It is important to understand the new tax laws and your opportunities.
There has been considerable dialogue about the individual income tax rates in the new Federal tax laws. However, there are also new opportunities for new tax-saving strategies, according to CNBC in “If you’re married and near retirement, consider this tax-saving strategy.”
For example, if you are thinking of a Roth IRA conversion, perhaps you should do it now, while rates are low and while you can still file married. Generally, a Roth IRA lets savers put away as much as $5,500 (plus $1,000 catch up contribution if you are 50 or older). The money can grow tax free and then, even better, you can take tax-free withdrawals.
However, not everyone can do a Roth IRA. If your modified adjusted gross income is more than $120K (single) or $189K (married), you cannot contribute to a Roth IRA. But you can convert your Traditional IRA to a Roth IRA by taking some of your Traditional IRA, pay the income taxes due on it, and convert the funds to a Roth IRA. This is allowed because the aforementioned adjusted gross income limits do not apply to Roth IRA conversions. However, another aspect of the new tax law ended the ability to “unwind” a Roth conversion completed after the end of 2017.
Higher income couples are now in lower tax brackets. A couple with a taxable income of $300,000 in 2017 would have been in the 33% bracket, but they are in the 24% bracket in 2018. Since higher-income couples now have a longer way to go before they hit a higher income tax bracket, they may be in the best position to make Roth IRA conversions now. They pay income taxes on the amount that is converted and, because they are now in a lower bracket, that amount will be considerably less than it was before the new law. Of course, the new tax law does not benefit everyone the same way.
The lower income tax rates for individuals are not permanent and may revert to the old structure after 2025—or any time Congress or the administration decides to make changes. If a Roth IRA conversion would work to your advantage, then this is a move to make now.
Converting while you are married is better because the brackets are narrower for singles. Therefore, it is easier for a single person to bump up into a higher tax bracket.
Notably, if you made any non-deductible (or after tax) contributions to any of your Traditional IRAs, and then want to convert to a Roth IRA, you may encounter the problematic “pro rata rule.”
You should always work with an experienced professional when doing a Roth IRA conversion.
Reference: CNBC (Oct. 4, 2018) “If you’re married and near retirement, consider this tax-saving strategy”
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