Could 2022 be an opportune time for a Roth conversion?

In this video, Anthony & Alex discuss the top 3 reasons to consider a Roth conversion now (and in the future).

Show Notes:

• Historical tax rates
• Is a Roth conversion right for you? 
• USA Today Article

Full transcript:

SPEAKERS

Anthony Saffer & Alex Okugawa

Full Transcript:

Alex Okugawa 0:00
Tax-free income from a Roth IRA can be a huge advantage in retirement and 2022 might just be the opportune time to perform a Roth conversion. Today we’re going to talk about Top Three Reasons. Why stay tuned.

Hey, there, it’s Alex and Anthony from One Degree Advisors. Today, we are discussing the top three reasons why you might want to consider a Roth conversion in 2022. Now, Anthony, funneling retirement savings into a Roth IRA is very attractive, but it should be done strategically,

Anthony Saffer 0:32
Roths provide that tax-free compounded growth, you get into retirement, and you have that tax-free income, most people know that since being around for about 25 years, doing a conversion from pre-tax retirement money into a Roth can be a great idea. But it requires tax at the time of conversion. So it should be done strategically.

Alex Okugawa 0:50
Navigating this cost-benefit analysis does require a bit of research and analysis. But again, it might be a good time to do it, and 2022. So let’s start with the first reason why, I mean, everyone’s paying attention to it, markets are down. So it might be a good time to convert.

Anthony Saffer 1:05
So when markets are down, basically what you’re saying is okay, I’m gonna have the values lower, I’m gonna make that conversion, meaning you’re paying less tax, because there’s less value that you need to convert, and then you can ride the wave back up. Again, assuming that it recovers,

Alex Okugawa 1:19
Think about it like a rubber band. The market is being pulled down right now. Like, let me convert it while this rubber band is being pulled down. So I’ve converted it, and then when the market recovers, now I can get that slingshot up in my Roth IRA, which is what I want the tax-free income.

Anthony Saffer 1:34
Yeah, and you can’t worry about getting the timing perfect, because it won’t happen. You just have to go ahead and do it when you think the time is right.

Alex Okugawa 1:40
And again, why it might be such a good time. I mean, at the time of recording this video, the S&P 500 is down about 13% from its high, crazily enough bonds, as represented by the $AGG are also down about 13% from their peak. So like you said earlier like it’s impossible to know the exact bottom, when will the recovery take place? I mean, that’s anyone’s guess. But it’s just looking at the market and looking at statistics, it still could be a good time to convert. All right, a second reason why tax rates are historically low. And the other thing to note here is that the tax cuts and Jobs Act, which is kind of this, this tax environment that we’re all enjoying right now are going to sunset after 2025.

Anthony Saffer 2:24
Yeah, and the other thing is, I mean, we are we have this large national debt, the large deficits, you know, many people are predicting that higher future taxes have to result to be able to pay that we’ll put this chart up from the urban Brookings Tax Policy Center. I mean, you can see from this with average tax rates is that we are pretty low historically.

Alex Okugawa 2:45
Now. This is the highest federal marginal tax income rate. So it’s not like the average. So it is the highest. But even then, again, to your point, really high government deficits are historically low tax environments. Again, we don’t know for certain but if we were to make guesses in estimates, which usually is what planning is, we’d say, hey, tax rates are gonna go up. So pay some money now. So you don’t have to pay taxes later.

Anthony Saffer 3:08
Yeah, so taking into account that number one, and number two values are lower, tax rates are lower. That’s where there can be some opportunity there. Awesome.

Alex Okugawa 3:15
Now, number three, inflation may increase wages faster than tax brackets. So again, it’s one of those things where if you expect income to increase in the future, you’ll want to convert while your income is lower now.

Anthony Saffer 3:28
Yeah, and I mean, even the expected increase in income, it may be due to inflation, just wage growth, it may be due to career advancement, which has nothing to do with the current economic circumstances, but more personal circumstances. But here’s the thing tax brackets do adjust for inflation, but they often lag. So from USA Today, it says the IRS has inflation adjustments, however, not perfect. The changes resulted in about a 3% adjustment. This is for 2022. Even though inflation over the past year has increased by 7%. Several provisions of the tax code were not adjusted to inflation. As a result, taxpayers can expect to pay more in 2022.

Alex Okugawa 4:06
And I don’t think a lot of people are thinking about that.

Anthony Saffer 4:09
So you’ll want to watch like, you know, looking at, you know, the current year’s estimate, if you’re going to pay more in taxes in 2022, as they’re saying, you still need to do your projection. But if this carries forward to the future, now, maybe a more opportune time,

Alex Okugawa 4:24
2022 might be a great year to do some conversions. And now let us know what you think. Are you using 2022 as an opportunity to do some Roth conversions? And if you have more questions about Roth conversions, and if they might be right for you, we made a video, which you can watch above here has some great information and resources. If you enjoyed today’s video, please like and subscribe for more. Thanks for watching.

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This does not constitute an investment recommendation. Investing involves risk. Past performance is no guarantee of future results. Consult your financial advisor for what is appropriate for you. Disclosures: https://onedegreeadvisors.com/solutions/#disclosures