haha, I appreciate that! Shoot, I could babble on about this stuff for hours. I usually try to keep the videos more focused, but this one got a little more open-ended. To be fair, there are a lot of 'what-ifs' baked into it. Thanks for watching and commenting!
Great video, Jeff! This one will be on replay for me. Feel free to get into the details - even if its an hour or so. I'll take as much information as I can as I look forward to shaping my portfolio for my "in retirement" years. Thank you for doing the work and sharing your content with us!
Hey Nick. I'm glad you liked this one. I plan on making a more detailed 'year-by-year' example version in the future. Specifically to show more details about the Roth conversion ladder. This video got into multiple topics and it was hard to get everything in. Thanks for watching and for all your support of the channel!
Definitely gleaned some nuggets from your presentation. By year's end, I have to do the tax loss harvest, decide on my Roth conversion amount and take a RMD on my inherited IRA. My challenge is that 64% of my portfolio is in the inherited IRA. That being said, I am pleased to more than 2X'd in the last 5-6 years. All good problems to have...
Hey Karl. Love that problem for sure (: It is tough to decide where to make conversions and how much. If I had a crystal ball and knew the exact future tax brackets it would be a lot easier (: I think I'll go with the 'get it over a little faster than necessary' approach, ultimately. Maybe pay a little higher taxes this year, but have it be worth it when it is tax free in retirement. Not toooooo much though, because I want to fill up the juicy 10% and 12% bracket for at least a few years in the future.
Great topic! This is such a complex discussion for most as we dont necessarily know what the tax laws will be in 20 years or what our various portfolios totals will be. Thanks for the Roth conversion info.
Hey Roy. You're welcome, thanks for watching. I did fly all over the map on this one & I plan to make a specific Roth conversion video to breakdown the yearly math in an easier to understand way. This was a 'high level plan', but it may bring more questions about the specific process. The next video will get out of my situation and detail taxes and cash-flow by account in a more zoomed in manner to help people plan.
Great content. Thanks for sharing your journey and plans in detail. Great discussion in the comments too. Best of all - no scammers (hopefully no jinx).
Thank you for taking the time to watch the video and for the kind words. I really do appreciate it. Welcome to the community. It is a solid group around here that thinks about investing for the long run. Obviously I can't speak for everyone, but the overall vibes are great.
Thanks for taking the time to watch it and for dropping a comment Alex. It is an interesting topic that has a lot of gray area involved (when to start? how much to convert each year? Now or later? etc). It is an important topic to get right (at least ballpark) to save a lot of money in retirement.
ThanX Jeff... GREAT video.... This one is a keeper.... I am looking to do this for my younger wife who is still employed... I am a lost cause... LOL.... Ours is a tad more corn-fusing due to pension(s) etc. but we will work thru the exercise to see what I can do for her. I will likely grab my RMD's and use them for college tuition 429 and other gift like monies for the family.... Thanks again for making learning fun and easier to understand.... Always great when I see a new TEEPS video come out.... Please take care. Blessings to you and your family for a blessed holiday and Thanksgiving.
Hey Lance. Thank you for the kind words about the video and the channel. Also, Happy Thanksgiving to you and yours as well! I love the holiday season. I'll still be putting out a video, at least once per week, but it is also that time of year that I love to chill and spend more time with family and friends. No yard work, low stress, live is good!
Great info, my dilemma is we do not have much available cash in a brokerage account to cover taxes on Roth conversions, we are still working x 4 more years, maxing out our ROTH 401K's(yeah!), but have substantial traditional IRA's(approx. $3,300,00, and will still grow until retirement in about 4 more years), and I'm with you once in retirement to live off dividends (SCHD, JEPQ, JEPI, VOO), which should provide around a generous yearly amount of at least $175,000-$200,000(or more), and that's before social security, so after watching your video I'm thinking to use some of the dividend monies to pay the conversion taxes, if that makes sense, any comments would be appreciated, truly enjoy your common sense approach to investing, I'm wired the same way !
Thanks Carl. I appreciate the positive feedback from the channel. I read a ton about this stuff, but I'm not one to cite every technicality and law as I present the information. I like the broad, common sense approach (of course while getting the important stuff right, or at least most of it). I don't think it's a bad move to use some dividends, and even additional withdrawals beyond that, to convert a chunk to a Roth IRA each year. With your amount there is a good chance it will put you in a higher tax bracket, but still nice to have some future tax free dividends in a Roth. This will also help the required minimum distributions from 'making you' take a lot out in your 70s. No RMDs for Roth accounts is amazing. A lot of this depends on your age, so I'm being broad here, but I think you're on the right track to use some of your money to cover those taxes. Getting the Roth conversion ladder started is nice. Once year 6 hits, it just snowballs into more and more tax free for life money in retirement (assuming you continue to convert more each year).
Hi Carl. I’m 1-2 years from retirement and lucky to have a good brokerage balance to pay taxes on my planned conversions (smaller 401k balance than your IRA) and also live on it tax free for a few years. I would recommend investigating the trade off between continuing to max the Roth 401k vs building up your brokerage balance to pay the conversion taxes and also minimize your taxable income to create more room for bigger conversions. With an IRA balance as big as yours beware the “widow’s tax trap” as well as huge RMDs. Using Boldin (formerly New Retirement) has helped me a lot in putting together my retirement plan without needing an FA. It’s well worth the $10/month (and 2 week free trial). Also, Eric at the Safeguard Wealth Management YT channel has some great retirement tax strategy videos - I have no affiliation and not recommending his services, just his free YT content (he’s also a skeptic when it comes to dividend/income investing😅). Comments offered in good faith and congratulations getting to where you are at financially.
Absolutely. I want to release a more detailed video about the Roth conversion ladder. I know this video was a little surface level because I covered a lot. I'll do a year-by-year example and feature the Roth conversions more in a future video. Thanks for watching and for the idea.
Use your 401K plan while your working to lower your tax brackets. Then after you retire, transfer your 401k plan money to a traditional IRA. Maximize those lower tax brackets after you retire by moving Traditional to Roth to take advantage of those lower tax brackets. I also heard this called a {BACKDOOR ROTH}. I was just talking to my wife about this a week ago.
Hey Michael. You nailed the concept . My wife and I loaded up on 401k contributions as much as possible during our careers. She is still doing it. This saved us 22% on every dollar. Great for raising a family and paying a mortgage (: All that tax-free income is still waiting in a traditional IRA and the IRS is licking its chops! Now the 'game' is to figure out how to pay the least amount of taxes as possible after my wife retires. Stretch it out over many years to hit those low tax brackets every year, but not too many years to get hit by RMDs. It's quite the dance. Ultimately, I'm certain that we will save a lot on our tax bill compared to not loading up on the pre-tax contributions and company matches in our careers.
You have to roll over a 401 k to a “rollover Ira” but it’s same concept as traditional. Far as “Backdoor” that’s a loop hole style of of contributing to a Roth when you exceed the yearly income level allowed to contribute to a Roth allowed by irs.
@JeffTeeples - It's hard not to start earlier when you think of the tax free growth. Even small amounts added to a Roth over the years make a big impact. And your example of the tax difference between a 200k rollover and 150k made it even more appealing.
Great videos my main man Jeff, they have really got me thinking. I just recently stumbled across some of your vids and am going through them now. You seem genuine and informative unlike most others on the platform. My mother is 75 and has a small amount in a roth account, the bulk in an IRA, and the rest in a brokerage account. She has paid over 100,000 in fees to fidelity since 2006 and pays thousands each quarter. I would really like to get her out of that, I was wondering do you do one on one consults, I wanted to get your thoughts? Thanks Teepster
Thank you for watching and for the kind words. That means a lot and it is why I'm here. I'm not a guy looking to clickbait flashy news topics for more views. The only goal is to help as many people as possible reach financial freedom by making better decisions. I don't offer one on one consulting at this time, but it is something I have considered adding in the future. I wish you and your mother nothing but the best. I hope to make more videos like this that can help in the future.
