So the big takeaway: Convert from bond holdings at the beginning of the year, and convert from stock holding when they dip. Excellent study! Thanks for sharing.
Just executed a Roth Conversion based upon ~20% discount. As the Market decreases, I will continue to convert in kind to a Roth Account. I plan to fill the 24% Bracket this year and for the next 2 years.
I have been watching Eric and Tony for some time now. Believe it or not, some of the early videos were criticized - as being too long, or slow paced. I think he's been trying to keep these short. (Just my 3 cents......{inflation has driven that up too}).
I think his pace and cadence is perfect. I don’t understand all the criticism about how he speaks. Sounds perfectly normal to me. I think maybe the editing they do to cut out the gaps between sentences to make the overall video shorter is what confuses people or what they don’t like. Don’t change a thing Eric.
If I knew the money moved to Roth was going to compound at 10% per year is be inclined to move so much per year that would require some to be taxed at 32% just to get it done. I could move it all in 4 years then no RMDs. State tax is the same only the Fed does the stupid upward bracket thing. I'd like to see it done away with and go to a flat tax.
One additional strategy, in 2022, the market was experiencing a severe downturn. In a matter of weeks my traditional IRA Stock funds lost 30k. At that point,. when what was previously worth 125K was now only worth 98K I converted those funds to a Roth Ira saving the taxes on the 30k and having the growth when the market recovered be tax free.
Performed my first conversion last year in December because I was uncertain how much taxable income I'd have. This year I'm performing quarterly conversions and paying estimated taxes.
I wish I had not done 100% pretax in my 401k over the decades. A huge mistake. I should have paid the tax on at least half of it when I was in the lower tax bracket while working.
I have been watching Eric and Tony for some time now. Believe it or not, some of the early videos were criticized - as being too long, or slow paced. I think he's been trying to keep these short. (Just my 3 cents......{inflation has driven that up too}).
@@mr.j2776 I'm new to this channel so have lots of listening pleasure ahead of me. Such a shame folks won't take even 20 mins in one sitting to tend to their personal finances. Will these same folks sell at the wrong time bc they don't understand the logic behind a strategy? If this great channel dumbs things down by giving less or no supporting info, they'll lose their value-add and subscribers like me. Happy investing!
@@i-postm4943 I try to watch all of their videos - even if the topic does not apply to my current situation. I think they do a great job. Sometimes I pause the video so I can look at the chart before Eric (or Tony) explains it. And it is aways easy on my computer to go back and play a section again.
Clearly this is true for the majority, especially if they're converting over a relatively short period of time and are dedicated to paying a lot of taxes on their conversions. HOWEVER...if you're starting early and converting slowly over time and under taxable limits you'll have to convert at the end of year to hyper dial in your 1040 to get it perfect. Anything can happen throughout the year and even small surprises can completely upend your apple cart. This year despite good planning I got a few surprises in the form of additional income/interest and as you pointed out you can no longer re-characterize your conversions so I use our IRA/Roth IRA contributions after the end of the calendar year to balance out any last minute changes. I've been playing this game since our early to mid 40's so we'll be all set long before RMDs ever kick in and once all is converted I'm going to use the same strategy to step up the cost basis in our taxable investments just in case they ever change the LTCG/QD rate of the 12% bracket. Now that I've taken care of taxes, I'm going to see what I can do about death, lol.
First he says that we can't know the future. Then he says that a drawdown strategy works best. But how do I know whether markets will drop enough to trigger the drawdown? Maybe I should just make a guess when to convert and how much each time.
Your videos are very insightful and very informative. Keep up the great work. One question I have regarding your analysis is what percentage was assumed for the partial conversion when the market was down, 20%?
OMG. Extremely valuable information... the only one downside for my (as second language speaking persona) ears is speedy presentation. Well, listen to 3 times to follow you advice 😂
The beginning of the year adds 11 months of growth. What is the result had the end of the year strategy started 1 month before the beginning of the year?
Mr. McVay, no the 1040 does not contain the information to do such a calculation. In any event this penalty is so small that it should be last in your list of things to worry about. My background: have done volunteer income taxes for AARP TaxAide over 20 years, plus my own financial situation requires good tax planning around RMDs. Have completed all the course work for CFP but never took that marathon exam. Hope this helps with your situation.
Something to consider is in this current market and world event taking place, holding off till 3rd or 4th quarter may make sense. Also the money you plan to use to pay the taxes on the conversion is coming from say an I bond which IS making money.
Would you consider making a video regarding strategies to pay for the ROTH conversion taxes for those who accumulated significant 401k balances ? There are a lot of retirees with tax bombs making ROTH conversions now and I believe many struggle with how best to pay the taxes due. For example, we retired in our mid-fifties and are using these lower earning years to make ROTH conversions at lower rates before RMD age - we are about 7 years into an annual 15 year conversion plan so far. We prefer to convert an amount annually to stay within the 24% bracket. We pay taxes out of pocket for these conversions to maximize the amounts going into the ROTH. Conventional wisdom was to drain taxable accounts and investments first to pay those conversion taxes while letting the tax deferred retirement accounts compound. We followed this so far and are through most of our cash savings we left available for that. Now we need to sell Mutual funds to pay the conversion taxes. But giving up cash from savings accounts only making a fraction of a percent was an easy choice compared to selling mutual funds that are making 10 -20 times that rate. My ROTH investments are fairly conservative and making around 4% in stock dividends. The mutual funds however were averaging at least 7% (many years twice that). Just assuming that 3% return difference, the mutual fund is worth almost 50% more at 25 years than the same amount a ROTH would generate at 35 years. I chose these times assuming one of us might live 25 years, then we would leave both the Mutual funds and the ROTH to our heirs. The heirs get another 10 years past our death to further compound, thus 35 years for it to compound at 4%. Still, the mutual fund is much higher 10 years earlier when it would be inherited. If the mutual fund was left to heirs, it should get a step up basis so it gains are not taxable, as they currently are for us. When we sell the mutual fund to pay taxes, we need to take out a larger amount to also pay for the taxes due on the mutual fund gains - about 60% of the mutual fund balance is profit. This results in a large drain of a mutual fund that was likely to have outperformed the ROTH gains. Additionally, the sold mutual funds increases our income and reduces the amount we can convert to a ROTH without crossing into the next tax bracket. If the market drops, taking from the mutual funds is even more costly as more shares will need to be redeemed. And selling these directly reduces the net value of that account each year So, I am considering a new strategy. Over 7 years we have converted significant amounts to the ROTH and it is producing enough now in dividends to pay for the conversion taxes on each year's conversions. The ROTH has been open over a decade and I am over 59.5 so there shouldn't be a penalty to take the dividends (?). I am considering taking just those tax free ROTH dividends to pay for the conversion taxes due. This allows us to convert more into the ROTH annually, also accelerating the annual dividends in the ROTH and somewhat offsetting part of the lost compounding. Those dividends were likely to compound less than the mutual funds would have, plus less ROTH money will need to be taken vs. mutual funds sold to cover their tax gains plus conversion taxes. Especially true if the mutual funds get even more than 7%, but I'm not counting on that over the next 10 years at least. Seems counterintuitive to be taking some of the gains from the ROTH now, but it is the only tax free money readily available and the long term costs of cashing in the mutual funds is likely much higher. My plan would be to let the tax free ROTH dividends pay the taxes due on future ROTH conversions. The ROTH will still grow significantly annually with larger the conversions. I also won't be actively reducing the mutual funds when sold to pay the ROTH conversion taxes so our net worth should continue to rise annually all things being equal. This is one example, but I'm sure many retirees are struggling regarding where to most most efficiently get the money to pay for the conversion taxes. I don't believe our situation is unusual since many of us followed financial advice to diversify. Many of us have been saving in both tax deferred and taxable investments for decades to prepare for retirement. So, some videos on how to pay ROTH taxes due in these scenarios might be useful if you are looking for more video topics.
@@f430ferrari5 - We have a very large tax bomb in each of our 401ks if we do not get money out. If we just took a 401k distribution and reinvested that, it would be in invested accounts that would add more taxable income. But in the ROTH, any gains will be tax free, forever. Critically, if we don't deflate the 401ks, once RMD age hits we could be permanently pushed into the next higher tax bracket. When the first spouse dies, the survivor would then permanently pushed up a second tax bracket when they would file at single rates. We can convert most now and stay in the 24% bracket, but if nothing done the surviving spouse might be in the 35% bracket. With these conversions, we hopefully can remain in the current 24% bracket for life. All would be made worse if Congress raises tax rates sometime in the next 20-30 years, which almost seems a certainty to us. So, since we have some of the lowest tax rates in my lifetime, we chose to pay them at the lower rates now. The ROTH is already generating more in divies annually than the taxes due on the planned conversion, so will still get the full converted amount plus extra divies left over with this approach. Everyone has different situations, since most of our retirement savings were tax deferred this makes the most sense for us right now.
@@davidroush1224 I already know everything you just said. Who said anything about reinvesting any 401k distribution portion. You asked where to take monies out to pay taxes on your “conversions”. All I suggested was pay the taxes from some 401k distributions. Is there a reason why you don’t?
