Here’s an updated scoop on the strategy, taking into account the possibility of tax reform
For years, I’ve lectured chapter and verse about the wonderfulness of Roth IRAs, and they may soon be more wonderful than ever. The quickest way to get a relatively large sum into a Roth IRA so you can start taking advantage of the wonderfulness is to convert a traditional IRA with a hefty account balance into a Roth account. Here’s the updated scoop on the conversion strategy, taking into account the possibility of tax reform.
Roth conversion basics
A Roth conversion is treated as a taxable distribution from your traditional IRA, because you’re deemed to receive a payout from the traditional account with the money then going into the new Roth account. So doing a conversion this year will trigger a bigger federal income tax bill for this year (and maybe a bigger state income tax bill too). But if you wait until next year, the federal income tax hit could lower. Or not, depending on your exact situation.
Tax reform effect
If a GOP tax reform plan becomes law and takes effect next year, the federal income-tax rates for most folks might be the lowest you’ll see for the rest of your life. If so, the tax cost of doing a Roth conversion could also be the lowest you’ll see.
Here are the tax rates and brackets for 2017 and the currently proposed rates and brackets in the House and Senate tax reform bills.
Table: 2017 rates and brackets
Table: 2018 rates and brackets under the House bill
For 2018 and beyond, the House GOP bill would reduce the number of individual tax rates from the current seven to four: 12%, 25%, 35%, and 39.6%. The last rate is the same as the highest rate under current law. The proposed rate brackets are as follows, based on taxable income (gross income minus allowable write-offs).