@@JeffTeeplesHey Teeps, thanks for the reply! Just wanted to say that I truly think it’d be money well spent just to get your insights. How about this: what do you think of doing a video on a “real-world hypothetical retirement scenario” and how the Teepster might handle it? I can provide you with the exact numbers for the three accounts, haha. Sounds good to me! I know you're probably not short on content right now, buuuuut if you ever hit a week where you're challenged for content (a case of UA-cam block or something), maaaaybe this could be an interesting consideration? All jokes aside, brotha, even though I am new I really appreciate the work you're doing. I’m loving the content, and I know it's helping a lot of people-myself included. Wishing you a Happy Thanksgiving, Jeff!
Thanks Jeff! Do you have any faith in the calculators like New Retirement or Projection Lab that help users figure out their Roth conversion amounts? The thing I find confusing about those tools are that they don’t really know what equity assets you own, so how can the numbers be accurate? Perhaps this is what pushes you into the next “tier” of their products that require payment on top of the subscription.
Hey John. I think the software is pretty cool in a lot of ways. However, coming from the budgeting and forecasting world of finance, I don't personally value tools with a lot of built in assumptions. I'm with Buffett when he said 'Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future'. This is a bit ironic because I literally specialized in building ridiculously detailed forecast models. It was my promotion path in my career. For my personal retirement strategy, I think the best approach is to understand how things work at a high level, and to common sense stuff together that remains 'up-to-date' on a yearly basis. This is why I don't use the retirement planners anymore. It's simple stuff like I showed in this video. I will say I do go further in my personal life. My wife and I decided to convert $100k (most likely in December) this year based on some updated projections. The retirement planner would not have the same results because everything is projected out with one-size fits all base assumptions, but so many things can change. For example, if the market were to crash hard, I would probably make a HUGE conversion that year. I would do an in-kind conversion of, for example, VGT, 'after' it fell by 40%. This moves 'more money' into a Roth long-term by essentially being the same concept as 'buying low'. This was probably way too detailed I just realized, lol, but it's too late to look back (:
Great video Jeff. What do you do when your IRA has 3 million in it and returning 8-10% yearly that comes out to 240-300K a year? You’d have to rollover more than your earnings per year to ever get your account to dwindle down to zero.
Hey Kevin. You are exactly right on this one. This video was high level and I didn't get into pre-retirement conversions at all. I wish I did in hindsight, but I'm planning a more detailed Roth conversion video for the near future. For the record, I will likely convert around $100k this year alone (all 22%, yuck) to prevent this future problem. I was a little vague in the video on the pre-pre-planning (: The other way to look at that problem is... SWEET, things worked out pretty well! If you really think about it, being forced to convert 400k per year is a good thing at the end of the day (: (assuming the ladder is well over 5 years old and living money is provided and then some from the Roth).
Another great video! Not many people cover going from accumulation to withdrawal phase, much appreciation for sharing your wisdom. One question - are you comfortable having 50% of retirement fund allocated to JEPQ? The nature of the covered call ETF may do some serious erosion to the principal if there is a prolonged 2001-03 like bear market on tech stocks. Sure, it may still yield 9% but the $ dividend will likely be far less because of principal erosion. Thoughts?
Thank you for the kind words & for the great question. I am comfortable with 50% JEPQ (although in reality it will likely be more like 25-50%, depending on wealth, income needs, etc) in retirement because of the appeal of a down turn, ironically. If the price cut in half, the market is likely volatile for ~10% dividends or more. I would be reinvesting at least 20% of my dividends (my plan in retirement), which would be getting MORE future dividends because it accumulates more shares per dollar invested. Unlike the traditional 4% rule (which is devastating to your wealth in a down turn, especially early), dividend plays turbo charge cash flow. The return with a lot of higher yielding blue chip dividends companies is usually strangely high (10% or more) in lost decades because of the reinvestments on crash. The math is weird. If I did zero reinvestments and had just enough to get by, I would be concerned about the price depreciation. But with dividends paying the bills + 20% reinvest + buffer, the crash only makes us better off long-term. I won't care, at all, about my portfolio value assuming I have the cash-flow covered.
Always thankful for your videos, Jeff. But I do have a question. 14:29 Here you’re saying that you’ll have $0 in ordinary income because you won’t be working. - Your estimate for living expenses including buffer is $167k. - In your chart, you’re showing annual dividends of $192k, which would certainly be enough. But… - You’re also saying you’ll have $1.5M in an tb account with SCHD which would pay something like $51k/yr in dividends. The rest of your projected annual dividend income is in a traditional that you can’t withdraw without penalty. I totally understand the Roth conversion portion. But that would mean you can’t touch the money entering into the Roth until year 6. So far as I’m seeing your game plan, your only income is $51k/yr for the first 6 years, with $30k+ going to taxes for your conversions. You’re a smart dude so what am I missing?
Thank you for the kind words, the support as a member, and the detailed comment. I appreciate all of it! You are exactly right in everything you said. You are missing nothing, and I likely was a little too high level on this one. I'm going to do a Roth conversion video soon that shows more detail about the specific process without diving into my situation. This video was killing two birds with one stone as I was asked 'what I'm going to do' quite often. To your point, I am unable to keep up with my bills in the first 5 years from strictly dividend income. I briefly mentioned I would have a chunk of a money market to 'cover me' during the process, but I did not make it clear at all. The taxable account will be dwindling down in the first 5 (and even next 5 or 10) years as the conversion are being made. So 'some' of the SCHD will move to the Roth if we want to keep things balanced. The taxable will start at 'about' $1M dollars. This will be used to live and pay the conversion taxes. The $192k is made, mostly in the Roth, and it will continue compounding as we pay the (big) deficient out of the taxable. But the 'overall numbers' still work, we just get proportionally more (over 2M) growing in Roth as less (well under $1M) remains in the taxable.
@@JeffTeeples This makes perfect sense! Thank you for clearing it up, brother. One day, I'd love for you to show people the benefits of reverse mortgages during the conversion process. Live off qualified income from dividends and interest below any tax threshold, subsidized by the monthly allotments of equity paid through the reverse mortgage to keep your ordinary income at $0 (reverse is technically debt) while your home is still appreciating in value. That way you can manipulate the ordinary income brackets of your conversion to pay as little taxes as possible. Reverse mortgages were peddled as Meemaw's living expenses after Peepaw died. But truth is they're the utility tool of the uber wealthy who know how to creatively structure their finances :)
@@JeffTeeplesthis is almost exactly my plan as well - brokerage is well funded (and gains already realized) to allow extremely low AGI using money market to live off and pay taxes on conversions so that post age 75 life will be pretty much tax free (will juggle things with a couple of small pensions so we still use up the deduction and maybe have a bit of income in the 10% bracket but hopefully avoid any SS being taxed).
Hi Anne. There are no RMDs for Roth IRAs. Additionally, they have awesome pass down rules to heirs. Our kids will get to benefit tax free for 10 years as it grows. Roth's are the best, but it is wise to minimize taxes over the years to get the money there.