@@f430ferrari5 - Sorry, it is all tied together in my mind. I am trying to maximize the amount we covert annually and barely remain in the 24% bracket. Thus our major driver is not increasing our annual income in any way and move into the 32% bracket. For example, if I wanted to move 200k into the ROTH I'd have to request something like $248k from the 401k to have it also cover the taxes. The $200k already put us at the top of the 24% bracket, so the $248k approach of taking an extra distribution from the 401k to pay taxes would have $48k moved at the 32% bracket, or $15,360 in taxes on that 48k. If I use ROTH divies, zero. So, in the end it is all driven by a desire to not move into the 32% bracket now while making these conversions. If we bleed down the 401ks down enough, come RMD age we don't permanently end up in the 32% or 35% bracket for the surviving spouse. Or higher, if Congress raises rates later.
@@davidroush1224 you can’t be serious with your mindset. Just convert 160k and withdraw 40k. You just moved 200k from your 401k. Yes? You’re still in the 24% bracket. Yes? This is what people who are 59.5 or older do who don’t have the liquid cash to pay the taxes for conversion or concerned with draining most of their liquid cash when future conversions may still be possible. It’s understood you want 200k into Roth vs 160k but what other choice is there? Are you going to drain your liquid cash funds? Are you going to drain your other investment funds? Just being direct and to the point. I understand your mindset somewhat. You regret not putting into Roth earlier now you’re in a panic to catch up and convert as much as possible while attempting to stay in the 24% bracket. You should in reality try to get yourself in the 12% bracket. That’s what I’m doing. You seem to have way over saved in your tax deferred accounts. Still better to over save than under save.
Everyone is missing out on the 'Roth Conversion with Cash-out Refi Combo'. Doing a cash-out refinance mortgage provides cash for living expenses (including $ to pay the tax on Roth conversions), and thus a super low tax rate on Roth conversions.
I do Roth conversions the same time I make quarterly estimated payments (so obviously 4 times a year). Since I'm going through the exercise of projecting annual income anyway, it's a good time to also do a conversion.
I want to perform a Roth conversion and I like to fill up my current tax bracket (24%), how much room do I really have when I am still working and contributing to my 401K? Do I use my Gross Income? Gross Income minus my 401K contribution and other pre-tax withholdings? For example, if my Gross Salary is 100K and contributing 10K to my 401K, so the Adjusted Gross is $90K. For single filers, the 24% tax bracket is $86,376 to $164,925. How much room do I have before hitting the next tax bracket? Is it $164,925-$100,000=$64,925? Or is it $164,925-$90,000=$74,925? Can you do a video on what to include/exclude when calculating the amount to convert for a Roth conversion so to fill out current tax bracket, especially for a person who is still working and contributing to 401K, and all the different tax withholding?
@Sal. For most…performing a Roth conversion while still working isn’t ideal. Even in your example of 100k and 10% to 401k why not just put 6k to Roth IRA. If over 50 then 7k to Roth IRA each year. A 100k now salary person who has to perform Roth conversions while still working is somebody that put max into 401k since working and also put monies into an IRA and is sitting on 2-3 million of tax infested accounts at 60 IMO. It’s the time of retirement and that window before collecting SS is the time to perform Roth conversions. If one is getting a pension at retirement it would still seem to be better to perform Roth conversions here at retirement.
I figured, hey, interyear Roth conversion timing wasn't worth the hassle -- how big a difference could it make, anyway? Well, now I know, +20%! Darned. Wish I could have a do-over on this one. And, back when I was doing my annual conversion "chunks" post-retirement but pre-social security, I would even have had the recharacterization "mulligan" available to me, pre-TCJA 2017. Wish I'd had Eric's wisdom here available to me then ...
Hi - honest question here; I may not have enough in my 401k to worry about doing 100k/yr... what about only doing 24k/yr for the married couple standard deduction to avoid taxes as much as possible? excuse my ignorance, just trying to learn.
a bit more context; let's say I have 1M in 401k tax deferred.. retire at 59... start conversion at 60 when W2 income is zero. just to use easy numbers.
Common sense would dictate that one expects the drawdown approach to be the most profitable, locking in tax-free growth associated with vicissitude of the market, but it's also the most difficult requiring success in accurately timing the market. The upside: it removes any need to finesse frequency and timing of conversions within a tax year.
Eric, thank you! ❤ Please make a similar video for those who are getting a LUMP SUM for SSA past 5-6 Years of SSDI Benefits (~$32,500 per year) and it's Impact on Taxable Income and IRMAA for those years with Rollover to Roth conversions $50-$75k in these past years already pushed Income above IRMAA surcharge in 2021 (but SSA didn't indicate IRMAA surcharge for 2023. Would electing Checkbox Lump Sum Tax Calculation method for such LUMP SUM or a different year by year method impact Income Base for 2023 on which SSA is going to determine IRMAA surcharge in 2025? Intuitive answer should be that PAST YEARS LUMP SSDI SUM should only impact Past 5 years Income, but does this mean it would push each of these 5 years Income for 2018, 2019, 2020, 2021, 2022? Or would somehow this PAST YEARS SSDI LUMP SUM ruin any plans for Rollover to Roth Conversions for this year? Why do they look back as far as 2 years for IRMAA? Should someone receiving such HUGE LUMP SUM. If previously you have made LUMP SUM SSDI video on Impact to Taxable Income for IRMAA and Tax Torpedo Zone Modeling Chart, could you please give us all a link with an example?❤ This is a Great video on the difference in Strategies for different portfolios. IRMAA Extra surcharge for MEDICARE Premiums is indeed a huge deal to consider for some of us who are retired on Social Security Income. Also, please make a Tax Torpedo Zone Modeling on SS Income of $32k or so for Singles who also want to convert from Rollover to Roth before FRA of 67 or 75? The only question is WHY does Rollover to Roth conversion should be impacting IRMAA surcharge for MEDICARE Premiums since technically there was nothing received by us from Conversion, on the contrary, we are going to pay Huge Taxes...
Aha, isn’t that the magic question - how to time the market!? Since only the guys doing internet ads know how to time the market /s…. It would appear doing a split strategy with the majority (75%?) early in the year, followed by the rest later in the year once you are confident about the room you have left in your tax rate, makes the most sense for common mortals.
OPT #5 is my strategy also, but this year, I did all of the conversions in Q1 because the stock market completely blew up. I'm sure I did not get the benefit of the lowest low point, but I did the conversions as the market began to crater. I probably finished the conversions for this year with the market down 5-10%. So I missed a little bit of the discounting. However I agree with the strategy it's a good one.
I am starting early next year. Will do the bulk of it in Jan and Feb. Will leave about 10,000 till the end of the year - so I can see how much of a hit I'll get with Dividends and Capital Gains. (I got kicked in the pants in 2021). If I still have room - I'll do 10-15,000 more. Repeat in 2024. Repeat in 2025. If any is left, I will do it in 2026. (Trying to stay in the 12% bracket - and 15% in 2026. To do that, I will do some in the 22% bracket in 2023).
Wow, nice setup. This is our dilemma wife & I 58 y/o wife has early breast cancer so she will take SS at 62 y/o. I'm retired with a $67OOO pension wife's SS will be approx $24000. We both have Roth combined approx $240,000 & 1.8 million in Vanguard IRAs. It only makes sense to do Roth conversions before the wife starts SS otherwise start to creep into 22% & higher? Our goal is to start taking distribution early 59.5 y/o spending down & enjoy life before death comes.
@@HB-yq8gy That's a lot more challenging then my situation. Professional advice (and plan) might be an option. Looks like a large amount to convert (or spend before RMDs). I think you will hit the 22% bracket, but from what I have heard, it might be a good idea to convert as much as possible without hitting the IRMA penalty.
@@HB-yq8gy - Definitely complicated with your wife's situation. Sounds like your total income at her age 62 will be around $91,000/year so making conversions now makes a lot of sense assuming you are getting by on your $67,000 pension. My understanding is that you will also draw down the Vanguard IRAs and are planning to only take enough to stay in the 22% bracket. That gives you up to $178,150/year to help fund these activities and conversions. Once she starts SS that lowers your conversion ability to stay in the 22% bracket. Even with "lavish" travel, in over 7 years of retirement our highest travel expenses in any single year were about $30,000. That included a month snorkeling in Maui, 2 trips to Europe as well as multiple smaller trips in the US. Maybe you will spend $50k/year in travel, but that is a lot in our experience. But you could if you are really trying to enjoy as much as possible now - which of course you SHOULD given her health situation. You may end up needing to bump into the 24% bracket now to ensure you both enjoy life as much as possible now, while also making significant ROTH conversions. From my understanding using the numbers you provided, you may want to keep later RMDs in mind on the large Vanguard IRA of $1.8 million. It is a large enough lump sum that even withdrawing $100k/year, depending on how it is invested, you may not see much of a decline in the IRA total. If not, and assuming it is still around $1.8 mil at age 72, then your RMD from it will be $70,312 if my math is correct. Add that to your pension, her SS and you already are at $161,312.5 before you even count your SS which could put you closer to $200,000/year after 72, and into the 24% bracket permanently. Or higher if Congress raises tax rates down the road. So, it might be worth considering converting some more now at the 24% bracket to lock in that tax rate, we well as reduce the compounding of money in the tax deferred IRA. We had similar totals in our tax deferred accounts than you 7 years ago, but even with large conversions our total is about 50% higher so growth in large tax deferred accounts can be substantial in up markets.. This is where my wife and I ended up. We are converting large amounts annually near the top 24% bracket maximum to try and bleed down large balances in our 401ks. We want to avoid those taxable accounts compounding even higher because we assume tax rates will also be higher in the not too distant future. And in any case, everything we convert to the ROTH compounds tax free so it doesn't add to the problem later if we hadn't converted. My suggestion is to at least consider bumping into the 24% bracket now. That would allow for some significant ROTH conversions while also taking out enough cash to fund any fun things she wants to enjoy. Life is short and I would guess that this is what you both saved for all these years anyway - I would try to hit her bucket list items early, if she has any. I wish the best for both of you. Hopefully her treatments are successful and allow you spend decades more together.
