Avoid the Tax Bracket Trap When Doing a Roth Conversion

Roth Conversion, where I have to convert any traditional money to Roth by the end of the year. Why would I do that?

Let's take that $100,000 you still want to convert. Let's say it's in a traditional account. You might say, well, I want to do 50 grand this year, get on my 20, 25 return, and then I'll convert the other 50 grand January 1, 2026, and I'll break up the conversion over two years. You may even want to break it up 33. 33, 33 over three years. Doesn't matter here. There's a couple of reasons why we like this chunking strategy. First is we want to lessen the tax burden over time, right? It's a large check I'll have to pay to convert to going, I want to stay in a lower tax bracket. If I do 100 grand, that might bump me into a higher tax bracket. And sometimes the steps on the brackets are 8% or 10%. So depending on what your income is, you may want to look at that and the tax brackets you're in. This is going to bump me up where this 100k is now at a 32% rate instead of a 24% rate or whatever it might be. You can be a little strategic in that and by chunking it, make sure you don't jump up into the higher bracket.

On this note, if you're single, the jump between 24 and a 32 is really where it's going to be. Most people are not stressing about this when they're up under 100 grand. There are people that are listening to this podcast that are having a good year, they're making money and they're like, I'm getting killed with taxes. That's who we're talking to here. And if you can pay a little more tax now with a little short term pain, the long term gain can be incredible. If we can really make strategic decisions now that save you taxes next year or even for the next 10 years, that's where the real money is and what the wealthy do.