Roth IRA Conversion Could Increase Your Taxes
If you're in a low tax bracket, be aware that converting could push you into a higher bracket — and possibly even the highest bracket. That's because the amount you convert is added to your taxable income.
For example, if you earn $20,000 and you convert a $200,000 IRA to the Roth, your income is now $220,000 — putting you into a much higher income tax bracket. This would affect your overall taxable income, not just the dollars involved in the conversion.
So if you are temporarily in a low tax bracket, for example, due to divorce, job loss, temporary work assignment (such as in a tax-free hazardous zone), high and sudden (but short-term) medical expenses, etc. If you are currently in the 15% federal income tax bracket or less and have reason to believe that your income will be higher in retirement, placing you in a higher bracket, converting now makes sense. Otherwise, just wait when your tax rate is lower.
In our next blog post, we will discuss the third Roth IRA conversion complication.