Why Not to Do a Roth Conversion in 2022
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Roth has been a buzzword in the industry since its creation, and 2021 shined an even brighter light on it. Between Peter Thiel’s $5 billion Roth account and political fighting over back-door Roth contributions in the proposed Build Back Better legislation, this topic is top-of-mind for consumers and advisors. But the focus has been on how to get as much money in a Roth as possible, but that is not a universally great idea.
Here are five reasons not to recommend a Roth conversion to your clients.
1. Shadow taxes – “We’ll just fill up the 24% tax bracket.” Marginal income tax rates get all the attention when deciding whether to do a Roth conversion and the amount to convert. However, federal income tax rates are not the only consideration. Because a Roth conversion is included in adjusted gross income, there are other costs associated with intentionally adding income to a tax year. The two biggest are the Medicare Income Related Monthly Adjustment Amount (IRMAA) and the Premium Tax Credit (PTC) established under the Affordable Care Act. These are often called “shadow taxes” because they do not follow the standard income tax brackets. If you have a client who is impacted by either, they need to be thoroughly considered before moving forward with a Roth conversion.