Are Roth IRA Conversions Worthwhile in the Top Income Tax Bracket?

Starting in 2010, all income restrictions on Roth IRA conversions have been removed. Even someone in the highest tax bracket can now do a Roth conversion.

At first glance, this does not seem particularly attractive. After all, if you are in the top tax bracket now, there is a chance you may earn less income in the future, which could put you in a lower tax bracket. Even if you expect to remain in the top bracket, you may think it is unwise to pay the income tax early and it is better to wait until you must withdraw from your IRA at age 70 1/2.

I compiled information on the top income tax bracket since the income tax was begun in 1913. I found that the current top bracket of 35% is actually very low based on history. Given the widening budget deficits, it is quite likely that the top income tax bracket may be much higher in the future.

  • From 1932 through 1986, the top marginal tax bracket was at least 50% and actually reached 94% in 1944.
  • In 1916, the top marginal tax rate was only 15%. But in order to raise funds for World War I, the top rate was raised to 67% in 1917. This is an increase of 52% in one year!
  • During the Depression years, the top marginal tax rate skyrocketed. It was a modest 25% in 1930 and was raised to 63% in 1932 and 79% in 1936. If health care costs are not contained, I wouldn’t be surprised if history repeats itself over the next five to ten years.

Based on the data below, Roth IRA conversions seem advisable for anyone in the top income tax bracket who expects to remain there in your retirement years.

  Top Marginal tax Rate(%) for Income Over InflFctr Infl Adj Income
1913            7.00 500,000 21.67 10,835,000
1916          15.00 2,000,000 18.52 37,040,000
1917          67.00 2,000,000 15.48 30,960,000
    1918            77.00 1,000,000 13.13 13,130,000
1919          73.00 1,000,000 11.23 11,230,000
1922          58.00 200,000 12.9 2,580,000
1923          43.50 200,000 12.53 2,506,000
1924          46.00 500,000 12.53 6,265,000
1925          25.00 100,000 12.1 1,210,000
1929          24.00 100,000 12.67 1,267,000
1930          25.00 100,000 13.63 1,363,000
1932          63.00 1,000,000 16.8 16,800,000
1936          79.00 5,000,000 15.37 76,850,000
1940          81.10 5,000,000 15.37 76,850,000
1941          81.00 5,000,000 13.8 69,000,000
1942          88.00 200,000 12.82 2,564,000
1944          94.00 200,000 12.17 2,434,000
1946          86.45 200,000 10.08 2,016,000
1948          82.13 400,000 9.03 3,612,000
1950          84.36 400,000 8.53 3,412,000
1951          91.00 400,000 8.18 3,272,000
1952          92.00 400,000 8.15 3,260,000
1954          91.00 400,000 8.12 3,248,000
1964          77.00 400,000 6.95 2,780,000
1965          70.00 200,000 6.81 1,362,000
1968          75.25 200,000 6.09 1,218,000
1969          77.00 200,000 5.73 1,146,000
1970          71.75 200,000 5.44 1,088,000
1971          70.00 200,000 5.27 1,054,000
1977          70.00 203,200 3.47 705,104
1979          70.00 215,400 2.79 600,966
1981          69.13 215,400 2.3 495,420
1982          50.00 85,600 2.22 190,032
1983          50.00 109,400 2.13 233,022
1984          50.00 162,400 2.05 332,920
1985          50.00 169,020 1.98 334,660
1986          50.00 175,250 1.96 343,490
1987          38.50 90,000 1.87 168,300
1988          28.00 29,750 1.79 53,253
1989          28.00 30,950 1.7 52,615
1990          28.00 32,450 1.61 52,245
1991          31.00 82,150 1.57 128,976
1992          31.00 86,500 1.52 131,480
1993          39.60 89,150 1.48 131,942
1994          39.60 250,000 1.44 360,000
1995          39.60 256,500 1.4 359,100
1996          39.60 263,750 1.362 359,228
1997          39.60 271,050 1.341 363,478
1998          39.60 278,450 1.319 367,276
1999          39.60 283,150 1.284 363,565
2000          39.60 288,350 1.238 356,977
2001          39.10 297,350 1.223 363,659
2002          38.60 307,050 1.193 366,311
2003          35.00 311,950 1.17 364,982
2004          35.00 319,101 1.136 362,499
2005          35.00 326,451 1.093 356,811
2006          35.00 336,551 1.071 360,446
2007          35.00 349,700 1.027 359,142
2008          35.00 357,700 1.027 367,358
2009          35.00 372,950 1.01 376,680
2010          35.00 373,650 1 373,650
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2 responses to “Are Roth IRA Conversions Worthwhile in the Top Income Tax Bracket?

  1. Hi QI, I was just contemplating this very same question recently as I am in the 2nd highest bracket now and I have a six figure rollover IRA. Have you run the analysis based on the scenario that you will stop working completely at 59 1/2 and thus no earned income and end up in a lower tax bracket?

    • Hi Calvin-
      I have not run a detailed analysis. I was just pointing out there is a pretty high likelihood that the highest tax bracket (and probably the second highest as well) may very well be MUCH higher in the future and stay there for an extended period, given the growing budget deficits.
      For someone working now that plans to stop working completely at 59 1/2, the decision is not so simple, since it may be better to wait until age 60 and then do aggressive Roth conversions in the gap between age 60 and 70 when you have to start withdrawing.
      But many people in high brackets now, may very well remain in high brackets even after they retire, since they will likely embark on second careers. Look at John Corzine (age 63) who just took on two new jobs as a CEO and college professor. I’m sure Corzine does not need to work anymore, but is probably working for the enjoyment.
      If your tax bracket will remain high after retirement, it probably pays to do some Roth conversions now in case the marginal rates go up substantially in the future.

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