Expecting a Pension? Strongly Consider a Roth Conversion
Release Date: 02/12/2025
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info_outlineDavid McKnight discusses a couple of really good reasons for doing a Roth conversion when you’re expecting a pension in retirement.
David sees the American tax system functioning in a similar way as a graduated cylinder.
Your income goes in and flows all the way down to the bottom. Some of your money gets taxed at 10%, at 12%, 22%, some at 24%, 32%, at 35%, and some at 37%.
Jeff Bezos, too, has some of his earned income taxed at 10% (only for about 3 seconds, though!).
If you’re planning on receiving a pension in retirement, understanding how this “tax cylinder” works will be crucial for maximizing your after-tax spendable income.
David shares an example showing that your pension and the taxable portion of your Social Security will consume all of your 10% bracket, and most of your 12% bracket – and that’s before you draw $1 from your IRA or 401(k).
When you take money out of your IRA or 401(k) in retirement, those dollars will flow into your cylinder and land right on top of all your other income and get taxed at 22%.
David explains that after the expiration of Trump tax cuts, the 22% will become 25% and, over the next 10 to 15 years, your personal tax bracket could be even higher!
If that scenario were to play out, the portion of your IRA or 401(k) that you get to keep could get smaller and smaller…
In case the Trump tax cuts extension does go through, then you could convert your IRA or 401(k) to Roth over nine years of historically low tax rates.
David likes to refer to the Trump tax cuts as the “tax sale of a lifetime” – he shares an example that illustrates why.
David touches upon what you can do, until 2034, to maximize your after-tax spendable income.
Mentioned in this episode:
David’s national bestselling book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track
PowerOfZero.com (free video series)
@mcknightandco on Twitter
@davidcmcknight on Instagram
David McKnight on YouTube
Get David's Tax-free Tool Kit at taxfreetoolkit.com