I am turning 50 this year and for the first time I realize retirement is coming sooner than later (and frankly I am looking forward to it!). The amount of complication in retirement is astounding and I have oblivious since my focus has been on accumulation thusfar. I plan to get up to speed and your videos are very helpful. Thank you!
@Safeguard Wealth Management At appx. 33:57 you say that generally, unless you have a large pension, you don’t want to eliminate all tax deferred accounts. At what annual pension amount with Joint-and 100% Survivor Annuity would you consider eliminating TDA’s with a near-max age 70 SS benefit?
I am so mad at myself for not looking into tax codes and Roth earlier. I am 69 and have been converting to the top of the 12% bracket for the last 3 years. But if I had started years ago I would be paying 0% taxes on my social security instead of 85%. If you hire a financial planner/advisor make sure they are considering your tax situation not just accumulating assets to increase their percentage of the pie.
This is a great point that I think gets missed in the explanation. Many times, conversion can not only exempt Social Security from taxation - it can also lower means-tested Medicare premiums and their deductibles - which are based on the same calculation
I'm in the same boat! I'm 75 & since 70 1/2, my IRA RMD distributions has made me lose my "enhanced Star" real estate reduction for seniors! Plus, my soc. security percentage that I must pay on has gone from 66% to 85% w/o making any more money! Why?
I got this taxation spreadsheet for $35 the best investment ever to see where your starting point is. This is my first spreadsheet it covers SSI & IRA distributions plug n play. It's cheaper than hiring a financial planner for a snapshot.
Trying to figure out how much we can convert this year without going into second IRMAA category for 2023 as we got in a high IRMAA for 2022 due to converting too much. How do you guestimate the 2023 IRMAA ranges for 2021 income since it won't be available till next year? What is the safest income to shoot for without pushing into the 2nd bracket? We're tying to bring Traditional IRA balance down now before we take SS in 5 yrs from now and before one of us dies!
I completely agree. This video helped me to make the decision to do a Roth conversion even though I have to pay taxes for it out of my traditional IRA.
I will be soon 50 and I am contributing to Roth 401K and Roth IRA (via backdoor conversion) even though my tax rate in future might be lower than today. The way I look at it, I would rather pay taxes now even if I am probably paying at a higher tax rate and continue to build on Roth retirement nest egg.
My wife and I are both 70 and turn 71 next year and still working. We make a about $165,000 with salary plus military retirement and social security. I plan on retiring in March 2023. My wife has a rollover IRA of $32,000 and stills contribute to Roth IRA and would like to convert to Roth. I have $40,000 in 457 which I plan to convert to rollover IRA and then convert to a Roth. Is 2023 the best year to convert to all to Roth when 71? Doing it when my income will dip and the IRAS will more than replace my salary when counted with conversion and then we have no RMDs when we turn 72 in 2024. So is my plan ok! My wife is in her second career and will continue to work for a non profit.
I have many spreadsheets for future tax implications, but did not consider that when I start my RMDs that money will be put into a taxable account, created more income. Argh. Great video. Lots of information and I will be watching it several more times!
I love what you said that it is crazy not to do the conversion. I know it is painful to pay tax now, but it is much worse to pay tax in a much higher rate and you can't do anything about it.
Do you have an updated chart on the “Annual Opportunities”’? I’m thinking that when the Fed decides to finally stop QE and raise the interest rate in March, 2022 - it will probably exceed any opportunity we’ve had in the past 14 years (2008) to do a Roth Conversion. Any chance you might update that chart?
An increase in taxable income, like a Roth conversion, can also affect other income based taxes and expenses for that year. For example, the stimulus payments in 2021 - thousands of dollars could have been lost. Also medical premium subsidies from ACA, Medicare premiums that are income based, tax surcharges on high high income, both state and federal. This can add up to tens of thousands of dollars over and above the tax paid on the conversion.
@@poolking25 we have made too much to do Roth most years. We have problems others would love to have $130k yearly rental income, about $2m in 401K money. We get no government giveaways, we do not need it but, it is significantly our money.
@@Gregarious3 Well done!!! You are way beyond trying to “position yourselves” into a favorable tax position because your hard/smart investments are paying off so you don’t have to worry and are just fine paying the costs because they don’t hurt your position. In short most of us worry about “making as little” as possible to pay less taxes and Medicare but you worry about “making as much as possible” so you Don’t have to worry.
Regarding fed tax payment on IRA withdrawals I think this is true but not certain. I need to pay at least 80% of a tax liability estimate before the tax deadline and I think you do not need to pay it quarterly just pay it whenever just get it paid before the deadline.
Tax code is written to punish singles, couples benefits, deductibles could double. Housing costs are a biggest expense, for eg. a couple or a single person living in a 1 bedroom condo have same expense. Widow trap happens, because the favorable taxation, and doubling of benefits disappear when a couple become single.
The tax code is not written to punish you, it's more about social engineering. The American Congress wants you to be married. They figure if you're married you will be more responsible and pay more taxes, bring new taxpayers into the world and commit less crimes etc. What will fuck up their plan is that soon one will be able to marry his/her dog or perhaps even a cockroach. I mean we all have feelings, desires and rights.
@@MikeNaples Tax code says married people pay less in taxes than singles, and if they have dependents they take a lot more than they pay in overall taxes. I don't know if crime is more among singles who are at age 30+, and responsibility increases with marriage?questionable. That is how older generation used to think up until 1950s, 60s, 70s.
