In President Trump’s proposed tax plan, personal income tax brackets go down from seven brackets to three. The following information is fluid and subject to change, but it’s what we know so far. I’ll explain in a moment what this has to do with a Roth conversion. If the Republican-controlled Congress agrees, here’s what the new brackets may look like:
|Ordinary Income Rates||Single-filers||Married Joint-filers|
|12%||$0 – $37,500||$0 – $75,000|
|25%||$37,500 – $112,000||$75,000 – $225,000|
Increased standard deduction
Additionally, President Trump’s proposal would significantly raise the standard deduction from $6,300 to $15,000 for single filers and $12,600 to $30,000 for married couples filing jointly. If passed, this would perhaps be the biggest personal income tax overhaul since the mid-1980s.
Besides the expectation of some extra cash in your wallet, how can you plan ahead to take full advantage of this opportunity? After all, tax rates will certainly change again at some point in the future.
Roth conversion after tax overhaul
Follow these proposed changes closely — it may be a timely opportunity to do a Roth IRA conversion. What do I mean? (Never heard of a Roth IRA? Have a look!)
How does a Roth conversion work?
You can convert pre-tax contributions in a Traditional IRA into a Roth IRA. The dollars you convert to a Roth are fully taxable at ordinary income tax rates. There is no penalty if you are below age 59 ½. You are phased out from contributing to a Roth IRA directly if you have an adjustable gross income (AGI) starting at $118,000 for single filers or $186,000 for married couples filing jointly. There is no income phase out limit for Roth conversions, however.
Is a Roth conversion right for you?
So if you are considering a Roth conversion, it may be a good idea to wait until after Congress lowers ordinary income tax rates. Of course, this all depends on whether your personal income taxes go down. If you anticipate a lower tax bill, a Roth conversion is something to consider if your financial situation warrants it. You’ll be setting yourself up for tax-free retirement income in later years.