OUR READER
WHO: Mark Crossler, 46
WHERE: Eugene, Ore.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
QUESTION: What's a good strategy for dealing with the likelihood that my tax bracket will go up?During his long commutes to work, Mark, a marketing professional from Eugene, Ore., likes to listen to personal-finance books on his iPod. His aha moment came when he realized that many of the tax breaks that he and his wife, Sandy, enjoy -- deductions for interest on their mortgage and home-equity loan; deductions for contributions to his 403(b) retirement plan; the $1,000-a-year federal tax credit for their son, Jacoby, 7; and the state income-tax deduction they get for contributions to Jacoby's 529 college-savings plan -- will disappear when they retire and pay off their mortgage. So even after they stop working and saving, they could still land in a high tax bracket.
And that bracket may be moving higher. As federal and state budget deficits grow, so do concerns that tax rates will rise. That makes moving money from a traditional IRA to a Roth look like a smart strategy. "Roth IRA conversions are the silver lining to the economic crisis," says IRA expert Ed Slott, a CPA in Rockville Centre, N.Y. "These may be the lowest tax rates you'll see for the rest of your life. And with account values down, it's a double sale."
Mark and Sandy started transferring money from traditional IRAs to Roth IRAs last fall after the stock market collapsed. Before the end of 2008, they also sold some investments they held in taxable accounts, locking in losses to offset future capital gains and generating cash to pay the taxes on the Roth IRA conversions. (If you use IRA funds to pay the tax, you'll incur additional tax and possibly pay a 10% early-withdrawal penalty.)
The Crosslers' $25,000 Roth conversion cost them an extra $5,700 in combined state and federal taxes in 2008, but they think it was worth it. "As the market rebounds, we'll have the added benefit of all that money growing tax-free for the rest of our lives," says Mark.
Wait till next year
To qualify for a Roth conversion in 2009, your adjusted gross income can't exceed $100,000, whether you are single or married. If your income is too high, be patient. Income limits on Roth IRA conversions disappear in 2010, so anyone can convert to a Roth IRA. Better yet, if you wait until then, you can spread the tax bill over two years, splitting it between your 2011 and 2012 tax returns.
Part of Mark's motivation is to have more control over taxes in retirement, when Roth withdrawals are tax-free. "We can withdraw enough taxable income from our traditional retirement accounts to keep us in a low tax bracket and then supplement our income from our Roth IRAs," says Mark.
That strategy makes sense, although the couple may not want to tap their Roth accounts quite so soon, says James Lange, head of James Lange and Associates, a financial-planning group in Pittsburgh, and author of Retire Secure (Wiley, $24.95). For instance, if you want to leave a legacy to your heirs, a Roth IRA trumps all other accounts, says Lange. There are no mandatory-distribution requirements, and your beneficiaries can inherit the account tax-free.
-
AI Stocks Lead Nasdaq's 398-Point Nosedive: Stock Market TodayThe major stock market indexes do not yet reflect the bullish tendencies of sector rotation and broadening participation.
-
Top Tech Gifts to Grab at Walmart Before ChristmasBig savings on Apple, Bose, HP, Vizio and more while there's still time to shop.
-
AI Appliances Aren’t Exciting Buyers…YetThe Kiplinger Letter Artificial intelligence is being embedded into all sorts of appliances. Now sellers need to get customers to care about AI-powered laundry.
-
457 Plan Contribution Limits for 2026Retirement plans There are higher 457 plan contribution limits in 2026. That's good news for state and local government employees.
-
Medicare Basics: 12 Things You Need to KnowMedicare There's Medicare Part A, Part B, Part D, Medigap plans, Medicare Advantage plans and so on. We sort out the confusion about signing up for Medicare — and much more.
-
The Seven Worst Assets to Leave Your Kids or Grandkidsinheritance Leaving these assets to your loved ones may be more trouble than it’s worth. Here's how to avoid adding to their grief after you're gone.
-
SEP IRA Contribution Limits for 2026SEP IRA A good option for small business owners, SEP IRAs allow individual annual contributions of as much as $70,000 in 2025, and up to $72,000 in 2026.
-
Roth IRA Contribution Limits for 2026Roth IRAs Roth IRAs allow you to save for retirement with after-tax dollars while you're working, and then withdraw those contributions and earnings tax-free when you retire. Here's a look at 2026 limits and income-based phaseouts.
-
SIMPLE IRA Contribution Limits for 2026simple IRA For 2026, the SIMPLE IRA contribution limit rises to $17,000, with a $4,000 catch-up for those 50 and over, totaling $21,000.
-
457 Contribution Limits for 2024retirement plans State and local government workers can contribute more to their 457 plans in 2024 than in 2023.
-
Roth 401(k) Contribution Limits for 2026retirement plans The Roth 401(k) contribution limit for 2026 has increased, and workers who are 50 and older can save even more.
