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When to and Not to Do a Roth Conversion

Personal factors, your tax bracket, expected future income and when you plan on retiring all play a role. The answer isn’t as simple as playing the tax bracket game (convert be low a certain tax bracket only).

Other considerations can affect you taxes down the road. Even Medicare premiums are an issue. A high required minimum distribution (RMD)(currently starts at age 72, but pending legislation will gradually raise that to 75, if passed) can cost more than just a tax bill. It can also increase your cost for Medicare.

The best way to handle a Roth conversion discussion is to break it into two parts: the conversion phase and the retirement phase.

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Profit from Inflation

It has been a long time since developed nations have tasted serious inflation. Unless you are near 60 or older you will not have experienced the last time inflation was a serious issue in the 1970s into the early 1980s. 

Coupled with low inflation is low interest rates. It is hard to miss the pattern of interest rates since 1982. Each increase in interest rates was followed by a new low in interest rates until we bumped against zero and stayed there for much of the past decade. 

The stock market loves low interest rates. The constantly declining interest rates gave us a stock market that has relentlessly climbed. In the early 1980s the price/earnings (p/e) ratio for large capitalization stocks was in the single digits and the dividend yield was in the 6% vicinity. Now the p/e multiple is closer to 30 and the dividend yield is below 2%. 

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The Way to Wealth

A government would be considered intolerable if it taxed people 10% of their time in service of the government. Yet idleness taxes many of us much more if we consider all the time spent checking email, our phone, social media and news feeds. All these activities add nothing of value to our lives or to those around us and is no worse than the government taxing you a percent of your time.

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