Last Call For Roth Conversions! with David McKnight

The last weeks of December are critical in terms of taking advantage of your last opportunities to do Roth conversions for the 2019 tax year. Many people think you can go all the way until December 31 but that’s not always going to be the case.

Some companies require you to submit a Roth conversion much earlier because they can take some time to process. Missing the Roth conversion deadline can have major tax implications.

With a traditional IRA you can fund it up until April 15 of the following year, but that’s not the case with Roth conversions. They have to be done by December 31 of the current year which can cause some people problems because of the tax uncertainties involved.

The IRS no longer allows you to do Roth recharacterizations in the event you end up in a higher tax bracket than expected. You just have to give it your best estimate.

You should be doing a Roth conversion in 2019 because if you don’t, you no longer have seven years to stretch out your tax liability.

If you waited until you had only a single year to do your Roth conversions and convert a million dollars, most of that money will be taxed at 37% plus whatever your state tax happens to be, and it will happen all in one year. This means you could give away up to 45% away.

The whole idea of this planning is to reduce taxes as much as possible and avoid a doubling of tax rates over time. Even if you take two years to complete your Roth conversions, you’re still likely going to be in the 37% tax bracket.

The further you stretch out your Roth conversion, the lower the effective tax rate on that conversion. If you feel like tax rates are going to be higher in the future than they are today then every year counts.

There are worse things in the world than simply paying the taxes at what the rates will be in 2026. What you should worry about is what is going to happen beyond that when we get to a crisis point in our country financially.

There is a proposal going through the House of Representatives right now that could result in an additional 7% increase in taxes for most Americans.

The tax rates in 2026 may still be good deals of historic proportions because at the rate we are taxing Americans right now, there is just not enough money to pay for everything that’s been promised.

Every percentage point increase in taxes after you retire means less money for you to spend. Remember, it’s not how much you have, it’s how much you actually get to spend after tax.

It’s crunch time. If you’re going to do a Roth conversion this year, now is the time to act. Take advantage of the seven years you have and keep more of your money.

Go to davidmcknight.com and find out what your Magic Number is. Keep in mind that you want to have some money in your tax-deferred bucket to take advantage of your standard deduction.

The 22% tax brackets for most Americans is golden. These tax brackets are not going to be around forever. If you wait even only a little bit you may miss your chance this year.