Try levelizing your income, Eddie.
If your income is $40k now and then $60k when SS starts, then Roth convert $20,000 a year now.
But doesn't that subject me to an additional 10% tax on my current (non-IRA related) income? Why would I want to push myself into a higher bracket now, if I can wait a few years, at which point the rollover wouldn't cost me additional taxes?
I'm not sure that makes a lot of sense... you're sure you'll pay 22% later so paying 22% now is the same thing....
But see my response above... It seems to me that my base income of 33K is getting hit with an additional 10% tax.
But wait. Now I'm wondering if I'm misunderstanding the way tax brackets work. Yeah, I may be... Maybe they don't apply across the board to all income, but just to chunks of income at different levels.
Let me check something out with you tax pros. This probably falls into the category of a "taxes for dummies" type question, lol.
Tax brackets go something like this, at least for single filers in 2021:
10% Up to $9000
12% $9,000 to $40,000
22% $40,000 to $86,000
24% $86,000 to $164,000
So that means one of two things. Please tell me which it is:
1. If your total taxable income falls at, let's say, the 22% level, then all of your taxable income is taxed at 22%.
2. Your taxable income is taxed in chunks, in a graduated fashion, progressing up those levels. The first 9K is taxed at 10%. The next 31K beyond that (9-40K range) is taxed at 12%. The next 46K above that (40-86K) is taxed at 22%. And so forth.
If it's #2, then I'll have to rethink things once again, because I misunderstood how taxes work. I think that information might have been in the back of my mind somewhere, but it was lost in a file drawer I hadn't opened in a while.
On the other hand, if it's #1, then I don't see why I wouldn't be subjecting myself to an additional tax hit, by rolling it over now. Waiting until SS puts me in a higher tax bracket would make more sense, in that scenario (since rolling over wouldn't push my rate any higher).
How are you getting the 10% additional tax... the $3k on $33k?
Yes, right. If you spread that over the 4 years before SS (assuming I take it at 62), that's an additional 13K in taxes. I don't really see the point in doing that, if #1 above is the correct scenario. If it's #2, though, then I've misunderstood.
Too bad they make it so damn complicated.
I know, right. I tend to over-complicate things enough on my own. I don't need help from the government.
Remember today’s tax brackets revert to the previous tax brackets adjusted for inflation after 2025. So taking advantage of these current brackets and rates may be an advantage.
I didn't know that was set to happen. "Previous tax brackets" meaning what, exactly?