Great video Jeff! Thanks! I always look forward to your videos on Sunday! I do have a question. Let's say you are already past 59 1/2 (60's) and have had a small Roth IRA for 8 years. If I do Roth conversions, do I still have to wait the 5 years to withdraw the converted money? I was thinking I read somewhere that if the Roth account had been opened for 5 years already, you could access all your money in it (including new conversion and earnings/income/growth) if you were over 59 1/2. Of course I have read so much, I am probably confusing it! LOL. Or is it just your converted dollars and not the growth/earning/income? In any event, I better start them Conversions! :)
Hey Darlene. Thanks for watching, commenting, and being an awesome member for so long. Each conversion will be on a separate 5-year rule window even if you are 60 or older. It is still worth it if you have enough to pay the taxes outside of the IRA accounts, but the cooldown does persist (which is lame if people are over 60). I plan to make a video to go into more year-by-year detail of a Roth conversion ladder. This one was a bit of everything so I didn't get too deep into anything.
@@JeffTeeples- I've heard conflicting info on the 5 year holding rule too. I was under the impression that once you met your 5 year period, you're golden. No more waiting periods. I forwarded you a Goldman Sachs email on the topic.
Good job!! Video idea…Jeff, can you do a video about MLP investing that explains the way it gets paid out and how the taxes are calculated…should the funds be in a tax shelter account or outside? The one that I hold is AMLP. I’m just confused a little about the taxes. Do I get a K1? You have a great way of explaining. Thanks, Druski
Thanks for the kind words. I have to admit that I'm not overly knowledgeable about MLPs. I do know the basics, and have read up a little, but since they haven't interested me at a high level I never dove in. I'm probably not the best person to make a video about them. However, never say never (:
The tax law might have changed again, but 7+ years ago there was a push to get the MLPs out of your retirement accounts. It wasn't considered a good place because you could end up with a big tax bill when you finally did sell it. You do receive a K-1 in the mail. It's usually just late enough to miss filling your taxes on time if you use an accountant. Again, tax rules might have changed. Check with an accountant/ CPA.
Hey Jerry. I've always understood the answer to this question to be yes. Unfortunately Roth conversions will have a separate 5-year rule from your 'normal' Roth money that you have access to after turning 60. However, a trusted member of the community sent me some information (that I will dive into on Friday when I catch up with channel admin) that may state otherwise. My understanding from everything I've read (unless something changed within the last year is as follows: You have full access to all contributions to a Roth IRA after fulfilling the initial 5-year rule. This is when you have opened and funded your Roth IRA 5 years ago. For example, if you opened a Roth at 27 years old, when you're 32 (or 33, depending on specific timing) you will be able to withdraw ALL contributions made to the Roth (not the earnings on them) tax and penalty free. This includes contributions moving forward. The 5-year window is a one time thing for 'normal contributions' to the Roth. You have access for life. However, for Roth 'conversions' (from a traditional IRA), the 5-year window will apply for every specific conversion even if you're over 60 years old. For example, if I convert 100k per year, started at 48 years old. I will have access to 100k when I'm 53, 200k at 54, 300k at 55, etc. EVERY conversion is on a separate 5-year window. I'm fairly sure this is how it still works.
@@JeffTeeplesthat’s exactly my understanding (after a lot of research this year). There is a nuance to the 5 year rule - it starts on January 1 of the year of the conversion. So if you convert on December 31, you only have to wait 4 years and 1 day to access the money. One thing I can’t find a definitive answer on is access to the gains. I have to think that any gains must be available immediately (not subject to 5 year rule) because how would the custodian, the IRS or the account owner be able to calculate the gains from each specific conversion?
I am still working at 60. Does it make sense to start contributing to Roth 401k some money after covering my company match in regular 401k? What happens with this Roth 401k if I retire within year or two before 5 years threshold?
Hey Alex. You can continue making contributions to your Roth 401k. It is great because when you retire and do a 'rollover' from your Roth 401k to a Roth IRA, you have full access to the money! It does not have separate rollover windows like conversions. It does have the initial 5-year rule for the Roth IRA in general, but I'm sure yours is over 5 years old at this point. If that is not true, you'll want to open a Roth IRA as soon as possible to start the 5-year window. The 5-year rule is attached to the Roth IRA you're rolling over to and not the Roth 401k that your work had. For example, if you only worked there 2 years and made contributions, left the company, and rolled the Roth 401k over to your Roth IRA that is 7 years old, you're good on the 5-year rule.
Jeff - we just came into a large sum of money from commission on a business deal. The stock market is uber-high right now. Would you still start DCAing for next 12-16 weeks? I hate to buy right before a pullback, which I think is happening after Xmas. Thanks
Hey Tom. I think I would DCA over a lump sum at this point in time. I usually believe in a hybrid approach (some lump, the rest averaged in over X amount of months). Right now I would drop it in a HYSA or money market and DCA in over 6 to 12 months.
Hey Jeff, I know you’ve previously said that you’re doing YT full time so I assume you’re no longer receiving W2 income. May I ask what you’re currently doing for health insurance? Are you on your wife’s health insurance plan with her employer or are you and your wife paying for an HSA eligible health insurance plan through the marketplace that potentially qualifies for premium tax credits? The reason I ask is because if you’re doing the latter and are qualifying for PTC’s, then I believe you’ll have to plan your Roth conversions very carefully because if you convert too much in a given year, then you could lose out on the PTC’s and end up paying it back to Uncle Sam when you prepare your tax return for that year. Even if you and your wife plan for an early retirement (and are therefore too young to take distributions from your IRA’s and 401K’s), if you intend to take advantage of an HSA eligible plan and try to qualify for PTC’s in your early retirement, then you’ll need to take this into consideration when planning your Roth conversion strategy. Just a thought b/c the health insurance premiums are no joke.
The Roth conversions can also be an issue with IRMAA Medicare taxes starting at age 63. Medicare has a 2-year look back to determine what your taxes will be at age 65.
Very great points and stuff I couldn't get into during this video. Thank you for watching and for bringing up the premium tax credits. My family (4 of us) are currently on my wife's health insurance. It is unbeatable. We will be on this for (base case) 7 or 8 more years. Maybe more, depending on where we stand. In my projections, I am assuming a huge health insurance cost (assuming higher than my friend that has health care for family and makes over $700,000 to be conservative). Right now our costs are WAY below $10k per month because of the health care being basically free. I am planning on maaaaaaybe doing some Roth conversions in the next couple years (starting in 2024). It would all be at 22%, but I think we'll have enough to where it will sniff that bracket on a yearly basis in retirement. Toying with around $50k or so. I would like to get it over with so I can qualify for all the future perks with my measly SCHD dividends in the taxable (:
Absolutely. In a perfect world I will have the conversions done sooner rather than later for reasons like this. I'm considering starting now and paying 'likely' a little more in taxes to get it to the Roth ASAP. But to be honest, if I phase out of any benefits in life because my 'income' (conversion amount) is too high for years in retirement... Life is good. I'll try to min-max and nerd out, but at the end of the day, I'm happy to pay my share to live here and enjoy life.
@@JeffTeeples There's another channel on YT that I watch (Safeguard Wealth Management) that often puts out videos on Roth conversion and retirement income strategies while taking into account the potential tax consequences and pitfalls as your income increases (PTCs, IRMAA, SS tax torpedos, etc). The guy in the videos, Eric, talks a bit fast and purposely keeps his discussions at a high level (probably done by design) but you can often pick up a few tips nonetheless. This is right up your alley.
Some issues with a Roth conversion. We have a high income now, we wouldn't be able to convert much to make a difference. Since the election, tax rates seem like they will stay the same, or possibly fall. RMD, take out a lot and enjoy your retirement! What are you saving for in your 70's?
