Craig Wear explains why waiting for lower tax brackets to convert to a Roth IRA often backfires. Required minimum distributions will push you into higher brackets anyway, and a surviving spouse faces a widow's tax trap that can add 20-40% more tax on inherited IRA assets.
A lot of people tell us, look, I'm going to be in a much lower tax bracket in retirement. And so I'm just going to wait. So if you have a more modest IRA account balance, then probably that would work, right? You maybe can just wait. It'll work out for you. But when you have a larger IRA, all of a sudden your RMDs are probably going to push you up into higher brackets anyway. What our research has shown us is for IRA millionaires, the compounding effect of that much money over just a year or two or three is an increase in dollar volume that you cannot overcome with a lower tax rate later. In addition to that, you've got to consider the fact of what happens if you don't do these conversions. What happens when one spouse passes and leaves the other? That's what we call, and the industry calls, the widow's tax trap. So all of a sudden what you find is the remaining heir maybe has less income, but they're taxed at higher brackets because of the difference between married filing joint bracket and tax rates and single payer tax rate. You could easily leave your spouse with an extra 20%, 30%, 40% additional tax increase in the amount of tax by just waiting. So it's really important not to wait and not to expect that you're going to have a lower bracket later on.
