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Roth Conversions Over the Years – Part 1, the “Pro Side”


Once in a while I peruse my archives, assembled over nearly 20 years as a Certified Financial Planner™. Through the miracle of modern electronics, I can quickly search my writings and notes about any subject I have covered in that time, whether for clients, radio, or publications.

Lately, the topic of Roth Conversions has come up quite often, due to past changes in the tax structure that more or less encouraged making Roth Conversions. This week’s search of the topic brought up my original magazine article called Roth IRA Conversion Considerations, which was published in 2009. Reading my “old” analysis, I was surprised how negative I was on the process at that time. Until I remembered why.

Eleven years ago, taxpayers were in much higher income tax brackets. A couple filing jointly entered the 25% marginal tax bracket at the modest income level of $67,900, and the 28% bracket at $137,051. Roth Conversions add to taxable income dollar-for-dollar. In 2009, narrow tax brackets and a highly “progressive” individual tax rate structure resulted in Roth Conversions of any significance elevating tax brackets. Fortunately, income limitations probably prevented some potentially bad choices. These limits were repealed starting January 1, 2010.

Also in my archives was a 2012 update on the topic of Roth Conversions. With the re-election of President Obama, we were faced with the real possibility of higher future tax brackets. The oldest argument in favor of Roth Conversions was to guard against higher future tax rates.

Since income limits for Conversions had been lifted, there were good and valid reasons to do Conversions. Future tax-free withdrawals, coupled with the absence of future Required Minimum Distributions (RMDs), indicated a bias toward doing the Conversion for those in position to do so.

Beginning on January 1, 2018, passage of the Tax Cuts and Jobs Act of 2017 (TCJA) further favored Roth Conversions. Individual Tax Rates were lowered, and tax brackets were made much wider. The same couple reaching the 25% bracket in 2009 with income of only $67,900 could now earn up to $321,450 and still be in the 24% bracket. High earners, who likely would have significant assets for retirement, could perform relatively painless Roth Conversions, and be spared the necessity of taking unwanted RMDs in the future.

Next week we will explore recent developments that are now clouding the desirability of performing Roth Conversions.

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