Hey Michael. That is a valid way to view it! And withdrawals to a taxable (instead of converting) can be done penalty free before 59.5 years old as well with a 72(t). That will be a separate video. I like the idea of Roth income over taxable because I have the taxable account to cover the taxes on the conversion. In other words, I'm 'taking out' 200k per year to play and have fun (: Still spending money and having fun in the meantime. I am with you in that it is pointless to save a ton of money for your 70's and beyond.
Hi Jeff, For someone who is self-employed and has a Solo 401(k) lets say in the ROTH version, is there a difference in this case? There’s a limit on contributions to a Solo 401(k), correct? So, in the scenario you provided, would it still be possible to convert that $200K into the Solo 401(k) (from taxable account or from a SEP IRA account)?
Thanks for watching and great question. You are able to convert a SEP IRAs to Solo 401ks. There is no limit on the conversion amount (just like the video), and you will owe taxes on the amount converted (assuming going from pre-tax account to the Roth account). Taxable accounts can't be converted to a Roth IRA. That would have to be contributions to the Roth (if you have earned income). There are contribution limits, but there are no conversion limits.
Yessir, you nailed it. That is why it is often better to wait for the conversion in your 'lower earning years' (aka retirement with zero earnings) 'IF' you have the taxable account balance to cover bills + conversion taxes in the meantime. I could convert every dollar this year, but it would 'start' in the 22% bracket and dip deep to the 37%. That would hurt retirement very badly. Instead, each year, I'll fill up the 0%, 10%, 12%, and even 22% ordinary tax bracket with conversion (ordinary) income. Married filing jointly can have $126k of ordinary income (conversions and or income, all the same) at 12% of lower! It's wild, because those same conversions would get zero dollars of that tax treatment if I did it now.
@JeffTeeples Thanks for a great lesson but I am in the highest tax bracket for the next 5 years until I retire so I don’t believe a Roth is for me now. I have an IRA with $2m in VTI and a Brokerage with $800k in VUSXX exempt from state and local taxes. Any ideas? Thank you again for your time.
Hmm, first of all, great work! That is an impressive portfolio. There are a few ways to approach it. A lot will depend on your age and your tax preferences. You could pay bills and live life with the taxable brokerage account being at a nice level. This could allow VTI to continue growing in your traditional IRA. Then you pull out the amount you want each year (when 60 and older) and that will create your taxable income. Or, when you retire and have less or even no income, you could pull some out each year to live on, just like the scenario above. And you could convert some to a Roth IRA to start a conversion ladder. The investments can be the same, VTI works great in Roth or pre-tax. In fact, you can actually convert it 'in-kind' and not sell VTI at all within a broker. I don't think there is a right or wrong way to do it. I do slightly lean Roth conversions for the simple fact that the money is never taxed again, so it doesn't matter what happens with our federal tax tables in the future, and it reduces our future 'income' which can help qualify for more benefits in general (tax free qualified dividends because the Roth doesn't add to any thresholds, whereas taking out a chunk from the traditional IRA each year is as if you made that much more ordinary income). A nice mix of withdrawing and converting to Roth is probably good at your high income level. Depends on your preference. I think you'll be okay either way, personally.
So, if I have a multi million dollar traditional IRA and I also make a lot of money from my job and dividends from taxable accounts, do I still qualify to roll over to a Roth? I thought there was a cap?
Great question. There are no limits for Roth IRA conversions. For example, you could literally convert $2M tomorrow regardless of what you make. The drawback of doing it while you're already in the 37% tax bracket is that you'll owe 37% taxes on every dollar you convert as if you made that much more income from your regular job. If you do it in retirement, then you'll get to fill up all the tax brackets every year (when you don't have income coming from a regular job). This will take advantage of our progressive tax system. However, if you make A LOT of money, and have no plans to retire, it might make sense to convert some and eat the taxes now so that you know the money will be tax free forever. It's a good problem to have I guess, lol.
Does your company assist with a Backdoor Roth? Some companies with high net worth employees do it. One example, they will take a large bonus and use it as a backdoor Roth contribution.
Thanks for watching and for the question. There are no restrictions for converting 401k or traditional IRAs over to Roth IRA. The IRS wants us to do it all at once and we can do however much we want. The tricky part is spacing it out to take advantage of the lower tax brackets in more years, but not too much to where tax rates go up and we wish we did more earlier.
There are two options - same rules for both. One way is 401k rollover to Roth IRA (eg when leaving a job or retiring). The other is traditional 401k to 401k Roth (what’s known as an in-service conversion). Not all 401k plans allow in service conversions so check with your 401k people if you are considering this (my 401k allows up to 4 conversions per year). In service conversions are less common - most people don’t want to leave their 401k with their company when they leave/retire but it is sometimes an option.
Hey Darrin. Thanks for watching and for the question. I don't work with people one on one at this time (outside of friends and family of course, free stuff). I spend my time making videos to help as many people as possible, however, in the past I could get something rolling.
New SUB here. Watched the charnel for awhile. Need some opinions on one category. I am sold on SCHD for HYD. I am also sold on VOO as my foundational. I am torn on Growth. I like 4 and need to whittle it down to one. SCHD 50%- VOO 30% and the last 20% I need help. I am 59 and want to let it roll for a few years. I am a fan of CS and have a small acct with some stocks . QQQM - SCHG or SCHA. TIA for any help guys.
Thank you for the kind words. I appreciate it. I like QQQM or SCHG for the last 20%. That is just my two cents. I personally like VGT, but it is 100% technology, which most people aren't comfortable with. QQQM and SCHG are my favorite multi-sector growth ETFs. My video this weekend actually details VGT vs QQQM vs SCHG for pairing with SCHD. It could be a helpful one for you. I walk through a back test during the video to see which combo has performed the best.
Thank you Eric. Your support has been so great. I plan to make a more detailed year-by-year Roth conversion video in the future. This one was a little all over the map because I was doing multiple things in it.
@@JeffTeeples You are too self-critical, Jeff! Your videos are just fine, imho! These are really tricky topics and everyone (including me) will have questions. Thank you for always taking the time to answer questions and build this community.
I would listen to Jeff drop knowledge for over an hour!
haha, I appreciate that! Shoot, I could babble on about this stuff for hours. I usually try to keep the videos more focused, but this one got a little more open-ended. To be fair, there are a lot of 'what-ifs' baked into it.
Thanks for watching and commenting!
Great video, Jeff! This one will be on replay for me. Feel free to get into the details - even if its an hour or so. I'll take as much information as I can as I look forward to shaping my portfolio for my "in retirement" years. Thank you for doing the work and sharing your content with us!
Hey Nick. I'm glad you liked this one. I plan on making a more detailed 'year-by-year' example version in the future. Specifically to show more details about the Roth conversion ladder. This video got into multiple topics and it was hard to get everything in. Thanks for watching and for all your support of the channel!
@@JeffTeeples I'll be looking forward to it!
Definitely gleaned some nuggets from your presentation. By year's end, I have to do the tax loss harvest, decide on my Roth conversion amount and take a RMD on my inherited IRA. My challenge is that 64% of my portfolio is in the inherited IRA. That being said, I am pleased to more than 2X'd in the last 5-6 years. All good problems to have...
Hey Karl. Love that problem for sure (: It is tough to decide where to make conversions and how much. If I had a crystal ball and knew the exact future tax brackets it would be a lot easier (:
I think I'll go with the 'get it over a little faster than necessary' approach, ultimately. Maybe pay a little higher taxes this year, but have it be worth it when it is tax free in retirement. Not toooooo much though, because I want to fill up the juicy 10% and 12% bracket for at least a few years in the future.
