay tax at different rates depending on how much income we have so we pay some at ten percent
some income at twelve percent some income at twenty two percent some income at twenty four
percent the upper limit of the twenty four percent bracket is 321 000 so most people
are below that so what happens as income comes into our picture we pay some at 10
some of 12 some at 22 and some at 24. now this seems pretty straightforward the problem becomes
is when we do a roth conversion we're throwing more income into this picture
and thus we are rising in the cylinder this is how we end up paying more tax
so let's look at an example in this example we have a hundred thousand dollars of income
there's a twenty four thousand dollar standard deduction leaving us a taxable income of 75
000.756 to be specific so this is the number that all of our taxes are going to be calculated on
so how do we calculate the tax well we know that the first 19 400 is going to be in this
area we're going to take 10 on that we know the next bit is going to be in this area where we're
going to pay 12 we are not rising with taxable income above seventy eight thousand nine fifty
so we know we're going to be in these brackets down in this area so the tax burden on that is
eight thousand eight hundred and sixty seven dollars and it's an effective tax rate of 11.4
percent okay not too bad so the marginal tax rate is 12 that's the highest tax rate we're going to
pay but the blended or the effective of tax rates a little bit lower because we're blending these
rates some at 10 some at 12 so that's how we would calculate a normal amount of tax that's due so
let's move on now and talk about what happens if we have a roth conversion let's assume for a
second that we are going to convert 50 000 in this calendar year we'll call this the conversion we're
going to convert 50 000 so what we do here now is we take the 75 we receive before an income plus 50
that's 125 600 now this is a significantly bigger number that's why we have to be very careful to
make sure this works out economically as you can see we are now going to be up here in terms of
our marginal tax rate now that doesn't mean that we are now paying 22 on every dollar of income we
have earned it means that the highest echelon of our income is going to be in that category the tax
burden on this is about 19 300 federal tax burden right and that is an effective tax rate of 15.4
so although we have now gone into the 22 tax bracket and we are paying a higher amount of tax
on the conversion we are still at an effective tax rate of 15.4 which is not so terrible
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button below now back to our regularly scheduled video here's here's the thing is as it pertains
to roth conversions yes we are accelerating the tax that's that's part of the equation that's why
i did this video to show you how the taxes are calculated a common myth in retirement is that
you're going to be in a lower tax bracket that is you're going to stay lower because all of a
sudden you're not working what the research shows and what my personal experience shows
is that people in retirement want to spend almost as much money as they spend while they're working
plus if they don't spend the money on cruises and what have you they're going to spend it on medical
and we also know that the whole deduction picture changes a little bit the securement way is
operating from position of strength and it's looking at something like this and saying
is it possible that we can take some risk off the table and feel better in retirement because
we've accelerated some of the tax here's what i know just because you have a hundred thousand
dollars in an ira it does not mean you have a hundred thousand dollars you do have a future
tax obligation with a partner the government and they're the only ones that get the vote so above
anything else please take action because you know you've heard me say it before there are
many ways to run into a secure and comfortable retirement but doing nothing is not one of them