Historically, the tax code had a marriage penalty. The reverse isn’t correct. Double the single brackets and they will equal the married brackets. The only time marriage has a benefit is when the spouse doesn’t work and of course that is offset by reduced income. So is it discrimination that the widow now has the assets of two people? I don’t like it either, but I have trouble calling it unfair. I do have a long list of complaints for the government, but this isn’t the one that motivates me 😁
Married filing jointly sucks. It's chock full of penalty and if you don't think that you're probably not in that situation. Every single year my CPA's make it pretty clear we'd be better off having never gotten married. People divorce for taxes now but IRS demands proof of seperate residences then. That's because you pay MORE taxes (percentage wise) as a marrier two income household. IE The Marriage Penalty."
@Jim Wright No one can possibly know that with certainty. I believe that he stated early on in the video that the figures/brackets were simply adjusted for (average) inflation rates. Of course our present inflationary environment is anything but average!
I came here to see if it would be wise to convert my Traditional IRA money to Roth…i only have around $25k in Traditional and am thinking of converting maybe $5k/year or so, to lessen the tax hit. I’m 47, so if I had it all converted by age 50, i’d still have 10-15 years of compounding growth to enjoy before I’d need it.
Wouldn’t another benefit of conversion be that by paying the taxes out of pocket it allows you to essentially increase the amount of funds you are contributing to retirement in tax advantage accounts once you’ve maxed out all other taxed advantage options?
There's another important consideration that is not mentioned in the explanation. If you have a $1,000,000 IRA - you're likely (all in) paying about 2% in costs, fees, and commissions. That's $20,000 a year. But if you only own - say 70% of the balance (Uncle Sam owns the rest - you're just his custodian), then you're paying $6,000/year to have money you don't own - managed. Over a 20-year retirement, that's well over $100,000 of wealth that could be yours - but won't be unless you convert. My belief is that we have to look as closely at the cost of not converting - as we do the cost of converting. Fees are just one of 6 factors I think bear consideration.
@@maggiekelly4055 Yes - but you'd only be paying fees on the converted amount - not Uncle Sam's portion. If your tax rate is - say 25% - your total fee expense will go down by 25% - that money makes Christmas better at your house instead of the broker's! Good ?
Paartly agree. It is important to me to pay minimal fees. It is possible to pay 0.1% or less, assuming you can be self directed. Sam will pay for the management fee indirectly because fees reduce Sam's take as well. (e.g. Vanguard total market indexes like VTI 0.03% fees) Management fees for an active account are obviously much higher.
One question. What happens if in the future the government decides to change Roth IRA's into taxable account if it's over a specific amount? After we change most off our tax account into Roth none taxable. Just Hypothetical.
there would surely be some advance warning that such legislation was coming down the pike - in which case I'd just take it all out and collapse the Roth account. There are other things you can then do to tax-protect the corpus.
As always some of the best content on the internet. I seem to be seeing more ads so not sure if you changed the UA-cam settings to generate more income but definitely becoming more annoying.
Yes this! And it’s why I’m converting a large chunk this month in a down market… counting on the growth inside the Roth to be more beneficial than the tIRA when the markets do recover. It’s that “Widow Trap” that concerns me, as we have dual pensions with 100% survivor benefits. IOW, stocks (Roth conversions) are on sale!
@@SafeguardWealthManagement Thank you. I have 90k salary, 200k conversion, 20k capital gains and dividend, so I have about 30k left before next IRMAA jump?
Wow. What a wonderful video explaining the different scenarios. Could you explain how to pay taxes on conversion of Roth funds if one is under 59.5 and not wait until tax filing date of next year (in order to ovoid underpayment penalty)?
I'm doing conversions I started Jan this year. I plan to pay tax estimates in Dec when I'll have some idea what investment gains if any will be. My estimates will be on the high side for fear of penalties. Is this ok or are you supposed to send tax estimates in immediately after the conversion? My adviser said you can actually wait until tax deadline the following year. I'm paying taxes with separate money from the conversion money.
@@gwen4993 My financial advisor told me for the IRA withdrawals I don't have to pay taxes until the following years tax due date so this is confusing. I'll transfer the full tax estimate now to the IRS so some months late but maybe I won't get a penalty. Let's say you are pulling from any tax deferred account do you have to deal with a quarterly tax payment through the year? You don't get the 1099R until the end of the year so people are forced to keep their own quarterly withdrawal record? Sometimes I think tax deferred accounts are a bad idea given the future headache.
@@gwen4993 I want to maximize the amount that goes to Roth so I'm paying taxes with non tax deferred withdrawal money, I did throw a 6% chunk into my State account but you got my attention I'm going to transfer 24% to the Feds now. I saw somewhere something about 50% penalty but maybe that's if you don't pay any taxes on the withdrawal until after the next tax years deadline.
@@gwen4993 I owe $25000 to the Fed's as a good estimate. If cap gains and dividends are low this year it will be lower. Not RMD just withdraw and move to Roth. Given it's not a lot maybe invest half and send half to the Fed's. When RMDs start in 7 years I'll set that up to be automatic and auto tax payment.
I just now discovered and watched your presentation, this is very well done and make a lot of sense, thank you for sharing this. I have a question related to Roth conversion. My question is not on the mechanics converting from traditional IRA, but rather on the risk of "pre-paying" taxes by converting. I know that under current law that tax rates will go up to the prior rate, but is there any concern about Congress creating new laws that change the taxability of Roth distributions? Is there any expectation that Congress could invent some type of "excess Roth Distribution Tax" and thereby make some of a Roth distribution taxable? If would be infuriating if a taxpayer opted to endure significant financial hardship in the present to be able to pay taxes on a Roth conversion, only to see the laws changed such that in the future some of those Roth conversion distributions get taxed again? This may sound crazy and completely unfair, but I think the the FICA withholding taxes on wage income is what funds Social Security payments, which are often 85 taxable. In other words, we pay taxes into Social Security while working and we pay taxes again on those dollars when we receive Social Security.
Im not going to gainsay your fear though I assume there would a be age p;itical backlash -remember most congressmen are doing just what you are. BUT why not just hedge your bets and mx flexibility- convert enough so you have 50% in traditional and 50% in roth ?
