What are your thoughts on Roth conversions if you are in the highest tax bracket and plan to be there moving forward?
-Joel
If you ask some financial professionals, the answer to this question might be a resounding no, and the discussion would be over. But there are arguments for doing Roth conversions, even if you are in the highest tax bracket.
In fact, there are specific instances where converting at the highest tax rates makes sense. And they are worth considering. (If you need help managing your retirement accounts, consider working with a financial advisor.)
Advantages of Using Roth Conversions in the Highest Tax Bracket
Consider these three advantages of using a Roth conversion, even when you’re in the highest tax bracket.
Taking Advantage of Relatively Low-Income Tax Years
This is the most common focus of planning for Roth conversions. The idea is that relatively low-income years, often thought of as the years between retiring and taking Social Security or required minimum distributions (RMDs), generate an opportunity to intentionally pay taxes.
For younger earners, this could also be thought of as converting (or contributing) to Roth before your earnings increase as your career progresses.
Removing Tax Uncertainty
If a taxpayer is concerned that tax rates could go up in the future, converting to a Roth takes tax rate changes out of the equation. The tax code is written in pencil, and Congress has the power to change it at any time and in any way it decides.
Nobody knows what tax laws will be in place in a few years, especially with the expiration of provisions of the Tax Cuts and Jobs Act in 2025. So if your concern is that tax rates will go up, converting to Roth now, in some ways, protects you from those potential increases.
Creating Tax Flexibility
A Roth can give you the flexibility to have funds available when you need them without fretting over the tax consequences. (If you need help with the tax consequences of your investment decisions, consider working with a financial advisor.)
When Would It Make Sense for a Roth Conversion in the Highest Tax Bracket?
The most clear-cut instance of Roth conversions making sense in the highest bracket is for taxpayers at a level of income and wealth where they can reasonably expect to be in the highest tax brackets throughout their lives. Tax rates may rise in 2026 and are currently at historical lows. For taxpayers already in the highest bracket who expect to always be there, converting to a Roth is a way to pay the devil we know instead of waiting to find out what the devil we don’t know will look like in the future
The uncertainty of tax rates in the future may be more painful than the check you’d have to write today.
This comes down to personal preferences and expectations for the future. By converting to a Roth in anticipation of tax rates significantly rising in the future, you are taking a risk to remove the IRS as a debt holder on your wealth.
If rates don’t go up in your lifetime or even go down in the future (whether because Congress changes the rates or you end up with lower income in the future), you could certainly end up paying more in taxes than if you did not convert.
It is important to make these decisions with as much information and context as possible. No one can guarantee what tax rates will be in the future. (If you need help managing the tax implications of your retirement decisions, consider working with a financial advisor.)
Next Steps
Whether you are in the highest tax bracket or any other, tax planning is most effective when you are thinking about the long term. Converting to Roth always means paying more in tax this year than you otherwise would have. So for a conversion to make sense, it has to be part of a longer-term plan.
The benefits of a conversion are typically recognized over time, not in the year of the conversion. The most successful Roth conversion strategies are going to be ones that are intentional and focused on multi-year planning.
Tips
-
Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
-
Consider a few advisors before settling on one. It’s important to make sure you find someone you trust to manage your money. As you consider your options, these are the questions you should ask an advisor to ensure you make the right choice.
-
Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
-
Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and offers marketing automation solutions so you can spend more time making conversions. Learn more about SmartAsset AMP.
©iStockPhoto/Kobus Louw, ©iStockPhoto/courtneyk
The post Ask an Advisor: I’m in the Highest Tax Bracket and ‘Plan to Be There Moving Forward.’ Should I Do a Roth Conversion? appeared first on SmartAsset Blog.
