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Retirement Starts Today

Do you want to spend more money in retirement, while paying less taxes? Great news, you're in the right place! I'll also teach you the benefits of retiring TO something, while most retirees only solve half the equation by retiring FROM something. Tune in every Monday morning - hosted by Benjamin Brandt CFP, RICP. Join my "Every Day is Saturday" weekly newsletter for show notes, free book giveaways and other great retirement content: www.retirementstartstodayradio.com/newsletter
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Now displaying: Page 1
Dec 14, 2020

What would happen if you go over your tax bracket by $1 when doing a Roth IRA conversion? On this Retirement Rewind episode, we’ll explore the best way that you can take advantage of the current tax cuts and get the most out of your money. What will Roth conversion season mean for you? Listen in and find out!

Outline of This Episode

  • [1:22] Why do we wait so long to convert our Roth IRA’s?
  • [3:44] What happens if I go over my tax rate?
  • [6:40] What about Medicare?
  • [13:15] Why are Roth IRA conversions such a big deal?
  • [15:48] How do Duane’s earnings this year affect his Medicare premiums?
  • [17:15] Should Don put 100% of his portfolio in stocks?

Why should you wait until the end of the year to convert your Roth IRAs?

It’s a good idea to wait until the end of the year to convert your IRAs into a Roth. This is because you’ll have a good idea as to how much you will earn during the year. 

The reason that you’ll want to wait until the end of the year to make a Roth conversion is to understand how much you’ll be making this year so you can fill up your tax bracket with the conversions.

Will you take advantage of Roth conversion season?

Why should you bother to convert your traditional IRA into a Roth? 

The funds in your IRA are pretax dollars so when you convert them to a Roth you pay taxes on them. It’s a good idea to convert your IRA into a Roth so that you can pay taxes now rather than later.

Roth conversions are a fantastic way to take advantage of the current tax cuts since it’s better to pay the devil you know than wait until later on in retirement when you’ll have no idea what the tax rates will be like.

Have you been converting some of your traditional IRA into a Roth over the years? If you haven’t now is a great time to start!

What happens if you go $1 over your tax bracket?

You may have the idea that if you go even just $1 over your tax bracket that all of your planning will be for naught. Before you panic too much, let’s talk about marginal income tax rates. 

Those couples who are married and file jointly and earn $79,000 per year will be taxed at a 22% federal income tax rate. However, that doesn’t mean that all $79,000 is taxed at the same rate. The rates are different for different parts of your income. The first $19,400 is taxed at 10%. Then the income from $19,400 to $78,951 is taxed at 12%. So that means only $49 would be taxed at 22%. 

This type of taxation is called marginal income tax. A marginal income tax ensures that if you get a raise your net income won’t decrease.

Hopefully, understanding how marginal income taxes work will help you understand that the sky will not fall if you go over your tax bracket by a few dollars.

What if you go over the income bracket for Medicare?

Unfortunately, Medicare is not as forgiving as the marginal income tax system. Many people don’t realize that Medicare has income-based premiums. If you make over $170,000 then you will no longer qualify for the Medicare Part B standard premium and you will also pay more for the Part D drug plan.

Listen in to hear how much your Medicare premiums could be and find out the answers to our listener questions.

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