@@davidroush1224 Thank you for the kind words & for taking the time to explain all this valuable information. Yes, our monthly expenses approx: $5000-6000. Plan on drawing down from Vanguard IRAs, my SS is approx $3084 yearly at 62 y/o. That's the plan drawdown/Roth conversions die close to zero. We will go over the best tax strategy with our CPA definitely don't feel comfortable as a DYI.
@@HB-yq8gy I can't imagine being in a similar situation with my wife so I wanted to offer some thoughts based on our experience. Hopefully it may help highlight some things to consider as you are planning the next few years. For the last 30 years when saving for retirement I ran projections of the effects of compound interest. I thought the numbers seemed almost impossibly high, but decades later they have proven to be true. That suggests to me that if there is a decent stock market over the years before you hit RMD age, there is a significant "risk" you similarly will have very high RMDs as we face. Nice problem to have, but if not careful you could end up with an extremely large income after age 72 if you don't agressively try to reduce the tax deferred IRA account earlier. With just your pension and both SS checks at 62 you will be making about $120,000/yr. (assuming you meant your SS would be ~30,000/year, not $3084). Given your $6000/month expenses, you will already have an income almost $50,000 over your expenses with those three sources alone. For reference, at age 64 our net worth is 1.8 times what our net worth was at the age 58 you mentioned. If you experienced similar market conditons, your IRA could be $2.35 million by the time she reaches 64. You may need to make withdrawal and conversion totals over $150,000/year until age 72 to bleed that IRA down completely. This may be higher than you expected or planned, I just wanted to convey that if you experienced what we did since age 58, you may need to make significant reductions in the tax deferred $1.8 million IRA. Or, you may choose not to completely exhaust the IRA by then. The first 5 years of retirement we only converted about $65,000 annually; we should have been more agressive earlier. Now, the stock market performance doesn't look that great for a year or more, so you may not see growth as we did. And if there is a market dip, it could be a great opportunity to convert more at a lower price. Again, I don't know your exact circumstances beyond this discussion thread. But the finances seem similar to ours so it's definitely a topic to discuss with your tax/financial professional. A beneficial strategy we used to offset conversion taxes due was charitable donations. We had highly appreciated stocks in taxable accounts that we had owned for decades. If we had sold outright they were mostly profit. That would just add to our tax bills and reduce the amount we could convert annually before moving into the next bracket. But by donating them to charity, one is allowed to write off the full current market price. A $15,000 stock donation offset the taxes due on about $65,000 in ROTH conversions for us. If you have anything similar, your CPA might also consider that. Sorry for the long message, but I thought it worth sharing our experiences since your finances seem similar to ours at your current age. Again, I'll leave you with best wishes with your wife's treatment program and hope everything works out for you both.
What are the tax implications of withdrawing in January and having to pay taxes on that withdrawal 12 months earlier than withdrawing in December? I started doing conversions last year and used a staggered drawdown based on the market. I'm waiting until the end of this week, expecting more drop in the market, and I will probably do a 25% conversion at that point. I'm not a fan of trying to time the market, but that's exactly what I'm trying to do. I'll be wrong for sure. We can spend way too much time worrying about all this. I want to get at least 80% out of our IRA/401k in the next 10 years, but if I only get 50% out, I will survive. Once those balances reach 1 million, the RMD schedules get scary because most people who have a million bucks in an IRA were fairly high earners with high SS payments. My wife and I will be over $75k in SS based on today's dollars. If we leave the money in IRA and get 6% growth over the next 12-15 years, we'll be looking at over $100k RMDs starting at age 72. That will have us at well over $200k in income at a time when we probably will be slowing down on our spending. Of course, paying too much taxes because you make too much money is a good problem to have.
I'm ready to start converting my set amount for the year. Plan to do it in thirds. And, if the market goes back up to its highs, won't bother. Why not spend some of your $ now on something you enjoy such as travel? Better than your Uncle Sam taking it. 😀
@I-Post M we are good financially and doing everything we want to do. We have a farm and do the Homesteading thing so that takes up most of our time. We retired before 60 so we will be eating through someone our money over the next 10 years. I travelled extensively for most of my career so we have been pretty much everywhere we want to go. We do have a ranch in Montana that we visit twice a year for meetings and spend a couple of weeks each time. If my biggest worry in retirement is paying too much in taxes then I think I'll be ok. God has blessed us greatly.
We have the same problem - too large of balances in 401k and IRA accounts. Our SS will be similar to yours and we are delaying taking SS until 70 to allow more time for conversions at lower tax bracket rates. Pensions and investments already cover all of our expenses. But without conversions, once RMD and SS is added we would be at least one bracket higher permanently. Definitely 2 when the first spouse passes and if tax rates increase down the road, inaction would be all the more costly. I likewise try to time the market and more times than not I have been successful at it, but of course not 100%. I convert individual stocks directly from my IRA to my ROTH-IRA, so I wait for some of my stocks to drop in value when there is bad news - either company or on a national level. But generally, a few of my stocks will be down at least 5% at some point during the year so timing has worked ok. I am sure his evaluation is correct that in an increasing market it is better to convert Q1. I have converted at both Q1 and Q4 depending on which of my stocks are down in price. But if you convert Q1 and stocks drop, you are worse off. His historical data is true because we have had up markets for so many years. In the end it comes down to if you personally think that will continue in any given year, or even for the next few years. I don't right now, but no doubt it is just my guess. But some support since before he passed away John Bogle said in an interview that he saw a slow decade ahead and he expected we would not see the same rates as the past. Perhaps even a lost decade as Japan experiences years ago. My concern over the last year was that the market would correct. I waited until the end of Q4 hoping for a significant correction but didn't get it so just settled for a few % drop in some of my stocks. Not all of my stocks were up very much over the year so I don't think waiting until Q4 hurt much at all as many were flat. I was better off waiting with the converted stocks that did drop. Many of my stocks already have been down enough in price to convert this year, but I am even more convinced that between Fed interest rate increases and the current war in Europe, many stocks will be lower toward the end of this year. This year will likely be a Q4 conversion again for me as I wait to see if my guess is correct. We have been converting for 7 years of retirement - 8 years more to go until 72. But because of the great market gains the last 7 years, even with very significant conversions annually, all of the IRA and 401k accounts are higher than when we started but hopefully RMDs will be small enough to avoid the permanent bracket jumps. Good luck with your plan.
@@davidroush1224 not sure if I’m missing something but pretty sure there is no rule to have to “convert” from traditional IRA/401k “stocks” to Roth IRA “stocks” at the same time. One could just convert out of tax infested account when market is high and then just put into money market with Roth IRA to start with because we think market will drop. Isn’t it the same 100k per year or so number (whether market is up or down) assuming 25k standard deduction. It’s actually a little higher to stay in 12% bracket. While the analysis is good it assumes a continuous rising market and we don’t have confidence that will be the case. Accordingly it’s never a good idea to go all in. Pretty sure within Roth IRA account automatic purchases can be made each month? So money stays in money market and invest over time again. So one catches lows and highs. So best time to perform conversion is by year end no matter because one can make the best decisions. There are no more mulligans and no more 60 days after year end. I believe most in this comments section need to focus more on the conversion amount vs best method or timing when to convert. If not clear yet. If one feels stock market is high at time of conversion and may drop then put most into Roth IRA money market and only some stock fund purchases. If market is low and one expects growth then upon conversion put more into the stock funds right away and just leave some in money market and invest over a period of time.
@@f430ferrari5 You are correct in that there is no rule requiring direct stock transfer. I have also sold stocks with great profits in my IRA, then just transferred the cash to my ROTH later. I initially transferred cash funds from my 401k to an IRA at E-Trade. I also have a ROTH at E-Trade so my conversions take place as a direct transfer from my E-Trade IRA to my E-Trade ROTH IRA. I mostly hold dividend stocks in my ROTH and all DRIP - some are monthly like Realty Income. If I believe that a stock will for some reason go to a lower price, I will wait until that drop happens. For example, if the stock drops 15%, I can transfer(convert)15% more shares at the same dollar value/taxes due. Again, there is no guarantee this will happen but I have about a dozen stocks in my IRA and typically at least a couple will be down 5% or more in Q4. I'll convert those to the ROTH then move cash into the ROTH to get a larger conversion closer to the top of my tax bracket. I have recently seen some articles suggesting that Q1 conversions provide better long term gains. I have made conversions in earlier quarters if one of my stocks has a larger than expected drop in price due to bad news, missed quarterly projections, etc. Most of these are stocks I believe are stable long term so I expect the price to recover and gain long over many years anyway. But, this is investing and no guarantees. My driver in this is that we had two very large 401ks. If we didn't make an effort to reduce them. the RMDs at 72 would push us permanently up one tax bracket. When the first spouse passes, the survivor would jump a second bracket as then filing single. This is even more critical if tax rates sunset in 2026 and go up 3-4%. Then, if Congress raised tax brackets more later even worse.
It seems like you've over-complicated the matter. First, it needs to be explicitly said that a person ends up with the same amount of money when you die, whether it is in a tax-deferred account or a Roth, if your tax bracket doesn't change. So, the issue is whether a person expects that the earnings of his retirement funds will drive him into a higher tax bracket in the future. If that is the case, then a Roth conversion of an amount that will prevent a person from being pushed up into the higher tax bracket will ultimately save money.