I could see a scenario in which the GROWTH in a Roth may be taxed to a degree, perhaps. And they will continue to look at Mega-backdoor Roths and high net-worth individuals. My personal theory is that they have to pay for all this money they’re printing from somewhere (his National Debt slides illustrate this). While I don’t have a crystal ball, I really don’t see how tax rates (in 2026) are going anywhere but up.
I disagree that a lower rate today is the best and only reason to convert. The real benefit is tax free growth from now for the next 30-40 years. I’m 54 so 25 to 35 years is a realistic time frame for additional tax free growth. Paying a higher rate today and no tax in the future beats a lower rate at 70 or 80 years old. Is my math wrong here?
Yes, you are incorrect. You lose the growth opportunity on the amount paid in taxes. So if your tax rate is the same now and later, then it is a wash. However, if your tax rate is lower now than in the future, you benefit by converting to a ROTH now at a lower tax rate since you will pay less tax.
@@jackcapone4375 In order to compare apples to apples you must take taxes into account. If you pay the conversion taxes from another account, that money is no longer earning income for you.
The math is wrong and the answer may be right because of risk. It the tax rate at future withdrawal and current conversion then they are equal. The risk part of the equation is tax may increase or decrease in the future either because of government or your situation changes. The key question is do you like a known calculation today better then speculation on a future calculation?
If you could predict the future with any accuracy you would be rich. Inflation wipes out debt. With the recent 20% to 30% inflation your graph should show GDP grow with inflation as debt remains the same in the future.
Ya all want our problems. We hit 32% tax bracket with only rental income. Then the 401ks....I planned based on the rules many years ago, only wages messed with the taxability of SS.
I applied for medical insurance through New York’s market place. As I am unemployed, I plan on doing Roth conversions and estimated my conversion to be about $20,000 for 2022. I expect no other income. New York State wants to put me in Medicaid because they say the Roth conversion does not qualify as income for the purposes of getting medical insurance through there marketplace. Any other New Yorkers have the same problem?
Converting traditional 401K/403B to Roth 401K/403B gives better protection from creditors and litigants is how I understand. Some states give similar protection to IRAs.
If your current marginal tax rate is 35% does it even make sense to do a Roth conversion now? I know your answer is going to be maybe, depends on what you think your income in retirement will be, but over simplify it for me and assume its a yes or no question.
We are going to start taking IRA distribution at 59 .5 then the wife will take SS at 62 y/o early due to cancer. Based on our taxation spreadsheet for NJ my Pension is $67000 SS $24000 & $35000 Ira still our effective tax is 10.2 % & marginal tax 22% I think the average couple doesn't need Roth conversion.
So I don't have nearly enough information to comment on your specific situation. I will say conversions certainly don't make sense for every couple. Keep in mind... You're probably right. The average retiree has something like $150,000 to $200,000 saved for retirement depending on the studies you look at. The benefit to conversions at these levels is much more minor. That being said, if all education is made for the average person, you're leaving behind a huge portion of people that simply aren't average. Conversions are massively important for specific groups of retirees.
@@SafeguardWealthManagement We are both 58 y/o meeting with our CPA soon for a forward-looking tax plan. We have approx 1.2 M IRA/403, $225, 000 Roths, $145,000 Cash brokerage & wife's has a $67,000 cash value pension. We will definitely be in a lower tax bracket once my wife retires end of the year. Our goal is to die close to zero and start spending & gifting now.
@@SafeguardWealthManagement Yearly pension. free medical for us, A will & beneficiaries updated. No debt. Expensive approx $5000 -7000 monthly. I am not taking my SS or spousal due WIP & GPO.
So there are certainly some factors here that would lead to needing more data (WIP + substantial earnings history for example) but with some back-of-the-napkin math, it would appear the Social Security Tax Torpedo isn't a significant factor because the pension is pushing you through most if not all of those zones. Guessing you are in the 22% bracket from still working? See what your CPA says as they have more information, but I actually think there are opportunities to convert. Just make sure your CPA is factoring in the necessary items to build a forward-looking plan. It may not be huge conversions but based on your spending, guaranteed income, and income needs, it would appear to me from the first look that your IRA will grow mostly unencumbered until RMD ages. That is... unless the pension doesn't start right away or your planning on pulling more than your monthly expenses for income. Keep in mind that as the Tax Cuts and Jobs Act ends, brackets are rising. So even if you statically stay in the same bracket, taxes will go up leading to 'max the bracket' strategies making sense. As I'm writing this, there are more variables that may change outputs drastically such as if you were planning to move out of state, but nonetheless, here are my 'back-of-napkin, youtube comment' thoughts. haha
Roth conversions may not pay off until age 90 for most. Tax-rate changes have minimal effect on the financial benefits of Roth conversions, Edward McQuarrie, professor emeritus at Santa Clara University, wrote in a recent paper. The most important factor is actually compounding. Only in the unlikely scenario that someone is in the 0% tax bracket is it justifiable to recommend a conversion based on higher tax rates in the future, McQuarrie noted. And unless a couple’s peak wage earnings are above $200,000 or for some reason they haven’t saved much for retirement, they will most likely be in a low tax bracket when taking required minimum distributions, according to the study. “[U]nless both members of a sixty-something couple are 401(k) millionaires, their tax rate in retirement will likely be 12%,” McQuarrie wrote in the paper. “They will have last seen tax rates that low when they were students.” In most cases, “the benefits from a Roth conversion are often small and slow to arrive,” past age 90, “and so long as annual distributions from converted amounts are not taken,” he wrote. Additionally, there is no benefit to a Roth conversion for the sake of tax diversification, he said. www.investmentnews.com/roth-conversion-study-207591
A large chunk would be hit in high tax bracket. Split it up over some number of years. Tax est tools are on the web to calculate what you might owe in the conversions.
