If this method is used each year until Jim and Linda turn 72, they will continue to reduce the amount in their traditional IRA and increase the amount in their Roth IRA. And since qualified distributions from Roth IRAs are income tax free, Jim and Linda have the flexibility to choose when to take these distributions for smarter tax management. If Jim and Linda convert $40,000 from the traditional IRA to a Roth IRA, they are bumped in to the 22% bracket, but once the standard deduction of $25,100 is applied, their taxable income will be $79,900.īy converting some of the funds from their traditional IRA to a Roth IRA, they can choose the amount of the distribution, so it stays within their lower tax bracket of 12% once the standard deduction is applied. With a taxable income of $65,000, there is $18,550 until they hit the top of the bracket - $83,550. After discussing all of the variables with their financial professional, Jim and Linda decide to use a method often called “tax-bracket stuffing.” While a Roth conversion is a fairly simple concept, there are many things to consider and several ways to do it. In a few years, they will be required to start taking Required Minimum Distributions from this account that could bump them up to the next tax bracket. Jim and Linda also have a traditional IRA with an account value of $750,000. In 2022, they are in the 12% tax bracket ($20,551-$83,550) and are concerned that future tax law changes could put them in a higher bracket. They have a pension and Social Security benefits that amount to a taxable income of $65,000 a year. Jim and Linda are both 66 and retired from working at Hewlett Packard Enterprise Company.
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