The Wise Shopper - Roth Conversions
Imagine walking through a grocery store, intent on purchasing a specific item. As you turn down an aisle, little colorful tags proclaiming “Special Deal” and “Buy 1, Get 1” protrude from each shelf. In anticipation of your item being offered at a discounted price, you get a little bounce in your step. Sure enough, as you reach the section that displays the one product you came here to buy, the tag says, “On Sale.” Jackpot! And if this is a non-perishable item that can be safely stored at home or frozen, there is a good chance you might load the grocery cart. (After all, isn’t that the business model for bulk warehouse stores?) And who doesn’t like saving a few bucks?
Guess what’s on sale right now? Taxes. The taxable income brackets for 2024 (ordinary income tax rates) are as follows:
Marginal Married Filing
Tax Rate Joint Single
10% $0 – $23,200 $0 – $11,600
12% $23,201 – $94,300 $11,601 – $47,150
22% $94,301 – $201,050 $47,151 – $100,525
24% $201,051 – $383,900 $100,526 – $191,950
32% $383,901 – $487,450 $191,951 – $243,725
35% $487,451 – $731,200 $243,726 – $609,350
37% Over $731,200 Over $609,350
It’s that last bracket that’s interesting – 37%. Did you know the top bracket from 1944 to 1963 was 91% – and even went as high as 94%? In 1964 it “dropped” to 77%, and from 1965 to 1981 it was 70%. Granted, not everyone falls into the top bracket, but compared to the last 100 years, taxes today are being offered at a discount. But this sale won’t last forever. On January 1, 2026, the rates return to their pre-Tax Cuts and Jobs Act levels of 10%, 15%, 25%, 28%, 33%, 35% and 39.6%.
So, what’s the point? Roth conversions! Would you rather have a $100,000 traditional IRA or a $100,000 Roth IRA? Of course, the answer is a Roth IRA. Why? Because the $100,000 Roth IRA is all yours. The $100,000 traditional IRA has yet to face a tax bite, which means a portion of it belongs to the IRS. If (and when) tax rates increase, that bite will only get larger.
We have two years left (2024 and 2025) before the impending tax bracket reset. (There is no such thing as a “prior year” conversion, so the ship has sailed on 2023.) If you can afford the tax bill from a non-qualified source, it is highly recommended you consider a Roth conversion. (Yes, paying the taxes due from the IRA is an option, but covering the costs from another account will maximize the conversion.)
Back to the grocery store. Would you bypass the little “On Sale” sign and voluntarily choose to come back when the price of your item had increased? That would be illogical. Likewise, tax bracket history tells us the chances of Roth conversions being offered at a deeper discount are slim. Now is the time to pull out your wallet and make the purchase. Your future wise-shopper self will thank you for it.
Thinking about doing a backdoor Roth conversion? Be aware of these two cautions.
By Andy Ives, CFP®, AIF®
IRA Analyst
Ed Slott and Company, LLC
Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.