Great topic! This is such a complex discussion for most as we dont necessarily know what the tax laws will be in 20 years or what our various portfolios totals will be. Thanks for the Roth conversion info.
Hey Roy. You're welcome, thanks for watching. I did fly all over the map on this one & I plan to make a specific Roth conversion video to breakdown the yearly math in an easier to understand way.
This was a 'high level plan', but it may bring more questions about the specific process. The next video will get out of my situation and detail taxes and cash-flow by account in a more zoomed in manner to help people plan.
Great content. Thanks for sharing your journey and plans in detail. Great discussion in the comments too. Best of all - no scammers (hopefully no jinx).
Thank you for taking the time to watch the video and for the kind words. I really do appreciate it. Welcome to the community. It is a solid group around here that thinks about investing for the long run. Obviously I can't speak for everyone, but the overall vibes are great.
Thanks Jeff! That was very interesting!
Thanks for taking the time to watch it and for dropping a comment Alex. It is an interesting topic that has a lot of gray area involved (when to start? how much to convert each year? Now or later? etc).
It is an important topic to get right (at least ballpark) to save a lot of money in retirement.
@@JeffTeeples You gave viewers a lot to think about there.
ThanX Jeff... GREAT video.... This one is a keeper.... I am looking to do this for my younger wife who is still employed... I am a lost cause... LOL.... Ours is a tad more corn-fusing due to pension(s) etc. but we will work thru the exercise to see what I can do for her. I will likely grab my RMD's and use them for college tuition 429 and other gift like monies for the family.... Thanks again for making learning fun and easier to understand.... Always great when I see a new TEEPS video come out.... Please take care. Blessings to you and your family for a blessed holiday and Thanksgiving.
Hey Lance. Thank you for the kind words about the video and the channel. Also, Happy Thanksgiving to you and yours as well! I love the holiday season. I'll still be putting out a video, at least once per week, but it is also that time of year that I love to chill and spend more time with family and friends. No yard work, low stress, live is good!
keep pumping out those financial informational videos Jeff!!!!
Will do Kevin. Thanks for the support!
Great info, my dilemma is we do not have much available cash in a brokerage account to cover taxes on Roth conversions, we are still working x 4 more years, maxing out our ROTH 401K's(yeah!), but have substantial traditional IRA's(approx. $3,300,00, and will still grow until retirement in about 4 more years), and I'm with you once in retirement to live off dividends (SCHD, JEPQ, JEPI, VOO), which should provide around a generous yearly amount of at least $175,000-$200,000(or more), and that's before social security, so after watching your video I'm thinking to use some of the dividend monies to pay the conversion taxes, if that makes sense, any comments would be appreciated, truly enjoy your common sense approach to investing, I'm wired the same way !
Thanks Carl. I appreciate the positive feedback from the channel. I read a ton about this stuff, but I'm not one to cite every technicality and law as I present the information. I like the broad, common sense approach (of course while getting the important stuff right, or at least most of it).
I don't think it's a bad move to use some dividends, and even additional withdrawals beyond that, to convert a chunk to a Roth IRA each year. With your amount there is a good chance it will put you in a higher tax bracket, but still nice to have some future tax free dividends in a Roth. This will also help the required minimum distributions from 'making you' take a lot out in your 70s. No RMDs for Roth accounts is amazing.
A lot of this depends on your age, so I'm being broad here, but I think you're on the right track to use some of your money to cover those taxes. Getting the Roth conversion ladder started is nice. Once year 6 hits, it just snowballs into more and more tax free for life money in retirement (assuming you continue to convert more each year).
Hi Carl. I’m 1-2 years from retirement and lucky to have a good brokerage balance to pay taxes on my planned conversions (smaller 401k balance than your IRA) and also live on it tax free for a few years. I would recommend investigating the trade off between continuing to max the Roth 401k vs building up your brokerage balance to pay the conversion taxes and also minimize your taxable income to create more room for bigger conversions. With an IRA balance as big as yours beware the “widow’s tax trap” as well as huge RMDs. Using Boldin (formerly New Retirement) has helped me a lot in putting together my retirement plan without needing an FA. It’s well worth the $10/month (and 2 week free trial). Also, Eric at the Safeguard Wealth Management YT channel has some great retirement tax strategy videos - I have no affiliation and not recommending his services, just his free YT content (he’s also a skeptic when it comes to dividend/income investing😅). Comments offered in good faith and congratulations getting to where you are at financially.
Can you please do additional videos on this subject? Can you also expand on it for single people from a tax perspective. Thanks! Love your content.
Absolutely. I want to release a more detailed video about the Roth conversion ladder. I know this video was a little surface level because I covered a lot. I'll do a year-by-year example and feature the Roth conversions more in a future video. Thanks for watching and for the idea.
Great video as always.
Thank you! I appreciate your (long-time) support of the channel!
Thanks Jeff, great video!!!
Thanks Stephen! I appreciate the consistent support of the channel.
Use your 401K plan while your working to lower your tax brackets. Then after you retire, transfer your 401k plan money to a traditional IRA. Maximize those lower tax brackets after you retire by moving Traditional to Roth to take advantage of those lower tax brackets. I also heard this called a {BACKDOOR ROTH}. I was just talking to my wife about this a week ago.
Hey Michael. You nailed the concept . My wife and I loaded up on 401k contributions as much as possible during our careers. She is still doing it. This saved us 22% on every dollar. Great for raising a family and paying a mortgage (:
All that tax-free income is still waiting in a traditional IRA and the IRS is licking its chops! Now the 'game' is to figure out how to pay the least amount of taxes as possible after my wife retires. Stretch it out over many years to hit those low tax brackets every year, but not too many years to get hit by RMDs. It's quite the dance.
Ultimately, I'm certain that we will save a lot on our tax bill compared to not loading up on the pre-tax contributions and company matches in our careers.
You have to roll over a 401 k to a “rollover Ira” but it’s same concept as traditional.
Far as “Backdoor” that’s a loop hole style of of contributing to a Roth when you exceed the yearly income level allowed to contribute to a Roth allowed by irs.
I definitely need to begin a Roth Conversion ladder at some point down the road. Thanks for the video.
Thanks for watching Leonard. You and me both. I'm considering starting it this year, still weighing the pros and cons.
@JeffTeeples - It's hard not to start earlier when you think of the tax free growth. Even small amounts added to a Roth over the years make a big impact.
And your example of the tax difference between a 200k rollover and 150k made it even more appealing.
Nice video. I enjoyed it.
Thank you for taking the time to watch the video and for dropping a nice comment.
Great videos my main man Jeff, they have really got me thinking. I just recently stumbled across some of your vids and am going through them now. You seem genuine and informative unlike most others on the platform. My mother is 75 and has a small amount in a roth account, the bulk in an IRA, and the rest in a brokerage account. She has paid over 100,000 in fees to fidelity since 2006 and pays thousands each quarter. I would really like to get her out of that, I was wondering do you do one on one consults, I wanted to get your thoughts? Thanks Teepster
Thank you for watching and for the kind words. That means a lot and it is why I'm here. I'm not a guy looking to clickbait flashy news topics for more views. The only goal is to help as many people as possible reach financial freedom by making better decisions.
I don't offer one on one consulting at this time, but it is something I have considered adding in the future. I wish you and your mother nothing but the best. I hope to make more videos like this that can help in the future.
@@JeffTeeplesHey Teeps, thanks for the reply! Just wanted to say that I truly think it’d be money well spent just to get your insights. How about this: what do you think of doing a video on a “real-world hypothetical retirement scenario” and how the Teepster might handle it? I can provide you with the exact numbers for the three accounts, haha. Sounds good to me!
