The retirement researcher is explaining why it's so hard to work out how much to convert to a Roth account. Because Medicare surcharges kick in at income cliffs, a single extra dollar can trigger a cost far larger than the dollar itself.
…22%. And yeah, absolutely. It's important to think about that point and to think about how you really have to invest in a taxable brokerage account outside of that as well to be on an equal footing. And I agree with you 100% about, I don't know if people always appreciate that aspect of things.
…taxes throughout the year. So for someone who decides, you know what, I'm going to switch from contributing to the traditional account to a Roth Account or converting assets to a Roth Account. What should they do, if anything, to account for the fact that their tax bill is going to be higher?
…And so you have to account ahead for the additional distributions needed to cover those taxes. And if it was just one single tax rate, there's a basic formula that tells you how much you need. It's just one divided by one minus the tax rate is what you would need to multiply the Roth conversion by to know the total amount you'd have to take out to also cover the tax bill. But the problem is. With all these different quirks in the tax code, the tax rate on each dollar of income can be jumping all over the place. And Medicare premium surcharges are a classic example of you could face 100,000% tax rate on a dollar when it's the dollar that puts you over the threshold for the next Medicare surcharge. So it becomes a lot more complicated to monitor all that. Now, with Medicare, there's a little bit of complication because really that's not going to apply until two years later. So it's an extreme example, but that's an issue that does make it harder. You need to account for when you're doing the calculations of how much to convert, how much additional taxable income that will create, how much…
That's a good way to describe it, the looping tax calculation, because it doesn't apply just to the conversion. I think it applies to spending in retirement in general, because the more you spend on anything, you may have to be taking more out of your traditional accounts or selling assets in your…
It can. Yeah, it makes the calculations a lot more difficult to run for sure.
Which, of course, I guess argues again for having more Roth assets because then you don't have to worry about it because you own the complete account and you don't have to worry about what I often call the tax cascade when you are taking money out of your traditional IRA.