ROTH conversions: How the taxes are calculated - YouTube

topic is roth conversions specifically how much  tax are you going to have to pay if you do a  

roth conversion i find roth conversions to be a  very effective strategy but when i look at roth  

conversions there are two things that stick out  to me number one how do you feel about tax rates  

going forward in other words do you think taxes  are going to be higher in the future number two  

and this may be a little bit more important where  am i now in terms of my income and would it be  

cost prohibitive to pay the tax now and i'm  going to show you in today's video how that all  

works out how income tax is calculated and also  what happens when you throw income right on top  

to create a roth conversion this is a tax rate  cylinder you may remember this from chemistry  

class i think you'll know as i start to explain it  we have what's known as a progressive tax system  

we pay tax at different rates depending on how  much income we have so we pay some at ten percent  

some income at twelve percent some income at  twenty two percent some income at twenty four  

percent the upper limit of the twenty four  percent bracket is 321 000 so most people  

are below that so what happens as income  comes into our picture we pay some at 10  

some of 12 some at 22 and some at 24. now this  seems pretty straightforward the problem becomes  

is when we do a roth conversion we're  throwing more income into this picture  

and thus we are rising in the cylinder  this is how we end up paying more tax  

so let's look at an example in this example  we have a hundred thousand dollars of income  

there's a twenty four thousand dollar standard  deduction leaving us a taxable income of 75  

000.756 to be specific so this is the number that  all of our taxes are going to be calculated on  

so how do we calculate the tax well we know  that the first 19 400 is going to be in this  

area we're going to take 10 on that we know the  next bit is going to be in this area where we're  

going to pay 12 we are not rising with taxable  income above seventy eight thousand nine fifty  

so we know we're going to be in these brackets  down in this area so the tax burden on that is  

eight thousand eight hundred and sixty seven  dollars and it's an effective tax rate of 11.4  

percent okay not too bad so the marginal tax rate  is 12 that's the highest tax rate we're going to  

pay but the blended or the effective of tax rates  a little bit lower because we're blending these  

rates some at 10 some at 12 so that's how we would  calculate a normal amount of tax that's due so  

let's move on now and talk about what happens  if we have a roth conversion let's assume for a  

second that we are going to convert 50 000 in this  calendar year we'll call this the conversion we're  

going to convert 50 000 so what we do here now is  we take the 75 we receive before an income plus 50  

that's 125 600 now this is a significantly bigger  number that's why we have to be very careful to  

make sure this works out economically as you can  see we are now going to be up here in terms of  

our marginal tax rate now that doesn't mean that  we are now paying 22 on every dollar of income we  

have earned it means that the highest echelon of  our income is going to be in that category the tax  

burden on this is about 19 300 federal tax burden  right and that is an effective tax rate of 15.4

so although we have now gone into the 22 tax  bracket and we are paying a higher amount of tax  

on the conversion we are still at an effective  tax rate of 15.4 which is not so terrible  

darrell do you think people like our videos  beats me how do we find out we can ask them  

how like this if you like our videos give us  a thumbs up below anything else yes subscribe  

this way you'll see our content right away tell  the viewers why we do this to help them create  

safety simplicity most of all financial strength  in the future got it to subscribe just click the  

button below now back to our regularly scheduled  video here's here's the thing is as it pertains  

to roth conversions yes we are accelerating the  tax that's that's part of the equation that's why  

i did this video to show you how the taxes are  calculated a common myth in retirement is that  

you're going to be in a lower tax bracket that  is you're going to stay lower because all of a  

sudden you're not working what the research  shows and what my personal experience shows  

is that people in retirement want to spend almost  as much money as they spend while they're working  

plus if they don't spend the money on cruises and  what have you they're going to spend it on medical  

and we also know that the whole deduction picture  changes a little bit the securement way is  

operating from position of strength and it's  looking at something like this and saying  

is it possible that we can take some risk off  the table and feel better in retirement because  

we've accelerated some of the tax here's what  i know just because you have a hundred thousand  

dollars in an ira it does not mean you have a  hundred thousand dollars you do have a future  

tax obligation with a partner the government and  they're the only ones that get the vote so above  

anything else please take action because you  know you've heard me say it before there are  

many ways to run into a secure and comfortable  retirement but doing nothing is not one of them