A Roth conversion can affect the premium you pay for Medicare Part B (the part that provides medical insurance, as opposed to hospital insurance or prescription drug coverage). For the year of the conversion it increases your income, potentially leading to an increase in your premium. On the other hand, in later years when you’re withdrawing money from your retirement account, your income will be smaller as a result of having done the conversion in a prior year, potentially allowing you to pay a smaller premium for many years. The net benefit or detriment will depend on individual circumstances. (more…)
Archive for the ‘Roth Accounts’ Category
Roth Conversion and Medicare Part B Premium
Thursday, July 15th, 2010Friday Wrapup
Friday, July 2nd, 2010A rare break in congressional gridlock produced some actual tax legislation this week, albeit of limited scope. In addition, it appears we may be heading toward an expansion in the use of Roth retirement accounts. (more…)
Senate Would Expand Roth Accounts
Wednesday, June 30th, 2010Action in the Senate June 29 may result in expanded access to Roth accounts. One provision would take effect upon enactment, which is on a fast track. Before it can become law, the provision must be approved by the House of Representatives. (more…)
Roth Conversions and the Medicare Tax
Thursday, June 24th, 2010This is the fifth in our series on Roth conversions and tax rates. (For earlier ones, click on the “Roth conversion” tag below this entry.) Our focus here is on how the new Medicare tax on investment income may affect planning for a Roth conversion in 2010 — even though the new tax doesn’t take effect until 2013. (more…)
Muddled Thinking on Roth Conversions
Monday, June 14th, 2010I couldn’t possibly comment on every article that comes out on Roth conversions. My Google alert for that topic comes up with so many entries on a daily basis that it would be a full-time job just to read them all. The vast majority reflect muddled thinking on the subject. Today’s piece in the Wall Street Journal on reasons not to convert is no exception. (more…)
Tax Rates and Roth Conversions
Tuesday, June 1st, 2010This is the fourth in a series of articles discussing tax rates and Roth conversions. The previous ones (here, here, and here) deal with different aspects of the question of how you determine the relevant rates: the conversion tax rate on the one hand, and the anticipated tax rate on withdrawals, or ATRW, on the other. Now we’re ready to look at the issue of how we use that information when we have it in hand. Some people have reached the mistaken conclusion that a Roth conversion never makes sense if the conversion tax rate is higher than ATRW. In reality this strategy can make sense, but generally only for relatively wealthy individuals. We’ll look first at how the strategy can be a winner for folks with lots of money, and then see how this doesn’t work for the rest of us. (more…)
Roth Conversions and Future Tax Rates
Tuesday, May 25th, 2010The wisdom of doing a Roth conversion depends in part on the rate of tax you would eventually pay on withdrawals from your retirement account if you don’t convert — your anticipated tax rate on withdrawals, or ATRW. In my first piece on ATRW I explained why you need to compare the highest rate you’ll pay in retirement with the lowest rate that will apply to the conversion. My second piece on ATRW looked at variables in your tax situation during retirement that may cause you to pay a higher rate than you anticipate. Now let’s look at another issue, the possibility of changes in the tax law that may result in higher or lower tax rates in the future. (more…)
Forbes Quotes Us on Roth Conversions
Thursday, May 20th, 2010Forbes quotes us in this article about converting from a traditional 401k account to a Roth IRA. In case you came here from that article looking for our piece discussing strategies available for isolating basis in a 401k conversion, that would be right here.
Roth Conversions: Predicting Your Tax Bracket
Monday, May 10th, 2010A Roth conversion involves a tradeoff between the income tax you’ll pay on the amount converted and the income tax you would otherwise pay later on withdrawals from a traditional retirement account. This post is the second in a series on how to compare the conversion tax rate with the anticipated tax rate on withdrawals, or ATRW. The previous one explained why the appropriate comparison is between the lowest rate that applies to conversion income and the highest rate that applies to withdrawals in retirement. The focus this time is on predicting the tax bracket that will apply to withdrawals, especially for people who are still working and more than a few years away from retirement. (more…)
Roth Conversions and Tax Rates
Tuesday, May 4th, 2010An important factor in determining whether to do a Roth conversion, and if so how much to convert, is the difference (if any) between the tax rate that would apply to a conversion and the rate that would apply to later withdrawals from the existing account if it is not converted. You might, for example, find that you’ll pay 28% on a conversion, while a projection indicates that if you don’t convert you’ll eventually pay 25% on withdrawals. I’m going to call this second number your anticipated tax rate on withdrawals, or ATRW.
It’s widely understood that having a conversion tax rate higher than ATRW makes a Roth conversion less attractive. Some have mistakenly concluded that it’s fatal. In reality, it’s possible for a Roth conversion to produce significant long-term benefits even in this situation. Before we examine the effect we should get a firmer grasp of the tax rates we’re comparing.
