‘Average tax rates are significantly lower than most people realize,’ writes Kevin Caldwell, principal at Golden Road Advisors in Tampa, Fla.
That’s good news: You may be able to take advantage of that better position to strengthen your retirement income plan years into the future. With a simple change in the structure of your retirement accounts, you can reap significant potential long-term rewards.
Before we get into the nuts and bolts, let’s define “middle-income earner.” We are focusing on the 22% and 24% brackets. Under the current tax law — changes made from the Tax Cuts and Jobs Act of 2017, which sunsets after 2025 — these rates fall in the middle of the brackets as seen below: Average tax rates are significantly lower than most people realize: If you are one of those people, congratulations on this good news! When compared historically, 22% is low for incomes in this range.
A Roth IRA is an Individual Retirement Account where contributions are made after tax, growth is tax free, withdrawals are not taxable, and there are no required minimum distributions . A Roth IRA conversion takes a traditional IRA and converts it to a Roth. You pay taxes on the amount of the conversion now, then let the account grow tax-free forever.1. Historically favorable tax rates in the middle brackets .Roth IRA conversions There are two simple scenarios we like for using Roth IRA conversions.
To be clear, taxes will be owed on the entirety of those annual conversions at the marginal rate of 24%.
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