I know you're probably not short on content right now, buuuuut if you ever hit a week where you're challenged for content (a case of UA-cam block or something), maaaaybe this could be an interesting consideration?
All jokes aside, brotha, even though I am new I really appreciate the work you're doing. I’m loving the content, and I know it's helping a lot of people-myself included.
Wishing you a Happy Thanksgiving, Jeff!
Thanks Jeff! Do you have any faith in the calculators like New Retirement or Projection Lab that help users figure out their Roth conversion amounts? The thing I find confusing about those tools are that they don’t really know what equity assets you own, so how can the numbers be accurate? Perhaps this is what pushes you into the next “tier” of their products that require payment on top of the subscription.
Hey John. I think the software is pretty cool in a lot of ways. However, coming from the budgeting and forecasting world of finance, I don't personally value tools with a lot of built in assumptions. I'm with Buffett when he said 'Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future'.
This is a bit ironic because I literally specialized in building ridiculously detailed forecast models. It was my promotion path in my career.
For my personal retirement strategy, I think the best approach is to understand how things work at a high level, and to common sense stuff together that remains 'up-to-date' on a yearly basis. This is why I don't use the retirement planners anymore. It's simple stuff like I showed in this video.
I will say I do go further in my personal life. My wife and I decided to convert $100k (most likely in December) this year based on some updated projections. The retirement planner would not have the same results because everything is projected out with one-size fits all base assumptions, but so many things can change.
For example, if the market were to crash hard, I would probably make a HUGE conversion that year. I would do an in-kind conversion of, for example, VGT, 'after' it fell by 40%. This moves 'more money' into a Roth long-term by essentially being the same concept as 'buying low'.
This was probably way too detailed I just realized, lol, but it's too late to look back (:
Great video Jeff. What do you do when your IRA has 3 million in it and returning 8-10% yearly that comes out to 240-300K a year? You’d have to rollover more than your earnings per year to ever get your account to dwindle down to zero.
Hey Kevin. You are exactly right on this one. This video was high level and I didn't get into pre-retirement conversions at all. I wish I did in hindsight, but I'm planning a more detailed Roth conversion video for the near future.
For the record, I will likely convert around $100k this year alone (all 22%, yuck) to prevent this future problem. I was a little vague in the video on the pre-pre-planning (:
The other way to look at that problem is... SWEET, things worked out pretty well! If you really think about it, being forced to convert 400k per year is a good thing at the end of the day (: (assuming the ladder is well over 5 years old and living money is provided and then some from the Roth).
Well done, Sir. I did not know that all Roth conversions are subject to the 5-year rule.
Thanks Mike. I appreciate it. Yeah, it's good to get the conversion ladder started because those separate 5-year windows on each conversion.
Tip: When you do roth conversions, open a separate roth account for each conversions. So that you will be guided with the 5 year rule.
Oh man, that would devastate my OCD. I'm not going to lie, lol. It is one way to do it though.
Another great video! Not many people cover going from accumulation to withdrawal phase, much appreciation for sharing your wisdom.
One question - are you comfortable having 50% of retirement fund allocated to JEPQ? The nature of the covered call ETF may do some serious erosion to the principal if there is a prolonged 2001-03 like bear market on tech stocks. Sure, it may still yield 9% but the $ dividend will likely be far less because of principal erosion. Thoughts?
Thank you for the kind words & for the great question.
I am comfortable with 50% JEPQ (although in reality it will likely be more like 25-50%, depending on wealth, income needs, etc) in retirement because of the appeal of a down turn, ironically.
If the price cut in half, the market is likely volatile for ~10% dividends or more. I would be reinvesting at least 20% of my dividends (my plan in retirement), which would be getting MORE future dividends because it accumulates more shares per dollar invested. Unlike the traditional 4% rule (which is devastating to your wealth in a down turn, especially early), dividend plays turbo charge cash flow.
The return with a lot of higher yielding blue chip dividends companies is usually strangely high (10% or more) in lost decades because of the reinvestments on crash. The math is weird.
If I did zero reinvestments and had just enough to get by, I would be concerned about the price depreciation. But with dividends paying the bills + 20% reinvest + buffer, the crash only makes us better off long-term. I won't care, at all, about my portfolio value assuming I have the cash-flow covered.
@@JeffTeeples of course, like always, you have a well thought out plan :)
Happy thanksgiving to you and your family!
Always thankful for your videos, Jeff. But I do have a question. 14:29
Here you’re saying that you’ll have $0 in ordinary income because you won’t be working.
- Your estimate for living expenses including buffer is $167k.
- In your chart, you’re showing annual dividends of $192k, which would certainly be enough. But…
- You’re also saying you’ll have $1.5M in an tb account with SCHD which would pay something like $51k/yr in dividends. The rest of your projected annual dividend income is in a traditional that you can’t withdraw without penalty.
I totally understand the Roth conversion portion. But that would mean you can’t touch the money entering into the Roth until year 6.
So far as I’m seeing your game plan, your only income is $51k/yr for the first 6 years, with $30k+ going to taxes for your conversions.
You’re a smart dude so what am I missing?
Thank you for the kind words, the support as a member, and the detailed comment. I appreciate all of it!
You are exactly right in everything you said. You are missing nothing, and I likely was a little too high level on this one. I'm going to do a Roth conversion video soon that shows more detail about the specific process without diving into my situation. This video was killing two birds with one stone as I was asked 'what I'm going to do' quite often.
To your point, I am unable to keep up with my bills in the first 5 years from strictly dividend income. I briefly mentioned I would have a chunk of a money market to 'cover me' during the process, but I did not make it clear at all.
The taxable account will be dwindling down in the first 5 (and even next 5 or 10) years as the conversion are being made. So 'some' of the SCHD will move to the Roth if we want to keep things balanced.
The taxable will start at 'about' $1M dollars. This will be used to live and pay the conversion taxes. The $192k is made, mostly in the Roth, and it will continue compounding as we pay the (big) deficient out of the taxable. But the 'overall numbers' still work, we just get proportionally more (over 2M) growing in Roth as less (well under $1M) remains in the taxable.
@@JeffTeeples This makes perfect sense! Thank you for clearing it up, brother.
One day, I'd love for you to show people the benefits of reverse mortgages during the conversion process. Live off qualified income from dividends and interest below any tax threshold, subsidized by the monthly allotments of equity paid through the reverse mortgage to keep your ordinary income at $0 (reverse is technically debt) while your home is still appreciating in value. That way you can manipulate the ordinary income brackets of your conversion to pay as little taxes as possible.
Reverse mortgages were peddled as Meemaw's living expenses after Peepaw died. But truth is they're the utility tool of the uber wealthy who know how to creatively structure their finances :)
@@JeffTeeplesthis is almost exactly my plan as well - brokerage is well funded (and gains already realized) to allow extremely low AGI using money market to live off and pay taxes on conversions so that post age 75 life will be pretty much tax free (will juggle things with a couple of small pensions so we still use up the deduction and maybe have a bit of income in the 10% bracket but hopefully avoid any SS being taxed).
Hi Jeff, is there RMD on Roth IRAs. If so, how would that affect the discussion you made on this youtube clip?
Hi Anne. There are no RMDs for Roth IRAs. Additionally, they have awesome pass down rules to heirs. Our kids will get to benefit tax free for 10 years as it grows. Roth's are the best, but it is wise to minimize taxes over the years to get the money there.