Outlook with most congress moves is somewhat unknown but the bill does not stop conversions for those under $400,000 of income. It does eliminate backdoor Roths, however.
The first chart you show looks like a $50,000 IRA account that somehow has $75,000 RMD's in only a few years. That doesn't make sense, and at the end of the time period, over $300,000 RMDs per year. How is that mathematically even possible?
Contributing to a 401K rather than a Roth IRA while working has an additional disadvantage I have not seen previously discussed, namely a reduction in the SS taxes you pay each year will impact how much you eventually receive when you apply for SS.
I've tried researching software options for this type of analysis and the only thing I've been able to determine is that the software seems to only be available to financial planners. Probably costs quite a bit, but seems to be an area that some intrepid programmer could make some money by providing this type of software to the baby boomer gen.
@@peter-hr1gl I think any such software would take expertise to use properly and with confidence. If you can't work it out with a calculator or spreadsheet, you would probably be better off hiring a pro.
@@SafeguardWealthManagement The backdoor Roth has been my retirement plan. It’s about to be eliminated. I’m going to be paying taxes on the way in and paying taxes on the way out. IRAs of any kind are not appealing if they’re subject to taxes. I’m self employed (more than 20 years) recently started earning enough to start a retirement account. My wife is a high earner and has a traditional 401k. Our combined income requires me to use the backdoor roth strategy, I’m only a few years into getting this process running smoothly and now it’s being squashed due to jealous politicians like Senator Wyden. All because LESS THAN 500 Americans have more than 10 million in their Roth accounts and 29,000 have more than 5 million and Peter Theil used the roth IRA to amass millions and then wanted to cash out. So now I’m looking for different options other than any kind of IRA to save for retirement. I’m thinking a regular brokerage account or purchasing income properties. I am the working poor in Massachusetts.
@@richardm1862 A backdoor Roth is when you put money in your IRA and then a few months later do a Roth conversion. This gets around the limit on how much you can directly put in a Roth each year. The government wants to eliminate this loophole.
You are out of my league. What about the guy that makes under $20 grand a year in Social Security. Good grief, I didn't even know you could get $3,000 a month. It used to be $1800 that my Uncle got. He just put it in the bank. What is the max benefits of SS? Instead of all this nonsense we should be talking about the crime of taxing retirement benefits and the confusion of SS and medicare in our later years. A crime.
There is simply no way that a Roth conversion makes sense for everyone. A much better video would have given income and IRA examples and played each out. This was just confusing, and I consider myself saavy. I have close to 5 million in combined IRAs and am 66. Any meaningful conversion takes me from my current 15% (18.9%) marginal to 40.8%. Taking RMDs at72 should be in the mid 200s or 24% marginal. I’m already maxed on Irma’s.
@@_-Karl-_ I’m in the 15 % marginal because all income is from dividends. So convert to Roth, takes me to the 22-24% now. Don’t convert , and pay RMDs in 6 years at 24% rate. In the meantime, RMD age might be raised to 75. No reason to jump now
I love your approach and the information you’re giving, but you were talking way too fast for the average person here. Not sure why anyone would applaud this presentation.
@@SafeguardWealthManagement Everyone Does have Different Preferences. * I listen at 1.5x Normal Speed to turn 45:59 into 30:40 of Listening Time * BUT, I listen on my iPad . . . WITH Closed Captions, AND EarBuds to PAUSE for Graphs
BTW, this is without a doubt one of the best financial advice channels on UA-cam. Even though I know it’s not “advice” legally.
Thanks Don!
Agreed
I am turning 50 this year and for the first time I realize retirement is coming sooner than later (and frankly I am looking forward to it!). The amount of complication in retirement is astounding and I have oblivious since my focus has been on accumulation thusfar. I plan to get up to speed and your videos are very helpful. Thank you!
@Safeguard Wealth Management At appx. 33:57 you say that generally, unless you have a large pension, you don’t want to eliminate all tax deferred accounts. At what annual pension amount with Joint-and 100% Survivor Annuity would you consider eliminating TDA’s with a near-max age 70 SS benefit?
Taking the long view sharpens the short. Well done gentlemen.
I am so mad at myself for not looking into tax codes and Roth earlier. I am 69 and have been converting to the top of the 12% bracket for the last 3 years. But if I had started years ago I would be paying 0% taxes on my social security instead of 85%. If you hire a financial planner/advisor make sure they are considering your tax situation not just accumulating assets to increase their percentage of the pie.
You don't pay 85% on your SS. 85% of SS is taxable at your regular rate.
Yeah I know, it should have said instead of on 85%.
This is a great point that I think gets missed in the explanation. Many times, conversion can not only exempt Social Security from taxation - it can also lower means-tested Medicare premiums and their deductibles - which are based on the same calculation
I'm in the same boat! I'm 75 & since 70 1/2, my IRA RMD distributions has made me lose
my "enhanced Star" real estate reduction for seniors! Plus, my soc. security percentage
that I must pay on has gone from 66% to 85% w/o making any more money! Why?
I got this taxation spreadsheet for $35 the best investment ever to see where your starting point is. This is my first spreadsheet it covers SSI & IRA distributions plug n play. It's cheaper than hiring a financial planner for a snapshot.
This is the best summary and explanation of all the post retirement traps I have ever seen. Thank you.
Thank you!
Trying to figure out how much we can convert this year without going into second IRMAA category for 2023 as we got in a high IRMAA for 2022 due to converting too much. How do you guestimate the 2023 IRMAA ranges for 2021 income since it won't be available till next year? What is the safest income to shoot for without pushing into the 2nd bracket? We're tying to bring Traditional IRA balance down now before we take SS in 5 yrs from now and before one of us dies!
