You need to focus on your marginal tax bracket and what your final tax bill will be for doing the Roth conversion. I did not follow your numbers but I suspect that you may be in the 22% federal tax bracket and as I recall NY state and NYC taxes are pretty high.Total Annual Wages: $264,000....
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2023 Tax Information:
AGI: 180K
Taxable Income: 152k
Effective Federal Tax Rate shown on Turbo Tax: 11.94%
The best way to do that is to do a dummy tax return to get a firm number. It will not be exact but you can use last years tax software or wait until December when the preliminary versions of the 2025 tax software comes out. That would also include state and NYC income taxes.
The 22 and 24 percent federal tax brackets are scheduled to revert to 25 and 28% in 2026.
If I was in your situation then to me it looks like the best case scenario is that you do Roth conversion in the 22% federal tax bracket(plus state taxes) now and the in 30+ years you avoid making traditional IRA withdrawals in the 28% federal tax bracket. That is only a 6% saving which to me is not enough incentive to pay taxes decades before you need to.
Under the current tax laws you may be able to do Roth conversions in the 12 or 15 percent federal after you retire which would be a lot more attractive.
I would not do the Roth conversions.
Your wife is only contributing $8,400 a year to her 401k now.Total Annual Wages: $264,000 (My Salary $193,500 / Wife 70,500 - this salary will increase to 101,00 over the next 3 years)
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401k Combined Balance: $388,000 (My wife and I both get a 5% match - I contribute $23,000 per year and my wife does 12% of salary)
I would suggest that you use the money to increases her 401k contributions to also contribute $23K a year too. You cannot do that directly but she could increase her payroll 401k withholding but $1,000 a month and then use about $750 a month from the gift to pay for your living expenses. That assumes that you are in a combined 25% tax bracket which is why the $750 is $250 lower. Those are rough round numbers so you would need to play with them to figure out how to max out the 401k.
You could put a lot more into the 401k before the end of 2024 and then also do more in 2025.
Statistics: Posted by Watty — Sun Sep 29, 2024 9:31 pm