Great video Jeff! Thanks! I always look forward to your videos on Sunday! I do have a question. Let's say you are already past 59 1/2 (60's) and have had a small Roth IRA for 8 years. If I do Roth conversions, do I still have to wait the 5 years to withdraw the converted money? I was thinking I read somewhere that if the Roth account had been opened for 5 years already, you could access all your money in it (including new conversion and earnings/income/growth) if you were over 59 1/2. Of course I have read so much, I am probably confusing it! LOL. Or is it just your converted dollars and not the growth/earning/income? In any event, I better start them Conversions! :)
Hey Darlene. Thanks for watching, commenting, and being an awesome member for so long.
Each conversion will be on a separate 5-year rule window even if you are 60 or older. It is still worth it if you have enough to pay the taxes outside of the IRA accounts, but the cooldown does persist (which is lame if people are over 60).
I plan to make a video to go into more year-by-year detail of a Roth conversion ladder. This one was a bit of everything so I didn't get too deep into anything.
@@JeffTeeples Thanks so much for the quick reply! No worries, I look forward to the other videos!
@@JeffTeeples- I've heard conflicting info on the 5 year holding rule too. I was under the impression that once you met your 5 year period, you're golden. No more waiting periods.
I forwarded you a Goldman Sachs email on the topic.
Good job!! Video idea…Jeff, can you do a video about MLP investing that explains the way it gets paid out and how the taxes are calculated…should the funds be in a tax shelter account or outside? The one that I hold is AMLP. I’m just confused a little about the taxes. Do I get a K1? You have a great way of explaining. Thanks, Druski
Thanks for the kind words. I have to admit that I'm not overly knowledgeable about MLPs. I do know the basics, and have read up a little, but since they haven't interested me at a high level I never dove in. I'm probably not the best person to make a video about them. However, never say never (:
The tax law might have changed again, but 7+ years ago there was a push to get the MLPs out of your retirement accounts. It wasn't considered a good place because you could end up with a big tax bill when you finally did sell it.
You do receive a K-1 in the mail. It's usually just late enough to miss filling your taxes on time if you use an accountant.
Again, tax rules might have changed. Check with an accountant/ CPA.
After age 60, do Roth 401 k conversions or backdoor Roth IRA have to stay in for 5 years before they can be withdrawn?
Hey Jerry. I've always understood the answer to this question to be yes. Unfortunately Roth conversions will have a separate 5-year rule from your 'normal' Roth money that you have access to after turning 60.
However, a trusted member of the community sent me some information (that I will dive into on Friday when I catch up with channel admin) that may state otherwise.
My understanding from everything I've read (unless something changed within the last year is as follows:
You have full access to all contributions to a Roth IRA after fulfilling the initial 5-year rule. This is when you have opened and funded your Roth IRA 5 years ago.
For example, if you opened a Roth at 27 years old, when you're 32 (or 33, depending on specific timing) you will be able to withdraw ALL contributions made to the Roth (not the earnings on them) tax and penalty free. This includes contributions moving forward. The 5-year window is a one time thing for 'normal contributions' to the Roth. You have access for life.
However, for Roth 'conversions' (from a traditional IRA), the 5-year window will apply for every specific conversion even if you're over 60 years old.
For example, if I convert 100k per year, started at 48 years old. I will have access to 100k when I'm 53, 200k at 54, 300k at 55, etc. EVERY conversion is on a separate 5-year window. I'm fairly sure this is how it still works.
@@JeffTeeplesthat’s exactly my understanding (after a lot of research this year). There is a nuance to the 5 year rule - it starts on January 1 of the year of the conversion. So if you convert on December 31, you only have to wait 4 years and 1 day to access the money. One thing I can’t find a definitive answer on is access to the gains. I have to think that any gains must be available immediately (not subject to 5 year rule) because how would the custodian, the IRS or the account owner be able to calculate the gains from each specific conversion?
You would be a good neighbor to have 🙂
LoL, we could just sit at the fence and BS about this stuff. Your family would say 'Oh no, he's out there talk to Jeff again'.
I am still working at 60. Does it make sense to start contributing to Roth 401k some money after covering my company match in regular 401k? What happens with this Roth 401k if I retire within year or two before 5 years threshold?
Hey Alex. You can continue making contributions to your Roth 401k. It is great because when you retire and do a 'rollover' from your Roth 401k to a Roth IRA, you have full access to the money! It does not have separate rollover windows like conversions. It does have the initial 5-year rule for the Roth IRA in general, but I'm sure yours is over 5 years old at this point. If that is not true, you'll want to open a Roth IRA as soon as possible to start the 5-year window.
The 5-year rule is attached to the Roth IRA you're rolling over to and not the Roth 401k that your work had. For example, if you only worked there 2 years and made contributions, left the company, and rolled the Roth 401k over to your Roth IRA that is 7 years old, you're good on the 5-year rule.
Jeff - we just came into a large sum of money from commission on a business deal. The stock market is uber-high right now. Would you still start DCAing for next 12-16 weeks? I hate to buy right before a pullback, which I think is happening after Xmas. Thanks
Hey Tom. I think I would DCA over a lump sum at this point in time. I usually believe in a hybrid approach (some lump, the rest averaged in over X amount of months). Right now I would drop it in a HYSA or money market and DCA in over 6 to 12 months.
@@JeffTeeples Thanks - that's what I thought as well.
Hey Jeff, I know you’ve previously said that you’re doing YT full time so I assume you’re no longer receiving W2 income. May I ask what you’re currently doing for health insurance? Are you on your wife’s health insurance plan with her employer or are you and your wife paying for an HSA eligible health insurance plan through the marketplace that potentially qualifies for premium tax credits? The reason I ask is because if you’re doing the latter and are qualifying for PTC’s, then I believe you’ll have to plan your Roth conversions very carefully because if you convert too much in a given year, then you could lose out on the PTC’s and end up paying it back to Uncle Sam when you prepare your tax return for that year. Even if you and your wife plan for an early retirement (and are therefore too young to take distributions from your IRA’s and 401K’s), if you intend to take advantage of an HSA eligible plan and try to qualify for PTC’s in your early retirement, then you’ll need to take this into consideration when planning your Roth conversion strategy. Just a thought b/c the health insurance premiums are no joke.
The Roth conversions can also be an issue with IRMAA Medicare taxes starting at age 63. Medicare has a 2-year look back to determine what your taxes will be at age 65.
Very great points and stuff I couldn't get into during this video. Thank you for watching and for bringing up the premium tax credits. My family (4 of us) are currently on my wife's health insurance. It is unbeatable. We will be on this for (base case) 7 or 8 more years. Maybe more, depending on where we stand.
In my projections, I am assuming a huge health insurance cost (assuming higher than my friend that has health care for family and makes over $700,000 to be conservative). Right now our costs are WAY below $10k per month because of the health care being basically free.
I am planning on maaaaaaybe doing some Roth conversions in the next couple years (starting in 2024). It would all be at 22%, but I think we'll have enough to where it will sniff that bracket on a yearly basis in retirement. Toying with around $50k or so. I would like to get it over with so I can qualify for all the future perks with my measly SCHD dividends in the taxable (:
Absolutely. In a perfect world I will have the conversions done sooner rather than later for reasons like this. I'm considering starting now and paying 'likely' a little more in taxes to get it to the Roth ASAP.
But to be honest, if I phase out of any benefits in life because my 'income' (conversion amount) is too high for years in retirement... Life is good. I'll try to min-max and nerd out, but at the end of the day, I'm happy to pay my share to live here and enjoy life.
@@charlielipthratt7291 That's a very good point as well.