Outstanding video. I've watched a lot of ROTH overviews, but this was definitely one of the best!
Wow, thank you!
I completely agree. This video helped me to make the decision to do a Roth conversion even though I have to pay taxes for it out of my traditional IRA.
I will be soon 50 and I am contributing to Roth 401K and Roth IRA (via backdoor conversion) even though my tax rate in future might be lower than today. The way I look at it, I would rather pay taxes now even if I am probably paying at a higher tax rate and continue to build on Roth retirement nest egg.
Sub'd! Well done. Your ability to "peel the onion" utilizing actual numbers makes this the best evaluation on the topic I've seen on UA-cam.
Thank you!
My wife and I are both 70 and turn 71 next year and still working. We make a about $165,000 with salary plus military retirement and social security. I plan on retiring in March 2023. My wife has a rollover IRA of $32,000 and stills contribute to Roth IRA and would like to convert to Roth. I have $40,000 in 457 which I plan to convert to rollover IRA and then convert to a Roth. Is 2023 the best year to convert to all to Roth when 71? Doing it when my income will dip and the IRAS will more than replace my salary when counted with conversion and then we have no RMDs when we turn 72 in 2024. So is my plan ok! My wife is in her second career and will continue to work for a non profit.
I have many spreadsheets for future tax implications, but did not consider that when I start my RMDs that money will be put into a taxable account, created more income. Argh.
Great video. Lots of information and I will be watching it several more times!
Thank you!
Just retired. Appreciated the helpful info. Also lets wipe out those created/ing national debt
Great info Thx. Do you think they will extend the tax cuts or not?
I love what you said that it is crazy not to do the conversion. I know it is painful to pay tax now, but it is much worse to pay tax in a much higher rate and you can't do anything about it.
Where can i go for resources and/or information if i still don't understand this. I've rewinded several times & i'm still having a hard time.
Do you have an updated chart on the “Annual Opportunities”’? I’m thinking that when the Fed decides to finally stop QE and raise the interest rate in March, 2022 - it will probably exceed any opportunity we’ve had in the past 14 years (2008) to do a Roth Conversion. Any chance you might update that chart?
What about the medicare penalty?! It's huge and permanent.
An increase in taxable income, like a Roth conversion, can also affect other income based taxes and expenses for that year. For example, the stimulus payments in 2021 - thousands of dollars could have been lost. Also medical premium subsidies from ACA, Medicare premiums that are income based, tax surcharges on high high income, both state and federal. This can add up to tens of thousands of dollars over and above the tax paid on the conversion.
Agree, I only do traditional 401ks. If I had done Roth instead, I wouldn't have qualified for the stimulus payments
@@poolking25 we have made too much to do Roth most years. We have problems others would love to have $130k yearly rental income, about $2m in 401K money. We get no government giveaways, we do not need it but, it is significantly our money.
@@Gregarious3 Well done!!! You are way beyond trying to “position yourselves” into a favorable tax position because your hard/smart investments are paying off so you don’t have to worry and are just fine paying the costs because they don’t hurt your position. In short most of us worry about “making as little” as possible to pay less taxes and Medicare but you worry about “making as much as possible” so you Don’t have to worry.
Regarding fed tax payment on IRA withdrawals I think this is true but not certain. I need to pay at least 80% of a tax liability estimate before the tax deadline and I think you do not need to pay it quarterly just pay it whenever just get it paid before the deadline.
Tax code is written to punish singles, couples benefits, deductibles could double. Housing costs are a biggest expense, for eg. a couple or a single person living in a 1 bedroom condo have same expense. Widow trap happens, because the favorable taxation, and doubling of benefits disappear when a couple become single.
The tax code is not written to punish you, it's more about social engineering. The American Congress wants you to be married. They figure if you're married you will be more responsible and pay more taxes, bring new taxpayers into the world and commit less crimes etc. What will fuck up their plan is that soon one will be able to marry his/her dog or perhaps even a cockroach. I mean we all have feelings, desires and rights.
@@MikeNaples Tax code says married people pay less in taxes than singles, and if they have dependents they take a lot more than they pay in overall taxes. I don't know if crime is more among singles who are at age 30+, and responsibility increases with marriage?questionable. That is how older generation used to think up until 1950s, 60s, 70s.
@@Just_forfun9140 Thanks for the seeming sincere unintelligible reply.
Historically, the tax code had a marriage penalty. The reverse isn’t correct. Double the single brackets and they will equal the married brackets. The only time marriage has a benefit is when the spouse doesn’t work and of course that is offset by reduced income. So is it discrimination that the widow now has the assets of two people? I don’t like it either, but I have trouble calling it unfair. I do have a long list of complaints for the government, but this isn’t the one that motivates me 😁
Married filing jointly sucks. It's chock full of penalty and if you don't think that you're probably not in that situation. Every single year my CPA's make it pretty clear we'd be better off having never gotten married. People divorce for taxes now but IRS demands proof of seperate residences then. That's because you pay MORE taxes (percentage wise) as a marrier two income household. IE The Marriage Penalty."
What type of software are you using to show future income and future tax bracket ranges?
@Jim Wright No one can possibly know that with certainty. I believe that he stated early on in the video that the figures/brackets were simply adjusted for (average) inflation rates. Of course our present inflationary environment is anything but average!
I came here to see if it would be wise to convert my Traditional IRA money to Roth…i only have around $25k in Traditional and am thinking of converting maybe $5k/year or so, to lessen the tax hit. I’m 47, so if I had it all converted by age 50, i’d still have 10-15 years of compounding growth to enjoy before I’d need it.
I'm starting convert to Roth now since the market is down but when the market up Don't have to pay capital gain tax.
Doesn’t the tax free growth when in the Roth mean we should convert even into a slightly higher bracket?
