Maximizing Your Roth IRA: Why the 22% Tax Bracket is Best

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In today’s financial landscape, planning for retirement requires more than just saving diligently—it’s about strategically managing taxes to preserve and grow your wealth. One powerful tool in this arsenal is the Roth IRA conversion, a method that can potentially save you significant sums over the course of your retirement years.

Understanding Roth Conversions

A Roth conversion involves transferring funds from a traditional IRA or 401k—where taxes have not yet been paid—into a Roth IRA. While this move incurs immediate tax liabilities based on the amount converted, it offers compelling long-term benefits. 

Funds in a Roth IRA grow tax-free and can be withdrawn tax-free in retirement, providing a shield against future tax increases and offering greater control over your financial future.

Additionally, you must be at least 62 years old to claim spousal benefits, and your own retirement benefit must be less than 50% of your spouse’s full retirement age benefit. If you’re divorced, you may still be eligible for spousal benefits if your marriage lasted at least 10 years and you haven’t remarried.

Reasons to Consider Roth Conversions 

  • Anticipated Tax Increases: Given the current economic climate and national debt, many anticipate higher taxes in the future. Converting to a Roth IRA allows you to lock in current tax rates, potentially shielding your retirement savings from future tax hikes.

  • Avoiding Required Minimum Distributions (RMDs): Traditional retirement accounts mandate RMDs starting at age 72, which can push retirees into higher tax brackets and lead to unnecessary tax exposure during market downturns.

  • Estate Planning Benefits: Roth IRAs are inherited tax-free and exempt from the 10-year distribution rule that applies to other inherited retirement accounts. This feature can significantly benefit your heirs by reducing their tax burden and preserving your financial legacy.

The Optimal Tax Bracket: 22%

The question then becomes: How much should you convert at any given time, and what is the best tax bracket to maximize Roth conversions? The absolute best bracket for Roth conversions is the 22%.

Typically, I recommend converting as much as possible to fill the 24% bracket while completely avoiding the 32% bracket like the plague.

This means converting up to $383,900 for married couples and $191,950 for single filers. For example, if you made $200,000 in earned income as a married couple, you’d have $183,900 of wiggle room. Convert that amount and pay the taxes.

Here’s why this is important: taxes are set to revert back to their 2017 levels starting in 2026. The future version of the 22% bracket will become 25%, and the 24% will become 28%. This means if you convert and fill the 24% bracket right now, it’s still 1% lower than what you’d pay in 2026 when the 22% becomes the 25% bracket.

Also, you don’t want to convert money into the 32% bracket because when the 24% becomes 28%, it will still be 4% lower than 32%. Many people rush to complete all their conversions before the tax hike in 2026, but that isn’t necessary.

You can stretch these conversions over many years if you need to. Don’t get caught up in the moment; pay 24% now and then 28% later. The goal is to pay the least amount of taxes, not necessarily to get everything done as quickly as possible.

Conclusion

In conclusion, the decision to execute Roth conversions should be a carefully considered part of your retirement planning strategy. By understanding the benefits—such as tax-free growth and withdrawals, avoidance of RMDs, and enhanced estate planning—and strategically utilizing the 22 percent tax bracket, you can potentially secure a more financially stable retirement

For more personalized advice and in-depth discussions on retirement planning, tax strategies, and financial security, consult with a qualified financial advisor. They can provide tailored guidance based on your unique financial situation and long-term goals.

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Ask us how we can help you worry less, spend more, and pay fewer taxes in retirement. 

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