To do a true "overall value" comparison, you need to show the relative growth in the source investment as well. You will see the opposite...the end of year strategy will show a higher balance in your 401k (source) than any other approach. So if you factor in tax deferred growth vs. tax-paid growth...it likely ends in pretty much a wash. At the end of the day the most important thing with conversions is to convert an absolute amount that keeps you below a taxable income threshold. (Which is based on expected tax brackets during retirement years...)
"Tax Invested Accounts" ... 😂😂😂... Question on forward looking tax plan: what tax bracket / rate changes do you assume in your plan? Mine is only based on today's brackets and rates. Thougths?
It all seems very confusing but, I'm sure it cost a lot for this setup. The time frame from 1972-to 2022 is a lot different going forward nobody knows anything. If the Roth is for legacy don't touch it? If not take the distribution early like 60 y/o enjoy spend it on family & friends & try to die with zero.
Better to pay taxes on the RMD before using the proceeds as Roth Contribution from your brokerage account. IRS believes IRA to Roth after 72...the funds are too co-mingled even if you do tax withholding inside the conversion.
@@edmundfong7288 - RMD money cannot be used as Roth "contribution". I'm actually planning to use the RMD cash to pay the taxes on the Roth conversion. I expect my kids to be in higher tax brackets than me, therefore it would be better for them to inherit a Roth IRA than a traditional IRA.
The logic is flawed. Starting as soon as possible is the deal, beginning of year, end of year, makes no difference. You are looking at the first 12 months with no growth but the initial conversion happens in December of course it’s going to show lower returns. Key is don’t wait for 12 months to begin conversions. It is March as I write this, if you convert in March 2022 your returns for all of 2022 will normally be better than if you wait till December to convert.
Right, that's point... So now you get into 2023 and want to do a conversion. The soonest you can do it is January 1st, hence the labeling of 'start of the year'.
You don't make it clear if in your analysis you also include the effects of allowing your pretax IRA growth until end of year just prior to conversion. Yes, that money is taxable, but the tax money that has to be paid up front isn't paid until the end of the year. So it is included as a part of the earning/working capital for that entire year. The early conversion forfeits that money up front. This has to partially mitigate the lost growth shown in your analysis. Otherwise, certainly glad I didn't do a Jan 1 conversion this year. Waiting was my friend, just like I suspected it would be...with more to follow IMO.
However, if you pay 100% of your fed income taxes from your pre-tax IRA at the END of the year you not only avoid estimated payments on those conversions, but retain that $$ in ur IRA to earn until the end of the year. The IRS allows you to do it that way and your taxes are considered to have been paid evenly throughout the year even though you actually paid them, for instance, the middle of December. You simply do a withdrawal as usual and direct Vanguard or whomever, to withhold 100% as tax. Been doing it for years. I have nothing withheld from SS or pensions during the year. THEN, if you want to, you can simply do an INDIRECT rollover to replace the $$ withdrawn within 60 days and it won't have to be included as taxable income! Sweet! Now, you can only do an indirect rollover once every 12 months so my wife and I alternate years.However, if you pay 100% of your fed income taxes from your pre-tax IRA at the END of the year you not only avoid estimated payments on those conversions, but retain that $$ in ur IRA to earn until the end of the year. The IRS allows you to do it that way and your taxes are considered to have been paid evenly throughout the year even though you actually paid them, for instance, the middle of December. You simply do a withdrawal as usual and direct Vanguard or whomever, to withhold 100% as tax. Been doing it for years. I have nothing withheld from SS or pensions during the year. THEN, if you want to, you can simply do an INDIRECT rollover to replace the $$ withdrawn within 60 days and it won't have to be included as taxable income! Sweet! Now, you can only do an indirect rollover once every 12 months, so my wife and I alternate years.
@@danniedecker7459 Thanks for the tip, but not sure I'm understanding what you mean. I'm not 59-1/2 so if I were to withdraw IRA funds to pay the tax (at any point in the year), I would incur a 10% penalty on top of the tax. So I have to pay taxes out of my cash savings. And, to my knowledge, I have to pay that income tax quarterly unless it's done at the end of the year. ??
Your begin-vs.-end of year comparisons are misleading. Assuming a growing market, earlier is generally better, the more earlier the bigger the difference. You arbitrarily chose begin-of-year as eleven months earlier instead of one month later than end-of-year. Of course, eleven months earlier will average better in a growing market -- regardless of which two months you compare. If eleven months earlier is December instead of January, then end-of-year is better. A more apples-to-apples comparison would be the last trading Wednesday of December vs. the first trading Wednesday of the following January. Are you really better off to wait that extra 1-2 weeks -- and at the same time increase your risk of converting too much?
@Eric - Suspect most retires below 50/50 split. Further, bond position greater than stock. Can U do presentation highlighted by Roth Timing Strategies slides at key differing stock and bond points of more interest to the “normal” retiree? ThankU! Super great “discloser”!
It sounds like Eric's study had the benefit of hindsight. I assume he chose the date when the stock market reached a 'crash bottom' to perform the remaining 50% of the planned Roth rollover. This is probably part of the reason for the Drawdown Based option showing the greatest benefit. Can someone provide me the date for the next 'crash bottom'? If so, I'll certainly plan a Roth rollover for that date, as the benefits are significant. I'd also invest in the stock market, with any other money I have laying around. I got lucky in 2020 and invested at the crash bottom (3/23/20). I learned that it can be very profitable. It was my first (& probably last) attempt at market timing, as I had received some inheritance $. p.s. I did do extensive research on prior stock crashes and I also read an article on the 1917 Spanish Flu stock crash, the weekend prior to 3/23/20, which was a big help.
Larry, this was not how the study was run at all. Hence the reason for urging investors to use a rules-based strategy. It's not about 'bottom ticking'. The market can fall further after you perform the conversion and this does not ruin the strategy. The goal here is to lock in some kind of a conversion at a discount. Also, I did not use the best drawdown trigger for the results for this exact reason. The bigger point is regardless of the drawdown trigger you use (-5%, -10%, etc.) there is statistical significance to the strategy.
@@SafeguardWealthManagement Very good. What drawdown trigger did you use? A $111,470.24 benefit is significant. I would certainly change from the Start of Year option to the Drawdown Based option if I can better understand your analysis. p.s. I love your channel. Your examples often give me ideas on how I can improve my retirement plan. For example, I recently added multiple spreadsheets that simulate a variety of sequence of returns. This was a huge improvement to my plan and will be very useful (& comforting) during the next significant stock crash.
Larry Jones If someone COULD tell us when the bottom is - I hope they can also tell us when the market starts to climb again. LOL. I have sat patiently thru some big drops and then the market rebounded. Really important to be invested when things start going up.
If only content makers would see how annoying it is to be listening to a video that is continuously jumping. What happened to spaces between sentences? The reason I hit do not recommend channel most often.
Am subscriber that was forced to watch and to listen a second time. More importantly, no summary at the end of their study conclusions. With a stock allocation, convert during market dips? With a bond allocation, convert at the start of the year? But what about converting not Dollar amounts but shares In Kind? If monthly conversions not worth the paperwork, did his study address the normal assumption we cannot time the market? I am inclined to assume year end conversions subject to errors by busy custodians and falling share prices as people sell assets for Xmas cash. Maybe we need to be their clients to get the secret sauce.
The editing of this video is so harsh as to be unwatchable. Why can't people just have a conversation with the camera? If you pause and "uhh" and "umm" a lot just get better at videos!
I'm just 1 minute in, and the jump-edits in this video are truly annoying; and there is no reason for this. I would not be surprised if you lose viewers because of this (who give up early and don't return), which is too bad because I suspect you have some good information to impart.
So the big takeaway: Convert from bond holdings at the beginning of the year, and convert from stock holding when they dip.
Excellent study! Thanks for sharing.
Gotta wait till you wake up before you watch this guy go. Good work .
I hope everyone who reads this makes so much money that we have to care about RMDs.😊
Yup. Yachts don't live in a 32% tax bracket! ;)
Just executed a Roth Conversion based upon ~20% discount. As the Market decreases, I will continue to convert in kind to a Roth Account. I plan to fill the 24% Bracket this year and for the next 2 years.
Sounds like your on top it! 👍🏻
I love what you do, but just wish you put a period at the end of your sentences so that I can follow what you say.
I have been watching Eric and Tony for some time now. Believe it or not, some of the early videos were criticized - as being too long, or slow paced. I think he's been trying to keep these short. (Just my 3 cents......{inflation has driven that up too}).
PLease SLOW DOWN when you talk!!
Change the playback speed 😂
I think his pace and cadence is perfect. I don’t understand all the criticism about how he speaks. Sounds perfectly normal to me. I think maybe the editing they do to cut out the gaps between sentences to make the overall video shorter is what confuses people or what they don’t like. Don’t change a thing Eric.
If I knew the money moved to Roth was going to compound at 10% per year is be inclined to move so much per year that would require some to be taxed at 32% just to get it done. I could move it all in 4 years then no RMDs. State tax is the same only the Fed does the stupid upward bracket thing. I'd like to see it done away with and go to a flat tax.
One additional strategy, in 2022, the market was experiencing a severe downturn. In a matter of weeks my traditional IRA Stock funds lost 30k. At that point,. when what was previously worth 125K was now only worth 98K I converted those funds to a Roth Ira saving the taxes on the 30k and having the growth when the market recovered be tax free.
