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Double-Edged Sword

Sonja Haggert

WE LOOK AT OUR traditional IRAs each year and decide how much we’ll convert to a Roth IRA. We’re worried our tax rate may increase down the road, either because of tax law changes or because of the extra taxable income once we start taking required minimum IRA distributions at age 72. To head off that threat or at least limit the damage, we’ve been shrinking our traditional IRAs by converting them to Roths, where the money should grow tax-free thereafter.

There’s talk in Washington of making changes to Roth IRAs. These proposals include putting a cap on how much can be held in a Roth or added once it reaches a certain size, removing the ability to put alternative assets into a Roth or possibly eliminating Roth conversions altogether.

Then comes the other part of the equation. If we make a large Roth conversion, which increases our income, we’ll face not just a bigger income tax bill, but also higher Medicare premiums. The bottom line: We’re working with our accountant, trying to figure out where the sweet spot is—and then we’ll make a conversion equal to that amount.

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