mickeymag
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Joined: 10 Nov 2012
Location: Ohio
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| roth conversion question |
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My wife and I are about ten years out from retiring, so I’ve been doing some calculations that suggest to me that our current household spending, which I anticipate being close to our retired household spending, will put us very near the threshold between what is today a difference between being in a 15% tax bracket and being in a 25% tax bracket--$70400, if I’m understanding correctly.
To be honest, I’m not at all sure that I understand the tax bracket implications, but if I do understand it, it looks like right now a couple who makes the mistake of earning $70,401 will pay about $7,000 more in taxes than the couple who earns $70,400. I realize, of course, that tax brackets might look different at retirement time, but nonetheless, if I’m understanding this right, it seems like we might want to aim for being at the highest end of the lowest tax bracket while we’re in retirement.
And if I have all that right, then maybe a hefty (say $100k) conversion of some of my Frank/Temp 403b to a Roth IRA in 2012 before taxes change might be pretty smart. I should also note that my wife already has a Roth IRA with $100K in it.
Any thoughts? Anything I’m wildly misunderstanding?
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Sat Nov 10, 2012 1:50 pm |
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oldguy
Senior Member
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Joined: 21 May 2006
Location: arizona
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quote:
Anything I’m wildly misunderstanding?
Yes, wildly! To use your numbers, if you make $70,401 your tax bill will go up by 25 cents. The 25% bracket only applies to the amoun t that you earned that is inside the 25% bracket, ie a dollar.
Somehow the urban legend about 'higher tax bracket' doesn't seem to die. For much of my career I explained to employees that working premium overtime or getting a bonus does NOT put your previous earnings into a higher bracket. 
And I dodn't see much benefit to converting to a Roth, that would put your entire $100,000 into the higher tax bracket (on top of the $70,000). Why not just cash out the 403 a little bit a a time beginning at age 70 1/2? Don't be in a hurry to prepay taxes, age 70 1/2 will come soon enough
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Sat Nov 10, 2012 6:26 pm |
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mickeymag
New Member
Cash: $ 1.10
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Joined: 10 Nov 2012
Location: Ohio
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Well, that’s the best news I’ve heard all day (excepting that I’ll have to tell my friend who was over hear Thursday night that his understanding of the tax is much better than mine; he told me that 25 cents on the dollar over and I didn’t believe him, ha, ha).
I was thinking that in retirement I would be trying to keep our income in the 15% tax range and then use Roth withdrawals to supplement as needed, but sounds like I don’t need to be thinking that at all.
As for deductions, once I retire (which I’m hoping to actually do at 60, thanks to early savings, a pension, my wife’s soc. sec. and some inheritance) our house will be paid for and we have no children so I was thinking our deductions would be pretty limited. Should I be expecting more from deductions?
Thank you both very much for your insights!
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Sat Nov 10, 2012 7:34 pm |
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oldguy
Senior Member
Cash: $ 751.85
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Joined: 21 May 2006
Location: arizona
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quote:
so I was thinking our deductions would be pretty limited. Should I be expecting more from deductions?
For a married couple, the standard deduction and the two exemptions were $19,500 in 2012 - those are the biggies - and you'll still get them now and in retirement. In fact the std deduction increases at age 65 so you'll get that too.
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Sat Nov 10, 2012 8:15 pm |
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