When it comes to evaluating Roth conversion strategies, a key factor to keep in mind is how it will affect your current tax bracket. Tommy Lucas, a certified financial planner and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida, emphasizes this crucial consideration.
Lucas points out that if you can complete the conversion while staying within the 12% tax bracket, it’s often an easy decision to make. However, moving beyond that bracket into higher ones requires more nuanced decision-making. “It depends on individual goals and circumstances,” he notes.
Ryan Losi, who serves as both a certified public accountant and the executive vice president at CPA firm Piascik, follows a similar guideline for determining the viability of Roth conversions. He advocates for staying within the 24% tax bracket or lower. “If we can achieve that, I’m all for it,” he explains. However, entering the 32% bracket or higher tends to delay the period needed to recover the initially paid taxes.
Of course, these guidelines aren’t set in stone. They can shift according to unique personal situations, such as specific estate planning objectives or long-term financial goals, according to experts.
When considering a Roth conversion, it’s beneficial to aim for filling a particular tax bracket with additional income without overflowing into the next one. However, Lucas warns that focusing exclusively on Roth conversions might cause you to overlook other financial planning opportunities.
For instance, if you have a hefty brokerage account with significant gains, why not use your lower tax brackets to rebalance your investment portfolio? This method, called “tax gain harvesting,” involves strategically selling profitable assets during years when your income is lower.
Looking ahead to 2024, if you’re filing as a single taxpayer with a taxable income of up to $47,025, or up to $94,050 if you’re married filing jointly, you might qualify for the 0% long-term capital gains rate. These income figures would indeed account for assets sold from your brokerage accounts, underlining the importance of strategic planning.