Why, your great. Where are you located?
so the years after you retire from a high income job might a good time?
Wouldn’t another benefit of conversion be that by paying the taxes out of pocket it allows you to essentially increase the amount of funds you are contributing to retirement in tax advantage accounts once you’ve maxed out all other taxed advantage options?
Excellent information! Thank you. Just subscribed.
There's another important consideration that is not mentioned in the explanation. If you have a $1,000,000 IRA - you're likely (all in) paying about 2% in costs, fees, and commissions. That's $20,000 a year. But if you only own - say 70% of the balance (Uncle Sam owns the rest - you're just his custodian), then you're paying $6,000/year to have money you don't own - managed. Over a 20-year retirement, that's well over $100,000 of wealth that could be yours - but won't be unless you convert. My belief is that we have to look as closely at the cost of not converting - as we do the cost of converting. Fees are just one of 6 factors I think bear consideration.
I don't you are right there. 30% of that fees comes from uncle sam's share.
Excellent point. But if I’m under an AUM fee structure, aren’t I still paying the AUM on my Roth assets?
@@maggiekelly4055 Yes - but you'd only be paying fees on the converted amount - not Uncle Sam's portion. If your tax rate is - say 25% - your total fee expense will go down by 25% - that money makes Christmas better at your house instead of the broker's! Good ?
Paartly agree. It is important to me to pay minimal fees. It is possible to pay 0.1% or less, assuming you can be self directed. Sam will pay for the management fee indirectly because fees reduce Sam's take as well. (e.g. Vanguard total market indexes like VTI 0.03% fees) Management fees for an active account are obviously much higher.
One question. What happens if in the future the government decides to change Roth IRA's into taxable account if it's over a specific amount? After we change most off our tax account into Roth none taxable. Just Hypothetical.
there would surely be some advance warning that such legislation was coming down the pike - in which case I'd just take it all out and collapse the Roth account. There are other things you can then do to tax-protect the corpus.
Likely would never happen instead they'd just close the door to any future contributions and what you have you have
Good thing we have the 2nd amendment.
@@jackburton806 that does not solve this kind of issue. Don't be trigger happy. Get smart and vote intelligently.
@@FM-kl3iu I could be wrong but I think he was joking.
Like it very educational thank you
As always some of the best content on the internet. I seem to be seeing more ads so not sure if you changed the UA-cam settings to generate more income but definitely becoming more annoying.
Even if you are in the same tax bracket in the future, if you convert, your taxes will be zero on the earnings in a Roth. Especially if done sooner.
Yes this! And it’s why I’m converting a large chunk this month in a down market… counting on the growth inside the Roth to be more beneficial than the tIRA when the markets do recover. It’s that “Widow Trap” that concerns me, as we have dual pensions with 100% survivor benefits.
IOW, stocks (Roth conversions) are on sale!
Excellent presentation. IRMAA surcharge is based on MAGI. Is MAGI before or after after the standard deduction for MFJ?
Great question - Before the standard deduction!
@@SafeguardWealthManagement Thank you. I have 90k salary, 200k conversion, 20k capital gains and dividend, so I have about 30k left before next IRMAA jump?
Ely informative, thanks.
Wow. What a wonderful video explaining the different scenarios. Could you explain how to pay taxes on conversion of Roth funds if one is under 59.5 and not wait until tax filing date of next year (in order to ovoid underpayment penalty)?
I'm doing conversions I started Jan this year. I plan to pay tax estimates in Dec when I'll have some idea what investment gains if any will be. My estimates will be on the high side for fear of penalties. Is this ok or are you supposed to send tax estimates in immediately after the conversion? My adviser said you can actually wait until tax deadline the following year. I'm paying taxes with separate money from the conversion money.
@@gwen4993 My financial advisor told me for the IRA withdrawals I don't have to pay taxes until the following years tax due date so this is confusing. I'll transfer the full tax estimate now to the IRS so some months late but maybe I won't get a penalty. Let's say you are pulling from any tax deferred account do you have to deal with a quarterly tax payment through the year? You don't get the 1099R until the end of the year so people are forced to keep their own quarterly withdrawal record? Sometimes I think tax deferred accounts are a bad idea given the future headache.
@@gwen4993 I want to maximize the amount that goes to Roth so I'm paying taxes with non tax deferred withdrawal money, I did throw a 6% chunk into my State account but you got my attention I'm going to transfer 24% to the Feds now. I saw somewhere something about 50% penalty but maybe that's if you don't pay any taxes on the withdrawal until after the next tax years deadline.
@@gwen4993 I owe $25000 to the Fed's as a good estimate. If cap gains and dividends are low this year it will be lower. Not RMD just withdraw and move to Roth. Given it's not a lot maybe invest half and send half to the Fed's. When RMDs start in 7 years I'll set that up to be automatic and auto tax payment.
I just now discovered and watched your presentation, this is very well done and make a lot of sense, thank you for sharing this. I have a question related to Roth conversion. My question is not on the mechanics converting from traditional IRA, but rather on the risk of "pre-paying" taxes by converting. I know that under current law that tax rates will go up to the prior rate, but is there any concern about Congress creating new laws that change the taxability of Roth distributions? Is there any expectation that Congress could invent some type of "excess Roth Distribution Tax" and thereby make some of a Roth distribution taxable? If would be infuriating if a taxpayer opted to endure significant financial hardship in the present to be able to pay taxes on a Roth conversion, only to see the laws changed such that in the future some of those Roth conversion distributions get taxed again? This may sound crazy and completely unfair, but I think the the FICA withholding taxes on wage income is what funds Social Security payments, which are often 85 taxable. In other words, we pay taxes into Social Security while working and we pay taxes again on those dollars when we receive Social Security.