Performed my first conversion last year in December because I was uncertain how much taxable income I'd have. This year I'm performing quarterly conversions and paying estimated taxes.
Set playback speed to .75 to slow it down.
I wish I had not done 100% pretax in my 401k over the decades. A huge mistake. I should have paid the tax on at least half of it when I was in the lower tax bracket while working.
The govt and human resources departments suckered everyone.
I know what u mean but how much difference is Dec 2021 or Jan 2022? It's prob best to do thru year and fine tune at very end of year?
Tx for the great detailed content. Love the charts! Please slow down by 25% so I can hear what you're saying. Sounds like one very long sentence.
I have been watching Eric and Tony for some time now. Believe it or not, some of the early videos were criticized - as being too long, or slow paced. I think he's been trying to keep these short. (Just my 3 cents......{inflation has driven that up too}).
@@mr.j2776 I'm new to this channel so have lots of listening pleasure ahead of me. Such a shame folks won't take even 20 mins in one sitting to tend to their personal finances. Will these same folks sell at the wrong time bc they don't understand the logic behind a strategy? If this great channel dumbs things down by giving less or no supporting info, they'll lose their value-add and subscribers like me. Happy investing!
@@i-postm4943 I try to watch all of their videos - even if the topic does not apply to my current situation. I think they do a great job. Sometimes I pause the video so I can look at the chart before Eric (or Tony) explains it. And it is aways easy on my computer to go back and play a section again.
Clearly this is true for the majority, especially if they're converting over a relatively short period of time and are dedicated to paying a lot of taxes on their conversions. HOWEVER...if you're starting early and converting slowly over time and under taxable limits you'll have to convert at the end of year to hyper dial in your 1040 to get it perfect. Anything can happen throughout the year and even small surprises can completely upend your apple cart. This year despite good planning I got a few surprises in the form of additional income/interest and as you pointed out you can no longer re-characterize your conversions so I use our IRA/Roth IRA contributions after the end of the calendar year to balance out any last minute changes. I've been playing this game since our early to mid 40's so we'll be all set long before RMDs ever kick in and once all is converted I'm going to use the same strategy to step up the cost basis in our taxable investments just in case they ever change the LTCG/QD rate of the 12% bracket. Now that I've taken care of taxes, I'm going to see what I can do about death, lol.
Luv your work!
Question; May I do a Roth conversion, straight from an employer 401k. Or does it have to go through a IRA.
I do 401K to Roth conversions.
First he says that we can't know the future. Then he says that a drawdown strategy works best. But how do I know whether markets will drop enough to trigger the drawdown? Maybe I should just make a guess when to convert and how much each time.
Your videos are very insightful and very informative. Keep up the great work. One question I have regarding your analysis is what percentage was assumed for the partial conversion when the market was down, 20%?
How does Roth conversions affect IRMA and Medicare?
OMG. Extremely valuable information... the only one downside for my (as second language speaking persona) ears is speedy presentation. Well, listen to 3 times to follow you advice 😂
If you click on the gear icon in lower right corner of UA-cam videos, you can make a video play slower or faster.
@@copester1204I had to do this as well.
The beginning of the year adds 11 months of growth. What is the result had the end of the year strategy started 1 month before the beginning of the year?
when performing a conversion at the beginning of the the year, are you required to make quarterly tax payments to avoid penalty?
Mr. McVay, no the 1040 does not contain the information to do such a calculation. In any event this penalty is so small that it should be last in your list of things to worry about.
My background: have done volunteer income taxes for AARP TaxAide over 20 years, plus my own financial situation requires good tax planning around RMDs. Have completed all the course work for CFP but never took that marathon exam. Hope this helps with your situation.
What’s the scale on the right? What am I missing?
Something to consider is in this current market and world event taking place, holding off till 3rd or 4th quarter may make sense. Also the money you plan to use to pay the taxes on the conversion is coming from say an I bond which IS making money.
Would you consider making a video regarding strategies to pay for the ROTH conversion taxes for those who accumulated significant 401k balances ? There are a lot of retirees with tax bombs making ROTH conversions now and I believe many struggle with how best to pay the taxes due.
For example, we retired in our mid-fifties and are using these lower earning years to make ROTH conversions at lower rates before RMD age - we are about 7 years into an annual 15 year conversion plan so far. We prefer to convert an amount annually to stay within the 24% bracket. We pay taxes out of pocket for these conversions to maximize the amounts going into the ROTH.
Conventional wisdom was to drain taxable accounts and investments first to pay those conversion taxes while letting the tax deferred retirement accounts compound. We followed this so far and are through most of our cash savings we left available for that. Now we need to sell Mutual funds to pay the conversion taxes. But giving up cash from savings accounts only making a fraction of a percent was an easy choice compared to selling mutual funds that are making 10 -20 times that rate.
My ROTH investments are fairly conservative and making around 4% in stock dividends. The mutual funds however were averaging at least 7% (many years twice that). Just assuming that 3% return difference, the mutual fund is worth almost 50% more at 25 years than the same amount a ROTH would generate at 35 years. I chose these times assuming one of us might live 25 years, then we would leave both the Mutual funds and the ROTH to our heirs. The heirs get another 10 years past our death to further compound, thus 35 years for it to compound at 4%. Still, the mutual fund is much higher 10 years earlier when it would be inherited.
If the mutual fund was left to heirs, it should get a step up basis so it gains are not taxable, as they currently are for us. When we sell the mutual fund to pay taxes, we need to take out a larger amount to also pay for the taxes due on the mutual fund gains - about 60% of the mutual fund balance is profit. This results in a large drain of a mutual fund that was likely to have outperformed the ROTH gains. Additionally, the sold mutual funds increases our income and reduces the amount we can convert to a ROTH without crossing into the next tax bracket. If the market drops, taking from the mutual funds is even more costly as more shares will need to be redeemed. And selling these directly reduces the net value of that account each year
So, I am considering a new strategy. Over 7 years we have converted significant amounts to the ROTH and it is producing enough now in dividends to pay for the conversion taxes on each year's conversions. The ROTH has been open over a decade and I am over 59.5 so there shouldn't be a penalty to take the dividends (?). I am considering taking just those tax free ROTH dividends to pay for the conversion taxes due.
This allows us to convert more into the ROTH annually, also accelerating the annual dividends in the ROTH and somewhat offsetting part of the lost compounding. Those dividends were likely to compound less than the mutual funds would have, plus less ROTH money will need to be taken vs. mutual funds sold to cover their tax gains plus conversion taxes. Especially true if the mutual funds get even more than 7%, but I'm not counting on that over the next 10 years at least. Seems counterintuitive to be taking some of the gains from the ROTH now, but it is the only tax free money readily available and the long term costs of cashing in the mutual funds is likely much higher.
My plan would be to let the tax free ROTH dividends pay the taxes due on future ROTH conversions. The ROTH will still grow significantly annually with larger the conversions. I also won't be actively reducing the mutual funds when sold to pay the ROTH conversion taxes so our net worth should continue to rise annually all things being equal.
This is one example, but I'm sure many retirees are struggling regarding where to most most efficiently get the money to pay for the conversion taxes. I don't believe our situation is unusual since many of us followed financial advice to diversify. Many of us have been saving in both tax deferred and taxable investments for decades to prepare for retirement. So, some videos on how to pay ROTH taxes due in these scenarios might be useful if you are looking for more video topics.
If you’re 59.5 why is necessary to “convert” vs withdraw. Just do a combo of both?
@@f430ferrari5 - We have a very large tax bomb in each of our 401ks if we do not get money out. If we just took a 401k distribution and reinvested that, it would be in invested accounts that would add more taxable income. But in the ROTH, any gains will be tax free, forever.
Critically, if we don't deflate the 401ks, once RMD age hits we could be permanently pushed into the next higher tax bracket. When the first spouse dies, the survivor would then permanently pushed up a second tax bracket when they would file at single rates. We can convert most now and stay in the 24% bracket, but if nothing done the surviving spouse might be in the 35% bracket. With these conversions, we hopefully can remain in the current 24% bracket for life.
All would be made worse if Congress raises tax rates sometime in the next 20-30 years, which almost seems a certainty to us. So, since we have some of the lowest tax rates in my lifetime, we chose to pay them at the lower rates now.
The ROTH is already generating more in divies annually than the taxes due on the planned conversion, so will still get the full converted amount plus extra divies left over with this approach. Everyone has different situations, since most of our retirement savings were tax deferred this makes the most sense for us right now.
@@davidroush1224 I already know everything you just said.
Who said anything about reinvesting any 401k distribution portion.
You asked where to take monies out to pay taxes on your “conversions”.
All I suggested was pay the taxes from some 401k distributions.
Is there a reason why you don’t?
@@f430ferrari5 - Sorry, it is all tied together in my mind. I am trying to maximize the amount we covert annually and barely remain in the 24% bracket. Thus our major driver is not increasing our annual income in any way and move into the 32% bracket.
For example, if I wanted to move 200k into the ROTH I'd have to request something like $248k from the 401k to have it also cover the taxes. The $200k already put us at the top of the 24% bracket, so the $248k approach of taking an extra distribution from the 401k to pay taxes would have $48k moved at the 32% bracket, or $15,360 in taxes on that 48k.
If I use ROTH divies, zero.
So, in the end it is all driven by a desire to not move into the 32% bracket now while making these conversions. If we bleed down the 401ks down enough, come RMD age we don't permanently end up in the 32% or 35% bracket for the surviving spouse. Or higher, if Congress raises rates later.
