The Five Cardinal Rules of Roth Conversions

David McKnight goes through his five cardinal rules for doing a Roth conversion.

The first principle is simple: don't do a Roth conversion that bumps you into a tax bracket that gives you heartburn.

Not sure about what a heartburn-inducing tax bracket looks like? David shares a simple "rule of thumb" you can follow.

In your zeal to get your Roth conversion done before tax rates go up for good, don't bump into the 32% tax bracket along the way.

The second cardinal rule ties into the almost certainty that Congress will extend the Trump tax cuts through 2033 – make sure to stretch your tax liability out between now and then!

There's a strong likelihood that, once Trump's second round of tax cuts expire, taxes will rise dramatically in 2034.

The reason for that? The trajectory of the national debt and over $200 trillion in unfunded obligations for Social Security, Medicare, and Medicaid.

The third principle is "Don't lose your sleep over IRMAA (Income Related Monthly Adjusted Amount) during your Roth conversion period."

Many people are reluctant to do Roth conversions because they don't want their Medicare premiums to increase.

Remember: your premiums would only go up over the period in which you're executing your Roth conversion strategy – that's nine years or less… 

David recommends having a "rip the band-aid off" approach when it comes to both IRMAA and Roth conversions.

Cardinal principle #4: whenever possible, pay the tax on your Roth conversion out of your taxable investments like a brokerage account or cash.

David sees six months of basic living expenses as the ideal balance in your taxable bucket.

The fifth and final cardinal rule is "know your ideal balance in your tax-deferred bucket before executing your Roth conversion strategy".

David shares a good mathematical reason for not converting 100% of your IRA to Roth even if you think that your tax rate down the road is likely to be higher than it is today.

A cheat code to help you establish the ideal balance in your tax-deferred accounts: if you're married, it's about $400,000 (if you don't have a pension or other sources of residual income).

Are you single? Then, it's about half that amount. 

Keep in mind that a lot will depend on how much Social Security you're planning on receiving in retirement.

Over at DavidMcKnight.com you can find a calculator to help you with all of this.

Following these five principles will help insulate your money from higher taxes, pay less taxes along the way, and increase the likelihood that your money will last as long as you do.

Mentioned in this episode:

David's national bestselling book: The Guru Gap: How America's Financial Gurus Are Leading You Astray, and How to Get Back on Track

DavidMcKnight.com

DavidMcKnightBooks.com

PowerOfZero.com (free video series)

@mcknightandco on Twitter 

@davidcmcknight on Instagram

David McKnight on YouTube

Get David's Tax-free Tool Kit at taxfreetoolkit.com