Im not going to gainsay your fear though I assume there would a be age p;itical backlash -remember most congressmen are doing just what you are. BUT why not just hedge your bets and mx flexibility- convert enough so you have 50% in traditional and 50% in roth ?
I could see a scenario in which the GROWTH in a Roth may be taxed to a degree, perhaps. And they will continue to look at Mega-backdoor Roths and high net-worth individuals. My personal theory is that they have to pay for all this money they’re printing from somewhere (his National Debt slides illustrate this). While I don’t have a crystal ball, I really don’t see how tax rates (in 2026) are going anywhere but up.
Thanks. Very well done with pertinent information.
Can my military retirement & Social Security monthly incomes be used to fund a ROTH? They are both after tax incomes.
no--Roth contributions must come from 'earnings', ie W2 income or self-employment income, etc.
@@nicklyons4227 thanks
I disagree that a lower rate today is the best and only reason to convert. The real benefit is tax free growth from now for the next 30-40 years. I’m 54 so 25 to 35 years is a realistic time frame for additional tax free growth. Paying a higher rate today and no tax in the future beats a lower rate at 70 or 80 years old. Is my math wrong here?
Yes, you are incorrect. You lose the growth opportunity on the amount paid in taxes. So if your tax rate is the same now and later, then it is a wash. However, if your tax rate is lower now than in the future, you benefit by converting to a ROTH now at a lower tax rate since you will pay less tax.
@@jackcapone4375 In order to compare apples to apples you must take taxes into account. If you pay the conversion taxes from another account, that money is no longer earning income for you.
The math is wrong and the answer may be right because of risk. It the tax rate at future withdrawal and current conversion then they are equal. The risk part of the equation is tax may increase or decrease in the future either because of government or your situation changes. The key question is do you like a known calculation today better then speculation on a future calculation?
If you could predict the future with any accuracy you would be rich. Inflation wipes out debt. With the recent 20% to 30% inflation your graph should show GDP grow with inflation as debt remains the same in the future.
Ya all want our problems. We hit 32% tax bracket with only rental income. Then the 401ks....I planned based on the rules many years ago, only wages messed with the taxability of SS.
Thank you! This was absolutely the info I needed to get it. Subscribed!
I applied for medical insurance through New York’s market place. As I am unemployed, I plan on doing Roth conversions and estimated my conversion to be about $20,000 for 2022. I expect no other income. New York State wants to put me in Medicaid because they say the Roth conversion does not qualify as income for the purposes of getting medical insurance through there marketplace. Any other New Yorkers have the same problem?
Converting traditional 401K/403B to Roth 401K/403B gives better protection from creditors and litigants is how I understand. Some states give similar protection to IRAs.
If your current marginal tax rate is 35% does it even make sense to do a Roth conversion now? I know your answer is going to be maybe, depends on what you think your income in retirement will be, but over simplify it for me and assume its a yes or no question.
Subscribed!
We are going to start taking IRA distribution at 59 .5 then the wife will take SS at 62 y/o early due to cancer. Based on our taxation spreadsheet for NJ my Pension is $67000 SS $24000 & $35000 Ira still our effective tax is 10.2 % & marginal tax 22% I think the average couple doesn't need Roth conversion.
So I don't have nearly enough information to comment on your specific situation. I will say conversions certainly don't make sense for every couple.
Keep in mind... You're probably right. The average retiree has something like $150,000 to $200,000 saved for retirement depending on the studies you look at. The benefit to conversions at these levels is much more minor. That being said, if all education is made for the average person, you're leaving behind a huge portion of people that simply aren't average. Conversions are massively important for specific groups of retirees.
@@SafeguardWealthManagement We are both 58 y/o meeting with our CPA soon for a forward-looking tax plan. We have approx 1.2 M IRA/403, $225, 000 Roths, $145,000 Cash brokerage & wife's has a $67,000 cash value pension. We will definitely be in a lower tax bracket once my wife retires end of the year. Our goal is to die close to zero and start spending & gifting now.
@@HB-yq8gy to clarify, is the pension $67,000 per year, or is it a $67,000 lump sum?
@@SafeguardWealthManagement Yearly pension. free medical for us, A will & beneficiaries updated. No debt. Expensive approx $5000 -7000 monthly. I am not taking my SS or spousal due WIP & GPO.
So there are certainly some factors here that would lead to needing more data (WIP + substantial earnings history for example) but with some back-of-the-napkin math, it would appear the Social Security Tax Torpedo isn't a significant factor because the pension is pushing you through most if not all of those zones.
Guessing you are in the 22% bracket from still working?
See what your CPA says as they have more information, but I actually think there are opportunities to convert. Just make sure your CPA is factoring in the necessary items to build a forward-looking plan. It may not be huge conversions but based on your spending, guaranteed income, and income needs, it would appear to me from the first look that your IRA will grow mostly unencumbered until RMD ages. That is... unless the pension doesn't start right away or your planning on pulling more than your monthly expenses for income. Keep in mind that as the Tax Cuts and Jobs Act ends, brackets are rising. So even if you statically stay in the same bracket, taxes will go up leading to 'max the bracket' strategies making sense.
As I'm writing this, there are more variables that may change outputs drastically such as if you were planning to move out of state, but nonetheless, here are my 'back-of-napkin, youtube comment' thoughts. haha
It’s not Obamacare. It’s Affordable Care.
No it's Obamacare
I think you can subtract std deduction from income in calculating IRMAA MAGI.
Nope, sorry.
Roth conversions may not pay off until age 90 for most. Tax-rate changes have minimal effect on the financial benefits of Roth conversions, Edward McQuarrie, professor emeritus at Santa Clara University, wrote in a recent paper. The most important factor is actually compounding.