@@davidroush1224 you can’t be serious with your mindset.
Just convert 160k and withdraw 40k. You just moved 200k from your 401k. Yes?
You’re still in the 24% bracket. Yes?
This is what people who are 59.5 or older do who don’t have the liquid cash to pay the taxes for conversion or concerned with draining most of their liquid cash when future conversions may still be possible.
It’s understood you want 200k into Roth vs 160k but what other choice is there? Are you going to drain your liquid cash funds? Are you going to drain your other investment funds?
Just being direct and to the point.
I understand your mindset somewhat. You regret not putting into Roth earlier now you’re in a panic to catch up and convert as much as possible while attempting to stay in the 24% bracket.
You should in reality try to get yourself in the 12% bracket. That’s what I’m doing.
You seem to have way over saved in your tax deferred accounts. Still better to over save than under save.
Everyone is missing out on the 'Roth Conversion with Cash-out Refi Combo'. Doing a cash-out refinance mortgage provides cash for living expenses (including $ to pay the tax on Roth conversions), and thus a super low tax rate on Roth conversions.
I do Roth conversions the same time I make quarterly estimated payments (so obviously 4 times a year). Since I'm going through the exercise of projecting annual income anyway, it's a good time to also do a conversion.
I want to perform a Roth conversion and I like to fill up my current tax bracket (24%), how much room do I really have when I am still working and contributing to my 401K? Do I use my Gross Income? Gross Income minus my 401K contribution and other pre-tax withholdings? For example, if my Gross Salary is 100K and contributing 10K to my 401K, so the Adjusted Gross is $90K. For single filers, the 24% tax bracket is $86,376 to $164,925. How much room do I have before hitting the next tax bracket? Is it $164,925-$100,000=$64,925? Or is it $164,925-$90,000=$74,925? Can you do a video on what to include/exclude when calculating the amount to convert for a Roth conversion so to fill out current tax bracket, especially for a person who is still working and contributing to 401K, and all the different tax withholding?
164k - 90k - 12k standard deduction
@Sal. For most…performing a Roth conversion while still working isn’t ideal.
Even in your example of 100k and 10% to 401k why not just put 6k to Roth IRA. If over 50 then 7k to Roth IRA each year.
A 100k now salary person who has to perform Roth conversions while still working is somebody that put max into 401k since working and also put monies into an IRA and is sitting on 2-3 million of tax infested accounts at 60 IMO.
It’s the time of retirement and that window before collecting SS is the time to perform Roth conversions.
If one is getting a pension at retirement it would still seem to be better to perform Roth conversions here at retirement.
I figured, hey, interyear Roth conversion timing wasn't worth the hassle -- how big a difference could it make, anyway? Well, now I know, +20%! Darned. Wish I could have a do-over on this one. And, back when I was doing my annual conversion "chunks" post-retirement but pre-social security, I would even have had the recharacterization "mulligan" available to me, pre-TCJA 2017. Wish I'd had Eric's wisdom here available to me then ...
Hi - honest question here; I may not have enough in my 401k to worry about doing 100k/yr... what about only doing 24k/yr for the married couple standard deduction to avoid taxes as much as possible? excuse my ignorance, just trying to learn.
a bit more context; let's say I have 1M in 401k tax deferred.. retire at 59... start conversion at 60 when W2 income is zero. just to use easy numbers.
Common sense would dictate that one expects the drawdown approach to be the most profitable, locking in tax-free growth associated with vicissitude of the market, but it's also the most difficult requiring success in accurately timing the market. The upside: it removes any need to finesse frequency and timing of conversions within a tax year.
Eric, thank you! ❤ Please make a similar video for those who are getting a LUMP SUM for SSA past 5-6 Years of SSDI Benefits (~$32,500 per year) and it's Impact on Taxable Income and IRMAA for those years with Rollover to Roth conversions $50-$75k in these past years already pushed Income above IRMAA surcharge in 2021 (but SSA didn't indicate IRMAA surcharge for 2023. Would electing Checkbox Lump Sum Tax Calculation method for such LUMP SUM or a different year by year method impact Income Base for 2023 on which SSA is going to determine IRMAA surcharge in 2025? Intuitive answer should be that PAST YEARS LUMP SSDI SUM should only impact Past 5 years Income, but does this mean it would push each of these 5 years Income for 2018, 2019, 2020, 2021, 2022? Or would somehow this PAST YEARS SSDI LUMP SUM ruin any plans for Rollover to Roth Conversions for this year? Why do they look back as far as 2 years for IRMAA? Should someone receiving such HUGE LUMP SUM. If previously you have made LUMP SUM SSDI video on Impact to Taxable Income for IRMAA and Tax Torpedo Zone Modeling Chart, could you please give us all a link with an example?❤ This is a Great video on the difference in Strategies for different portfolios. IRMAA Extra surcharge for MEDICARE Premiums is indeed a huge deal to consider for some of us who are retired on Social Security Income. Also, please make a Tax Torpedo Zone Modeling on SS Income of $32k or so for Singles who also want to convert from Rollover to Roth before FRA of 67 or 75? The only question is WHY does Rollover to Roth conversion should be impacting IRMAA surcharge for MEDICARE Premiums since technically there was nothing received by us from Conversion, on the contrary, we are going to pay Huge Taxes...
What was the drawdown trigger used in the studies? 20% ?
Aha, isn’t that the magic question - how to time the market!?
Since only the guys doing internet ads know how to time the market /s…. It would appear doing a split strategy with the majority (75%?) early in the year, followed by the rest later in the year once you are confident about the room you have left in your tax rate, makes the most sense for common mortals.
In another video, Eric IDs the drawdown trigger used as 10%. FWIW.
OPT #5 is my strategy also, but this year, I did all of the conversions in Q1 because the stock market completely blew up. I'm sure I did not get the benefit of the lowest low point, but I did the conversions as the market began to crater. I probably finished the conversions for this year with the market down 5-10%. So I missed a little bit of the discounting. However I agree with the strategy it's a good one.
I am starting early next year. Will do the bulk of it in Jan and Feb. Will leave about 10,000 till the end of the year - so I can see how much of a hit I'll get with Dividends and Capital Gains. (I got kicked in the pants in 2021). If I still have room - I'll do 10-15,000 more. Repeat in 2024. Repeat in 2025. If any is left, I will do it in 2026. (Trying to stay in the 12% bracket - and 15% in 2026. To do that, I will do some in the 22% bracket in 2023).
Wow, nice setup. This is our dilemma wife & I 58 y/o wife has early breast cancer so she will take SS at 62 y/o. I'm retired with a $67OOO pension wife's SS will be approx $24000. We both have Roth combined approx $240,000 & 1.8 million in Vanguard IRAs. It only makes sense to do Roth conversions before the wife starts SS otherwise start to creep into 22% & higher? Our goal is to start taking distribution early 59.5 y/o spending down & enjoy life before death comes.
@@HB-yq8gy That's a lot more challenging then my situation. Professional advice (and plan) might be an option. Looks like a large amount to convert (or spend before RMDs). I think you will hit the 22% bracket, but from what I have heard, it might be a good idea to convert as much as possible without hitting the IRMA penalty.
@@HB-yq8gy - Definitely complicated with your wife's situation. Sounds like your total income at her age 62 will be around $91,000/year so making conversions now makes a lot of sense assuming you are getting by on your $67,000 pension. My understanding is that you will also draw down the Vanguard IRAs and are planning to only take enough to stay in the 22% bracket. That gives you up to $178,150/year to help fund these activities and conversions. Once she starts SS that lowers your conversion ability to stay in the 22% bracket.
Even with "lavish" travel, in over 7 years of retirement our highest travel expenses in any single year were about $30,000. That included a month snorkeling in Maui, 2 trips to Europe as well as multiple smaller trips in the US. Maybe you will spend $50k/year in travel, but that is a lot in our experience. But you could if you are really trying to enjoy as much as possible now - which of course you SHOULD given her health situation.
You may end up needing to bump into the 24% bracket now to ensure you both enjoy life as much as possible now, while also making significant ROTH conversions. From my understanding using the numbers you provided, you may want to keep later RMDs in mind on the large Vanguard IRA of $1.8 million. It is a large enough lump sum that even withdrawing $100k/year, depending on how it is invested, you may not see much of a decline in the IRA total. If not, and assuming it is still around $1.8 mil at age 72, then your RMD from it will be $70,312 if my math is correct.
Add that to your pension, her SS and you already are at $161,312.5 before you even count your SS which could put you closer to $200,000/year after 72, and into the 24% bracket permanently. Or higher if Congress raises tax rates down the road. So, it might be worth considering converting some more now at the 24% bracket to lock in that tax rate, we well as reduce the compounding of money in the tax deferred IRA. We had similar totals in our tax deferred accounts than you 7 years ago, but even with large conversions our total is about 50% higher so growth in large tax deferred accounts can be substantial in up markets..
This is where my wife and I ended up. We are converting large amounts annually near the top 24% bracket maximum to try and bleed down large balances in our 401ks. We want to avoid those taxable accounts compounding even higher because we assume tax rates will also be higher in the not too distant future. And in any case, everything we convert to the ROTH compounds tax free so it doesn't add to the problem later if we hadn't converted.
My suggestion is to at least consider bumping into the 24% bracket now. That would allow for some significant ROTH conversions while also taking out enough cash to fund any fun things she wants to enjoy. Life is short and I would guess that this is what you both saved for all these years anyway - I would try to hit her bucket list items early, if she has any. I wish the best for both of you. Hopefully her treatments are successful and allow you spend decades more together.