@@JeffTeeples There's another channel on YT that I watch (Safeguard Wealth Management) that often puts out videos on Roth conversion and retirement income strategies while taking into account the potential tax consequences and pitfalls as your income increases (PTCs, IRMAA, SS tax torpedos, etc). The guy in the videos, Eric, talks a bit fast and purposely keeps his discussions at a high level (probably done by design) but you can often pick up a few tips nonetheless. This is right up your alley.
Some issues with a Roth conversion. We have a high income now, we wouldn't be able to convert much to make a difference.
Since the election, tax rates seem like they will stay the same, or possibly fall.
RMD, take out a lot and enjoy your retirement! What are you saving for in your 70's?
Hey Michael. That is a valid way to view it! And withdrawals to a taxable (instead of converting) can be done penalty free before 59.5 years old as well with a 72(t). That will be a separate video. I like the idea of Roth income over taxable because I have the taxable account to cover the taxes on the conversion.
In other words, I'm 'taking out' 200k per year to play and have fun (: Still spending money and having fun in the meantime. I am with you in that it is pointless to save a ton of money for your 70's and beyond.
Hi Jeff, For someone who is self-employed and has a Solo 401(k) lets say in the ROTH version, is there a difference in this case? There’s a limit on contributions to a Solo 401(k), correct? So, in the scenario you provided, would it still be possible to convert that $200K into the Solo 401(k) (from taxable account or from a SEP IRA account)?
Thanks for watching and great question. You are able to convert a SEP IRAs to Solo 401ks. There is no limit on the conversion amount (just like the video), and you will owe taxes on the amount converted (assuming going from pre-tax account to the Roth account).
Taxable accounts can't be converted to a Roth IRA. That would have to be contributions to the Roth (if you have earned income).
There are contribution limits, but there are no conversion limits.
Jeff, aren't roth conversions taxed under ordinary income brackets regardless of whether you have income or not?
Yessir, you nailed it. That is why it is often better to wait for the conversion in your 'lower earning years' (aka retirement with zero earnings) 'IF' you have the taxable account balance to cover bills + conversion taxes in the meantime.
I could convert every dollar this year, but it would 'start' in the 22% bracket and dip deep to the 37%. That would hurt retirement very badly.
Instead, each year, I'll fill up the 0%, 10%, 12%, and even 22% ordinary tax bracket with conversion (ordinary) income.
Married filing jointly can have $126k of ordinary income (conversions and or income, all the same) at 12% of lower! It's wild, because those same conversions would get zero dollars of that tax treatment if I did it now.
@JeffTeeples Thanks for a great lesson but I am in the highest tax bracket for the next 5 years until I retire so I don’t believe a Roth is for me now. I have an IRA with $2m in VTI and a Brokerage with $800k in VUSXX exempt from state and local taxes. Any ideas? Thank you again for your time.
Hmm, first of all, great work! That is an impressive portfolio.
There are a few ways to approach it. A lot will depend on your age and your tax preferences.
You could pay bills and live life with the taxable brokerage account being at a nice level. This could allow VTI to continue growing in your traditional IRA. Then you pull out the amount you want each year (when 60 and older) and that will create your taxable income.
Or, when you retire and have less or even no income, you could pull some out each year to live on, just like the scenario above. And you could convert some to a Roth IRA to start a conversion ladder. The investments can be the same, VTI works great in Roth or pre-tax. In fact, you can actually convert it 'in-kind' and not sell VTI at all within a broker.
I don't think there is a right or wrong way to do it. I do slightly lean Roth conversions for the simple fact that the money is never taxed again, so it doesn't matter what happens with our federal tax tables in the future, and it reduces our future 'income' which can help qualify for more benefits in general (tax free qualified dividends because the Roth doesn't add to any thresholds, whereas taking out a chunk from the traditional IRA each year is as if you made that much more ordinary income).
A nice mix of withdrawing and converting to Roth is probably good at your high income level. Depends on your preference. I think you'll be okay either way, personally.
@ Thanks so much for your detailed response. I probably will not convert to Roth while I am in such a high tax bracket, but maybe after I retire?
I think that is a great plan. Very similar to how I’m approaching it.
So, if I have a multi million dollar traditional IRA and I also make a lot of money from my job and dividends from taxable accounts, do I still qualify to roll over to a Roth? I thought there was a cap?
Great question. There are no limits for Roth IRA conversions. For example, you could literally convert $2M tomorrow regardless of what you make. The drawback of doing it while you're already in the 37% tax bracket is that you'll owe 37% taxes on every dollar you convert as if you made that much more income from your regular job. If you do it in retirement, then you'll get to fill up all the tax brackets every year (when you don't have income coming from a regular job). This will take advantage of our progressive tax system.
However, if you make A LOT of money, and have no plans to retire, it might make sense to convert some and eat the taxes now so that you know the money will be tax free forever.
It's a good problem to have I guess, lol.
Does your company assist with a Backdoor Roth?
Some companies with high net worth employees do it. One example, they will take a large bonus and use it as a backdoor Roth contribution.
@@charlielipthratt7291Thank you. That’s interesting
@@JeffTeeplesThank you Jeff
Is there age or amount restrictions for converting 401K to Roth?
Thanks for watching and for the question. There are no restrictions for converting 401k or traditional IRAs over to Roth IRA. The IRS wants us to do it all at once and we can do however much we want.
The tricky part is spacing it out to take advantage of the lower tax brackets in more years, but not too much to where tax rates go up and we wish we did more earlier.
@ don’t know where I would be without you.
There are two options - same rules for both. One way is 401k rollover to Roth IRA (eg when leaving a job or retiring). The other is traditional 401k to 401k Roth (what’s known as an in-service conversion). Not all 401k plans allow in service conversions so check with your 401k people if you are considering this (my 401k allows up to 4 conversions per year). In service conversions are less common - most people don’t want to leave their 401k with their company when they leave/retire but it is sometimes an option.
@@lindsaynewell6319thanks
🎉It’s Teeples Time!🎉
SCHD Stan! Thanks for tuning in.
Do you work with folks one on one?
Hey Darrin. Thanks for watching and for the question. I don't work with people one on one at this time (outside of friends and family of course, free stuff). I spend my time making videos to help as many people as possible, however, in the past I could get something rolling.
@ past get something rolling? Thanks for your reply.
Whoops, I meant I could get it rolling in the future*
Great. Now I need a new phone because I just obliterated the like button
Perfect! Oh wait. Nooooooo! (:
im cramming JEFT vids!
Thanks for the support! I appreciate it and I hope you are getting something out of the videos.
New SUB here. Watched the charnel for awhile. Need some opinions on one category. I am sold on SCHD for HYD. I am also sold on VOO as my foundational. I am torn on Growth. I like 4 and need to whittle it down to one. SCHD 50%- VOO 30% and the last 20% I need help. I am 59 and want to let it roll for a few years. I am a fan of CS and have a small acct with some stocks . QQQM - SCHG or SCHA. TIA for any help guys.
Thank you for the kind words. I appreciate it. I like QQQM or SCHG for the last 20%. That is just my two cents.
I personally like VGT, but it is 100% technology, which most people aren't comfortable with. QQQM and SCHG are my favorite multi-sector growth ETFs.
My video this weekend actually details VGT vs QQQM vs SCHG for pairing with SCHD. It could be a helpful one for you. I walk through a back test during the video to see which combo has performed the best.
Awesome video, Jeff, thank you!
Thank you Eric. Your support has been so great. I plan to make a more detailed year-by-year Roth conversion video in the future. This one was a little all over the map because I was doing multiple things in it.
@@JeffTeeples You are too self-critical, Jeff! Your videos are just fine, imho! These are really tricky topics and everyone (including me) will have questions. Thank you for always taking the time to answer questions and build this community.