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WCI #359: Tax Deferred vs. Roth Contributions: A Deep Dive

White Coat Investor Podcast

NOTE

Maximizing Tax Advantages with Roth Conversions

Roth conversions provide the opportunity to optimize tax savings by balancing out progressive tax rates over one's lifetime. It is advisable to consider converting to a Roth IRA during low-income years, keeping in mind that low income does not always equate to low tax rates due to applicable tax credits. Another strategic time for Roth conversions is during early retirement, with the general advice being to delay taking Social Security until the age of 70, unless specific circumstances warrant earlier action.

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But Roth conversions are a way to take advantage of a low tax rate whenever you have one. And if you think about the big picture, you have a progressive tax system in this country. So there are exceptions to this, but generally speaking, as your income goes up, your tax rate goes up. So the Roth conversion lets you balance that out over your whole lifetime, you know, between the time you're working, any time you have off early retirement, later retirement, you can use Roth conversions to kind of fill up lower brackets in any of those years that you might have them. And usually the typical times that people will convert are, as I mentioned, if you have a low income year, that's a good time to check to see if it's worth doing. A caution on that though, is that low income does not always equal low tax rates. There are a bunch of tax credits that can apply if you're, you know, if your income drops earned income tax credits, savers credit, things like that. So, you know, you want to actually check and make sure your low income is giving you a low tax rate where the Roth conversion is going to be favorable. But that's a common thing that people do throughout their career to sort of take advantage of any of those lower income low tax years. And then the other time is an early retirement. So, you know, the general standard advice, and it's which one that I subscribe to is, you know, if you're, unless you have health issues or if there's other uncommon situations, you probably want to take Social Security at 70.

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