@@davidroush1224 Thank you for the kind words & for taking the time to explain all this valuable information. Yes, our monthly expenses approx: $5000-6000. Plan on drawing down from Vanguard IRAs, my SS is approx $3084 yearly at 62 y/o. That's the plan drawdown/Roth conversions die close to zero. We will go over the best tax strategy with our CPA definitely don't feel comfortable as a DYI.
@@HB-yq8gy I can't imagine being in a similar situation with my wife so I wanted to offer some thoughts based on our experience. Hopefully it may help highlight some things to consider as you are planning the next few years.
For the last 30 years when saving for retirement I ran projections of the effects of compound interest. I thought the numbers seemed almost impossibly high, but decades later they have proven to be true.
That suggests to me that if there is a decent stock market over the years before you hit RMD age, there is a significant "risk" you similarly will have very high RMDs as we face. Nice problem to have, but if not careful you could end up with an extremely large income after age 72 if you don't agressively try to reduce the tax deferred IRA account earlier.
With just your pension and both SS checks at 62 you will be making about $120,000/yr. (assuming you meant your SS would be ~30,000/year, not $3084). Given your $6000/month expenses, you will already have an income almost $50,000 over your expenses with those three sources alone.
For reference, at age 64 our net worth is 1.8 times what our net worth was at the age 58 you mentioned. If you experienced similar market conditons, your IRA could be $2.35 million by the time she reaches 64. You may need to make withdrawal and conversion totals over $150,000/year until age 72 to bleed that IRA down completely.
This may be higher than you expected or planned, I just wanted to convey that if you experienced what we did since age 58, you may need to make significant reductions in the tax deferred $1.8 million IRA. Or, you may choose not to completely exhaust the IRA by then. The first 5 years of retirement we only converted about $65,000 annually; we should have been more agressive earlier.
Now, the stock market performance doesn't look that great for a year or more, so you may not see growth as we did. And if there is a market dip, it could be a great opportunity to convert more at a lower price. Again, I don't know your exact circumstances beyond this discussion thread. But the finances seem similar to ours so it's definitely a topic to discuss with your tax/financial professional.
A beneficial strategy we used to offset conversion taxes due was charitable donations. We had highly appreciated stocks in taxable accounts that we had owned for decades. If we had sold outright they were mostly profit. That would just add to our tax bills and reduce the amount we could convert annually before moving into the next bracket. But by donating them to charity, one is allowed to write off the full current market price. A $15,000 stock donation offset the taxes due on about $65,000 in ROTH conversions for us. If you have anything similar, your CPA might also consider that.
Sorry for the long message, but I thought it worth sharing our experiences since your finances seem similar to ours at your current age. Again, I'll leave you with best wishes with your wife's treatment program and hope everything works out for you both.
You also take out cash to pay taxes on time
What are the tax implications of withdrawing in January and having to pay taxes on that withdrawal 12 months earlier than withdrawing in December?
I started doing conversions last year and used a staggered drawdown based on the market. I'm waiting until the end of this week, expecting more drop in the market, and I will probably do a 25% conversion at that point. I'm not a fan of trying to time the market, but that's exactly what I'm trying to do. I'll be wrong for sure.
We can spend way too much time worrying about all this. I want to get at least 80% out of our IRA/401k in the next 10 years, but if I only get 50% out, I will survive.
Once those balances reach 1 million, the RMD schedules get scary because most people who have a million bucks in an IRA were fairly high earners with high SS payments. My wife and I will be over $75k in SS based on today's dollars. If we leave the money in IRA and get 6% growth over the next 12-15 years, we'll be looking at over $100k RMDs starting at age 72. That will have us at well over $200k in income at a time when we probably will be slowing down on our spending.
Of course, paying too much taxes because you make too much money is a good problem to have.
I'm ready to start converting my set amount for the year. Plan to do it in thirds. And, if the market goes back up to its highs, won't bother.
Why not spend some of your $ now on something you enjoy such as travel? Better than your Uncle Sam taking it. 😀
@I-Post M we are good financially and doing everything we want to do. We have a farm and do the Homesteading thing so that takes up most of our time. We retired before 60 so we will be eating through someone our money over the next 10 years.
I travelled extensively for most of my career so we have been pretty much everywhere we want to go. We do have a ranch in Montana that we visit twice a year for meetings and spend a couple of weeks each time.
If my biggest worry in retirement is paying too much in taxes then I think I'll be ok. God has blessed us greatly.
We have the same problem - too large of balances in 401k and IRA accounts. Our SS will be similar to yours and we are delaying taking SS until 70 to allow more time for conversions at lower tax bracket rates. Pensions and investments already cover all of our expenses. But without conversions, once RMD and SS is added we would be at least one bracket higher permanently. Definitely 2 when the first spouse passes and if tax rates increase down the road, inaction would be all the more costly.
I likewise try to time the market and more times than not I have been successful at it, but of course not 100%. I convert individual stocks directly from my IRA to my ROTH-IRA, so I wait for some of my stocks to drop in value when there is bad news - either company or on a national level. But generally, a few of my stocks will be down at least 5% at some point during the year so timing has worked ok.
I am sure his evaluation is correct that in an increasing market it is better to convert Q1. I have converted at both Q1 and Q4 depending on which of my stocks are down in price. But if you convert Q1 and stocks drop, you are worse off. His historical data is true because we have had up markets for so many years. In the end it comes down to if you personally think that will continue in any given year, or even for the next few years. I don't right now, but no doubt it is just my guess. But some support since before he passed away John Bogle said in an interview that he saw a slow decade ahead and he expected we would not see the same rates as the past. Perhaps even a lost decade as Japan experiences years ago.
My concern over the last year was that the market would correct. I waited until the end of Q4 hoping for a significant correction but didn't get it so just settled for a few % drop in some of my stocks. Not all of my stocks were up very much over the year so I don't think waiting until Q4 hurt much at all as many were flat. I was better off waiting with the converted stocks that did drop.
Many of my stocks already have been down enough in price to convert this year, but I am even more convinced that between Fed interest rate increases and the current war in Europe, many stocks will be lower toward the end of this year. This year will likely be a Q4 conversion again for me as I wait to see if my guess is correct.
We have been converting for 7 years of retirement - 8 years more to go until 72. But because of the great market gains the last 7 years, even with very significant conversions annually, all of the IRA and 401k accounts are higher than when we started but hopefully RMDs will be small enough to avoid the permanent bracket jumps. Good luck with your plan.
@@davidroush1224 not sure if I’m missing something but pretty sure there is no rule to have to “convert” from traditional IRA/401k “stocks” to Roth IRA “stocks” at the same time.
One could just convert out of tax infested account when market is high and then just put into money market with Roth IRA to start with because we think market will drop.
Isn’t it the same 100k per year or so number (whether market is up or down) assuming 25k standard deduction. It’s actually a little higher to stay in 12% bracket.
While the analysis is good it assumes a continuous rising market and we don’t have confidence that will be the case. Accordingly it’s never a good idea to go all in.
Pretty sure within Roth IRA account automatic purchases can be made each month? So money stays in money market and invest over time again. So one catches lows and highs.
So best time to perform conversion is by year end no matter because one can make the best decisions.
There are no more mulligans and no more 60 days after year end.
I believe most in this comments section need to focus more on the conversion amount vs best method or timing when to convert.
If not clear yet. If one feels stock market is high at time of conversion and may drop then put most into Roth IRA money market and only some stock fund purchases.
If market is low and one expects growth then upon conversion put more into the stock funds right away and just leave some in money market and invest over a period of time.
@@f430ferrari5 You are correct in that there is no rule requiring direct stock transfer. I have also sold stocks with great profits in my IRA, then just transferred the cash to my ROTH later. I initially transferred cash funds from my 401k to an IRA at E-Trade. I also have a ROTH at E-Trade so my conversions take place as a direct transfer from my E-Trade IRA to my E-Trade ROTH IRA.
I mostly hold dividend stocks in my ROTH and all DRIP - some are monthly like Realty Income.
If I believe that a stock will for some reason go to a lower price, I will wait until that drop happens. For example, if the stock drops 15%, I can transfer(convert)15% more shares at the same dollar value/taxes due.
Again, there is no guarantee this will happen but I have about a dozen stocks in my IRA and typically at least a couple will be down 5% or more in Q4. I'll convert those to the ROTH then move cash into the ROTH to get a larger conversion closer to the top of my tax bracket.
I have recently seen some articles suggesting that Q1 conversions provide better long term gains. I have made conversions in earlier quarters if one of my stocks has a larger than expected drop in price due to bad news, missed quarterly projections, etc. Most of these are stocks I believe are stable long term so I expect the price to recover and gain long over many years anyway. But, this is investing and no guarantees.
My driver in this is that we had two very large 401ks. If we didn't make an effort to reduce them. the RMDs at 72 would push us permanently up one tax bracket. When the first spouse passes, the survivor would jump a second bracket as then filing single. This is even more critical if tax rates sunset in 2026 and go up 3-4%. Then, if Congress raised tax brackets more later even worse.
It seems like you've over-complicated the matter.
First, it needs to be explicitly said that a person ends up with the same amount of money when you die, whether it is in a tax-deferred account or a Roth, if your tax bracket doesn't change.
So, the issue is whether a person expects that the earnings of his retirement funds will drive him into a higher tax bracket in the future. If that is the case, then a Roth conversion of an amount that will prevent a person from being pushed up into the higher tax bracket will ultimately save money.
