What are your thoughts on Roth conversions if you are in the highest tax bracket and plan to remain there in the future?
-Joel
If you ask any number of financial professionals, the answer to this question might be a resounding no, and the discussion would be over. But there are arguments for doing Roth conversions even if you’re in the highest tax bracket.
There are even specific cases where converting at the highest tax rates makes sense. And they are worth considering. (If you need help managing your retirement accounts, consider working with a financial advisor.)
Benefits of Using Roth Conversions in the Highest Tax Bracket
Consider these three benefits of using a Roth conversion, even if you’re in the highest tax bracket.
Benefit from relatively low income tax years
This is the most common focus when planning Roth conversions. The idea is that relatively low-income years, often seen as the years between retirement and taking Social Security or required minimum distributions (RMDs), generate an opportunity to intentionally pay taxes.
For younger earners, this can also be thought of as converting (or contributing) to Roth before your earnings increase as your career progresses.
Removing tax uncertainty
If a taxpayer is concerned that tax rates may increase in the future, converting to a Roth can ignore changes in tax rates. The tax code is written in pencil and Congress has the power to change it at any time and in any way it chooses.
No one knows what tax laws will be in place in a few years, especially with provisions of the Tax Cuts and Jobs Act set to expire in 2025. So if you’re concerned that tax rates will go up, switching to Roth now in some ways protects you from these potential increases.
Creating tax flexibility
A Roth can give you the flexibility of having funds available when you need them without worrying about the tax implications. (If you need help with the tax implications of your investment decisions, consider working with a financial advisor.)
When would it make sense for a Roth conversion in the highest tax bracket?
The clearest example of Roth conversions making sense in the highest tax bracket is for taxpayers at levels of income and wealth where they can reasonably expect to remain in the highest tax brackets for their entire lives. Tax rates could rise in 2026 and are currently at historically low levels. For taxpayers who are already in the top tier and expect it to always be there, converting to a Roth is a way to pay the devil we know, instead of waiting to figure out how to pay the devil we don’t. know what it will look like in the future.
The uncertainty about tax rates in the future can be more painful than the check you have to write today.
This comes down to personal preferences and expectations for the future. By switching to a Roth in anticipation of a significant increase in tax rates in the future, you are taking the risk of eliminating the IRS as a debtor on your assets.
If rates don’t increase during your lifetime or even decrease in the future (whether because Congress changes rates or because you have a lower income in the future), you could certainly pay more in taxes than if you didn’t. transfer.
It’s important to make these decisions with as much information and context as possible. No one can guarantee what tax rates will be in the future. (If you need help managing the tax implications of your retirement decisions, consider working with a financial advisor.)
Next steps
Whether you’re in the highest tax bracket or a different tax bracket, tax planning is most effective when you think about the long term. Switching to Roth always means paying more taxes this year than you otherwise would have. For a conversion to be meaningful, it must be part of a long-term plan.
The benefits of a conversion are typically recognized over time, rather than in the year of the conversion. The most successful Roth conversion strategies will be intentional and focused on multi-year planning.
Tips
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Finding a financial advisor does not have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can interview your advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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Consider a few advisors before choosing one. It’s important to make sure you find someone you trust to manage your money. As you consider your options, these are the questions you should ask an advisor to ensure you make the right choice.
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Have an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But with a high-interest account, you can earn compound interest. Compare savings accounts from these banks.
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The post Ask an Advisor: I’m in the highest tax bracket and “plan to stay there in the future.” Should I do a Roth conversion? appeared first on SmartAsset Blog.
