your lowest-tax window
If you've stopped working but haven't started Social Security yet, you're in the lowest tax bracket you'll see for the rest of your life.
It won't last. Your bracket is low because almost no income is coming in right now: no paycheck, no Social Security yet, and the government isn't forcing withdrawals from your retirement accounts yet. A lot of retirees land in the 12% federal bracket for the first time in years.
That ends the day Social Security turns on, and again later when the government forces withdrawals from your traditional IRA. Both stack onto your income and push you up into the 22% bracket.
Every dollar in a traditional IRA or 401(k) gets taxed as regular income when it comes out. The rate is whatever bracket you're in that year, so the year you move the money decides what you pay.
The math:
Move $40,000 from a traditional IRA into a Roth this year, while you're in the 12% bracket. You pay $4,800 in tax, and that money is never taxed again.
Do the same $40,000 after Social Security and forced withdrawals push you to 22%, and it costs $8,800.
Same dollars, $4,000 more in tax, decided by nothing but the year you moved it.
So if you're in that gap now, convert some of your traditional IRA to a Roth this year, up to the top of the 12% bracket. Ask your CPA exactly how much room you have before you cross into 22%.
Once Social Security starts, the 12% rate is gone, and you don't get it back.
As promised, income over wealth in under a minute.
- Dan
It won't last. Your bracket is low because almost no income is coming in right now: no paycheck, no Social Security yet, and the government isn't forcing withdrawals from your retirement accounts yet. A lot of retirees land in the 12% federal bracket for the first time in years.
That ends the day Social Security turns on, and again later when the government forces withdrawals from your traditional IRA. Both stack onto your income and push you up into the 22% bracket.
Every dollar in a traditional IRA or 401(k) gets taxed as regular income when it comes out. The rate is whatever bracket you're in that year, so the year you move the money decides what you pay.
The math:
Move $40,000 from a traditional IRA into a Roth this year, while you're in the 12% bracket. You pay $4,800 in tax, and that money is never taxed again.
Do the same $40,000 after Social Security and forced withdrawals push you to 22%, and it costs $8,800.
Same dollars, $4,000 more in tax, decided by nothing but the year you moved it.
So if you're in that gap now, convert some of your traditional IRA to a Roth this year, up to the top of the 12% bracket. Ask your CPA exactly how much room you have before you cross into 22%.
Once Social Security starts, the 12% rate is gone, and you don't get it back.
As promised, income over wealth in under a minute.
- Dan