Strong analysis but like someone else said below, you talk very fast. Not sure if this hurts or helps but good to be cognizant of. Best
Set the UA-cam playback speed at .75x. Works great!
It's good, then I don't have to set the speed to 1.5 like I do with some videos
To do a true "overall value" comparison, you need to show the relative growth in the source investment as well. You will see the opposite...the end of year strategy will show a higher balance in your 401k (source) than any other approach. So if you factor in tax deferred growth vs. tax-paid growth...it likely ends in pretty much a wash.
At the end of the day the most important thing with conversions is to convert an absolute amount that keeps you below a taxable income threshold. (Which is based on expected tax brackets during retirement years...)
"Tax Invested Accounts" ... 😂😂😂...
Question on forward looking tax plan: what tax bracket / rate changes do you assume in your plan? Mine is only based on today's brackets and rates. Thougths?
Thanks
Great video Eric - And very timely for me! Thanks!
Thank you Terry!
Hey guy, let me tell you something, when you pay more tax mean you make more money. Make more money and pay more tax proudly.
A study on what drawdown trigger (%) gave the best results historically would be really sweet!
It all seems very confusing but, I'm sure it cost a lot for this setup. The time frame from 1972-to 2022 is a lot different going forward nobody knows anything. If the Roth is for legacy don't touch it? If not take the distribution early like 60 y/o enjoy spend it on family & friends & try to die with zero.
Great video. What advice do you have for us over age 72 who would like to do Roth conversions?
Better to pay taxes on the RMD before using the proceeds as Roth Contribution from your brokerage account. IRS believes IRA to Roth after 72...the funds are too co-mingled even if you do tax withholding inside the conversion.
@@edmundfong7288 - RMD money cannot be used as Roth "contribution". I'm actually planning to use the RMD cash to pay the taxes on the Roth conversion. I expect my kids to be in higher tax brackets than me, therefore it would be better for them to inherit a Roth IRA than a traditional IRA.
@@jimlow6824 I stand corrected at 61 y/o in the second year of partial conversions...maybe RMDs will be pushed back to 75.
@@edmundfong7288 - Wow, you're in a great position. Wish I had the advice from Safeguard Wealth Management when I was in my 60's.
Genius as usual; great analysis.
Thank you Paul!
Eric, excellent video, great energy and like the black and white effect! Nice work, great content!
Thank you John!
The logic is flawed. Starting as soon as possible is the deal, beginning of year, end of year, makes no difference. You are looking at the first 12 months with no growth but the initial conversion happens in December of course it’s going to show lower returns. Key is don’t wait for 12 months to begin conversions. It is March as I write this, if you convert in March 2022 your returns for all of 2022 will normally be better than if you wait till December to convert.
Right, that's point... So now you get into 2023 and want to do a conversion. The soonest you can do it is January 1st, hence the labeling of 'start of the year'.
Are we in a drawdown period NOW?
You don't make it clear if in your analysis you also include the effects of allowing your pretax IRA growth until end of year just prior to conversion. Yes, that money is taxable, but the tax money that has to be paid up front isn't paid until the end of the year. So it is included as a part of the earning/working capital for that entire year. The early conversion forfeits that money up front. This has to partially mitigate the lost growth shown in your analysis. Otherwise, certainly glad I didn't do a Jan 1 conversion this year. Waiting was my friend, just like I suspected it would be...with more to follow IMO.
Agreed. Lots of word salad. Needs to be a shorter presentation with diagrams.
However, if you pay 100% of your fed income taxes from your pre-tax IRA at the END of the year you not only avoid estimated payments on those conversions, but retain that $$ in ur IRA to earn until the end of the year. The IRS allows you to do it that way and your taxes are considered to have been paid evenly throughout the year even though you actually paid them, for instance, the middle of December. You simply do a withdrawal as usual and direct Vanguard or whomever, to withhold 100% as tax. Been doing it for years. I have nothing withheld from SS or pensions during the year. THEN, if you want to, you can simply do an INDIRECT rollover to replace the $$ withdrawn within 60 days and it won't have to be included as taxable income! Sweet! Now, you can only do an indirect rollover once every 12 months so my wife and I alternate years.However, if you pay 100% of your fed income taxes from your pre-tax IRA at the END of the year you not only avoid estimated payments on those conversions, but retain that $$ in ur IRA to earn until the end of the year. The IRS allows you to do it that way and your taxes are considered to have been paid evenly throughout the year even though you actually paid them, for instance, the middle of December. You simply do a withdrawal as usual and direct Vanguard or whomever, to withhold 100% as tax. Been doing it for years. I have nothing withheld from SS or pensions during the year. THEN, if you want to, you can simply do an INDIRECT rollover to replace the $$ withdrawn within 60 days and it won't have to be included as taxable income! Sweet! Now, you can only do an indirect rollover once every 12 months, so my wife and I alternate years.
@@danniedecker7459 Thanks for the tip, but not sure I'm understanding what you mean. I'm not 59-1/2 so if I were to withdraw IRA funds to pay the tax (at any point in the year), I would incur a 10% penalty on top of the tax. So I have to pay taxes out of my cash savings. And, to my knowledge, I have to pay that income tax quarterly unless it's done at the end of the year. ??
@@drott150 yeah...sounds like h'es at least 62 here....
Why do you use such rapid fire speech? It’s difficult to follow you from one thought to another!
@Eric - Interesting wood pile behind U. Unique wallpaper. Love it!
Your begin-vs.-end of year comparisons are misleading. Assuming a growing market, earlier is generally better, the more earlier the bigger the difference. You arbitrarily chose begin-of-year as eleven months earlier instead of one month later than end-of-year. Of course, eleven months earlier will average better in a growing market -- regardless of which two months you compare. If eleven months earlier is December instead of January, then end-of-year is better. A more apples-to-apples comparison would be the last trading Wednesday of December vs. the first trading Wednesday of the following January. Are you really better off to wait that extra 1-2 weeks -- and at the same time increase your risk of converting too much?
Did you watch the video all the way through? We address this objection.
@Eric - Suspect most retires below 50/50 split. Further, bond position greater than stock. Can U do presentation highlighted by Roth Timing Strategies slides at key differing stock and bond points of more interest to the “normal” retiree? ThankU! Super great “discloser”!
It sounds like Eric's study had the benefit of hindsight. I assume he chose the date when the stock market reached a 'crash bottom' to perform the remaining 50% of the planned Roth rollover. This is probably part of the reason for the Drawdown Based option showing the greatest benefit. Can someone provide me the date for the next 'crash bottom'? If so, I'll certainly plan a Roth rollover for that date, as the benefits are significant. I'd also invest in the stock market, with any other money I have laying around. I got lucky in 2020 and invested at the crash bottom (3/23/20). I learned that it can be very profitable. It was my first (& probably last) attempt at market timing, as I had received some inheritance $. p.s. I did do extensive research on prior stock crashes and I also read an article on the 1917 Spanish Flu stock crash, the weekend prior to 3/23/20, which was a big help.
Larry, this was not how the study was run at all. Hence the reason for urging investors to use a rules-based strategy. It's not about 'bottom ticking'. The market can fall further after you perform the conversion and this does not ruin the strategy. The goal here is to lock in some kind of a conversion at a discount.
Also, I did not use the best drawdown trigger for the results for this exact reason. The bigger point is regardless of the drawdown trigger you use (-5%, -10%, etc.) there is statistical significance to the strategy.
@@SafeguardWealthManagement Very good. What drawdown trigger did you use? A $111,470.24 benefit is significant. I would certainly change from the Start of Year option to the Drawdown Based option if I can better understand your analysis. p.s. I love your channel. Your examples often give me ideas on how I can improve my retirement plan. For example, I recently added multiple spreadsheets that simulate a variety of sequence of returns. This was a huge improvement to my plan and will be very useful (& comforting) during the next significant stock crash.
Larry Jones If someone COULD tell us when the bottom is - I hope they can also tell us when the market starts to climb again. LOL. I have sat patiently thru some big drops and then the market rebounded. Really important to be invested when things start going up.
My BP goes up when i listen to u. Pls slow down when speaking. Thx for the info.
please slow down lol
You talk TOO FAST !!!!!!!!!!!!!!!!!!!!!!
If only content makers would see how annoying it is to be listening to a video that is continuously jumping. What happened to spaces between sentences? The reason I hit do not recommend channel most often.
You speak to fast!
You're a fast talker, too fast
Am subscriber that was forced to watch and to listen a second time. More importantly, no summary at the end of their study conclusions. With a stock allocation, convert during market dips? With a bond allocation, convert at the start of the year? But what about converting not Dollar amounts but shares In Kind? If monthly conversions not worth the paperwork, did his study address the normal assumption we cannot time the market? I am inclined to assume year end conversions subject to errors by busy custodians and falling share prices as people sell assets for Xmas cash. Maybe we need to be their clients to get the secret sauce.
You must be from the south. His speed is great.
@@edmundfong7288 fast, but if you slow it down 25%, he sounds a little drunk. Easier to understand, but slurring 🙂🍻
@@stephelast9161 you're absolutely right!! .75 speed is great !
The editing of this video is so harsh as to be unwatchable. Why can't people just have a conversation with the camera? If you pause and "uhh" and "umm" a lot just get better at videos!
I'm just 1 minute in, and the jump-edits in this video are truly annoying; and there is no reason for this. I would not be surprised if you lose viewers because of this (who give up early and don't return), which is too bad because I suspect you have some good information to impart.