Married couple here, trying to decide on if we should do a $20,000 Roth conversion for 2025.
If we do this about $8,000 in tax exempt dividends would now be taxed at 15% instead of 0 (total 2025 estimated dividends $75,000) as another $20,000 in income would push us well over the $96,700 limit for tax free dividends. So with the extra 15% dividend taxes and the 22% marginal on the Roth conversion it would add $4,600 to our 2025 income tax.
Not counting state, obviously.
Last time I did a large Roth conversion (in 2023) the market gains covered the taxes paid in less than 10 months. This is money we do not need, realistically, ever. No worries about 5 year lockup. Kind of sucked when I looked at my taxes and realized I had paid more because of the loss of the 0% rate.
Would you do it, paying $1,200 in extra dividend taxes as well as the income tax on the conversion itself?
Roth conversion will increase dividend taxes as well as income taxes. Does it still make sense?
byu/madkiwis intax
Posted by madkiwis
1 Comment
No, it’s almost never a good idea to do Roth conversions while working full time. You do Roth conversions if you are unemployed like back in school or in early retirement.
You’re misunderstanding the difference between Roth and traditional if you think market gains “covered the taxes.” You would have had the same gains on a larger balance if you kept the money in the pretax account (or, if you paid taxes from outside balance then on the pretax balance plus investing the amount you used to pay the taxes.
Also, you probably don’t want to hold dividend stocks especially in a taxable account but really at all. Companies that pay dividends generally lag those that reinvest profits in growth. Dividends are kind of like forced sales.