Only in the unlikely scenario that someone is in the 0% tax bracket is it justifiable to recommend a conversion based on higher tax rates in the future, McQuarrie noted. And unless a couple’s peak wage earnings are above $200,000 or for some reason they haven’t saved much for retirement, they will most likely be in a low tax bracket when taking required minimum distributions, according to the study.
“[U]nless both members of a sixty-something couple are 401(k) millionaires, their tax rate in retirement will likely be 12%,” McQuarrie wrote in the paper. “They will have last seen tax rates that low when they were students.”
In most cases, “the benefits from a Roth conversion are often small and slow to arrive,” past age 90, “and so long as annual distributions from converted amounts are not taken,” he wrote.
Additionally, there is no benefit to a Roth conversion for the sake of tax diversification, he said. www.investmentnews.com/roth-conversion-study-207591
There is only 1 reason to convert. A higher tax % paid when you other wise withdraw. Avg tax rate. Not a higher tax bracket
If I made $30k for 2021 and I want to covert $525k from Traditional IRA to Roth IRA, how much taxes would I owe ?
You don't want to convert the entire $525,000 all in one year any you most likely want to retain some money in traditional IRA anyway.
A large chunk would be hit in high tax bracket. Split it up over some number of years. Tax est tools are on the web to calculate what you might owe in the conversions.
whats the outlook for the bill that aims to stop roth conversion starting 2022?
Outlook with most congress moves is somewhat unknown but the bill does not stop conversions for those under $400,000 of income. It does eliminate backdoor Roths, however.
The first chart you show looks like a $50,000 IRA account that somehow has $75,000 RMD's in only a few years. That doesn't make sense, and at the end of the time period, over $300,000 RMDs per year. How is that mathematically even possible?
Can retired convert?
Yes, 100%. It is often a great time to convert
Contributing to a 401K rather than a Roth IRA while working has an additional disadvantage I have not seen previously discussed, namely a reduction in the SS taxes you pay each year will impact how much you eventually receive when you apply for SS.
@@gwen4993 you are right
Once your lifetime earnings reach a certain point, the further increase in potential benefits becomes so small it's almost insulting.
My pension is 172,000 per year, and 250,000 in a tax deferred account , I am 70 years old, should I convert to Roth now?
Can I ask what software you recommend for us regular folks to simulate the impact of Roth conversions?
I notice multiple questions like this yet no answer. Could you please answer the question as best you can or explain why not? Thank you
I've tried researching software options for this type of analysis and the only thing I've been able to determine is that the software seems to only be available to financial planners. Probably costs quite a bit, but seems to be an area that some intrepid programmer could make some money by providing this type of software to the baby boomer gen.
@@peter-hr1gl I think any such software would take expertise to use properly and with confidence. If you can't work it out with a calculator or spreadsheet, you would probably be better off hiring a pro.
Roth conversations are off the table if the BBB bill passes the Senate.
This is a common misunderstanding. For the vast majority of retirees, conversions are still available. Backdoor Roths would be eliminated.
@@SafeguardWealthManagement The backdoor Roth has been my retirement plan. It’s about to be eliminated. I’m going to be paying taxes on the way in and paying taxes on the way out. IRAs of any kind are not appealing if they’re subject to taxes. I’m self employed (more than 20 years) recently started earning enough to start a retirement account. My wife is a high earner and has a traditional 401k. Our combined income requires me to use the backdoor roth strategy, I’m only a few years into getting this process running smoothly and now it’s being squashed due to jealous politicians like Senator Wyden. All because LESS THAN 500 Americans have more than 10 million in their Roth accounts and 29,000 have more than 5 million and Peter Theil used the roth IRA to amass millions and then wanted to cash out. So now I’m looking for different options other than any kind of IRA to save for retirement. I’m thinking a regular brokerage account or purchasing income properties. I am the working poor in Massachusetts.
@@SafeguardWealthManagement What is a backdoor Roth????
@@richardm1862 A backdoor Roth is when you put money in your IRA and then a few months later do a Roth conversion. This gets around the limit on how much you can directly put in a Roth each year. The government wants to eliminate this loophole.
You are out of my league. What about the guy that makes under $20 grand a year in Social Security. Good grief, I didn't even know you could get $3,000 a month. It used to be $1800 that my Uncle got. He just put it in the bank. What is the max benefits of SS? Instead of all this nonsense we should be talking about the crime of taxing retirement benefits and the confusion of SS and medicare in our later years. A crime.
There is simply no way that a Roth conversion makes sense for everyone. A much better video would have given income and IRA examples and played each out. This was just confusing, and I consider myself saavy. I have close to 5 million in combined IRAs and am 66. Any meaningful conversion takes me from my current 15% (18.9%) marginal to 40.8%. Taking RMDs at72 should be in the mid 200s or 24% marginal. I’m already maxed on Irma’s.
@@_-Karl-_ I’m in the 15 % marginal because all income is from dividends. So convert to Roth, takes me to the 22-24% now. Don’t convert , and pay RMDs in 6 years at 24% rate. In the meantime, RMD age might be raised to 75. No reason to jump now
Three reasons to Perform Roth Conversion : REQUIRED MINIMUM DISTRIBUTION.
I love your approach and the information you’re giving, but you were talking way too fast for the average person here. Not sure why anyone would applaud this presentation.
You can go to settings and select the playback speed of the video to 0.75x (slowed down). Of course the duration of the video will be a little longer.
Exactly. Thanks AWoL. Understand that everyone has difference preferences. We also have similar videos that cover things at a slower pace.
@@SafeguardWealthManagement Everyone Does have Different Preferences.
* I listen at 1.5x Normal Speed to turn 45:59 into 30:40 of Listening Time
* BUT, I listen on my iPad . . . WITH Closed Captions, AND EarBuds to PAUSE for Graphs
Pandemic killed more people than WWI and WWII combined. So debt spending makes sense.
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