Watch This Before Roth Converting in 2024…trust me.
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- Опубліковано 22 тра 2024
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One of the most consequential choices you can make when preparing to retire is whether you should do a Roth Conversion. It could save you millions of dollars.
When you perform a Roth Conversion, you are deciding to pay taxes today to get out of future taxes.
But is it worth it? By the end of this video -- you'll have a much better idea.
*RIGHTCAPITAL LINK*: foundryfinancial.typeform.com...
NOTE -- I ask a couple of questions, but feel free to scroll past the questions -- not required for the link.
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ABOUT ME
I’ve always been passionate about personal finance, investing, real estate, and helping people find the freedom to live their life with purpose. But when my dad died in 2015, I tried to help my Mom find an advisor to sort out her finances. Instead of a helping hand, I found an industry of financial advisors dominated by glorified salespeople working on commission - pushing products that were not in my mother’s best interest. Or advisors with minimums that shut-out all but the ultra wealthy. Disappointed with the options, I took matters into my own hands and launched Foundry Financial, a wealth management firm with transparent pricing that specializes in helping provide clarity around money - so you have the confidence to make smart decisions.My goal is to help a million people retire without worry!
📅 THE BASICS OF RETIREMENT PLANNING
Retirement planning has several steps, with the end goal of having enough money to quit working and do whatever you want. Our goal is to help people master retirement and retire without worry.
Step 1: Know when to start retirement planning. When should you start retirement planning? The earlier you start planning, the more time your money has to grow. That said, it’s never too late to start retirement planning. Even if you haven’t so much as considered retirement, don’t feel like your ship has sailed. Every dollar you can save now will be much appreciated later. Strategically investing could mean you won't be playing catch-up for long.
Step 2: Figure out how much money you need to retire, The amount of money you need to retire is a function of your current income and expenses, and how you think those expenses will change in retirement.
Step 3: Prioritize your financial goals. Retirement is probably not your only savings goal. Lots of people have financial goals they feel are more pressing, such as paying down credit card or student loan debt or building up an emergency fund.Generally, you should aim to save for retirement at the same time you're building your emergency fund - especially if you have an employer retirement plan that matches any portion of your contributions.
Step 4: Choose the best retirement plan for youA cornerstone of retirement planning is determining not only how much to save, but also asset allocation. It can make a massive difference in your retirement plan.
Step 5: Select your retirement investments. Retirement accounts provide access to a range of investments, including stocks, bonds and mutual funds. Determining the right mix of investments depends on how long you have until you need the money and how comfortable you are with risk. It’s often helpful to talk with an adviser to discover the right mix of stocks and bonds.
❣ SPONSORED No, this video was not sponsored.
⚠️ "DISCLAIMER:⚠️This is not financial or investment advice. This Channel is meant for EDUCATIONAL AND ENTERTAINMENT PURPOSE only. None of this is meant to be construed as investment advice, it's for entertainment purposes only. #retirementplanning #retirement #passiveincome
Thanks for the great video!
Excellent information ! 🥳
Thank you very much Kevin. The demo makes this topic a lot more relatable rather than simply explaining the components. Much appreciated.
My pleasure.
Excellent video. Thoughtfully laid out and easy to understand.
Thanks, Troy!
Thanks you Kevin - so helpful much appreciated
Kevin, thanks for the video. So many things to consider! I need an advisor to help me through this.
Excellent video. I've been doing annual Roth conversions, to the limit of the 22% bracket, in order to reduce impact of future RMD. Once 2026 arrives, and taxes are raised, the conversions will be reduced to fill only the lowest bracket. We are living on the Roth accounts and SSI. So glad to see the potential tax savings of up to 2M using this strategy.
Thanks for a very enlightening video.
Thanks for the excellent Video Kevin--just subscribed and also just setup an account at Right Capital. Looking forward to you activating the "Tax" tab so I can run through different conversion scenarios.
Thanks, Tony!
Great job of making me very complex topic extremely understandable!
Thanks!
I managed to watch a few of your videos in the last few days. Your videos are very informative, and I appreciate your method of teaching and sharing your knowledge. I tried your tool and must say I’m very impressed, I particularly like the simple vs the more detailed approach you offer.
Thank you for sharing your story and knowledge on UA-cam.
Thanks, Rick! I really appreciate it.
Good content. I am looking forward to you activating the "Tax" tab so I can run through different conversion scenarios.
Should be live.
Great video.I like your explanation. Thank you very much
Thank you, hope it was helpful.
Thank you for the offer to turn on the tools. I had previously tried with this site but found that the basic tools are too basic and the site wasn't very valuable from a planning perspective. It might give a good doomed / only mostly doomed thumbs-up thumbs-down fuzzy feelings, but the marginal tax graph is what I really wanted to sort this out and that is not a feature. Thank you!
This was really helpful to see how Roth Conversions impact retirement planning. Do the Roth Conversion plans show up in the Monte Carlo analysis? Personally I'm more interested in how it affects the probability of success more than the estimated amount left at the end of the plan. Secondly, thank you for the access to the software. I assume the tax planning is already on as I can see the Roth Conversion action item on my end, but if there are more things to turn on that would be even better. It would also be both helpful and interesting to see what you have as the inputs on the advisor's side that impact the plans on the users side. Thanks again!
Great video.. Retire a year ago at 61. Wife is retiring in couple months so have been moving cash into Roths while we still have wages. Next is to start some smaller Roth conversions and this video really helps get me thinking more deeply about the best taxing strategy. Thanks john
Thanks, John! Glad it was helpful.
Thank you for knowledgeable video. I have subscribed to your channel and also made an account with your software. I really like how it is laid out. I will be looking out for when you are able to activate the tax part so I can look at my options. Thanks again.
great video. but also remember that not everyone has the money to pay the extra taxes from the roth conversion. .... and....speaking of roth, 401k, HSA and all that... please make a video for Freelancers. You live in LA, you know they exist.
Hi, what software were you using in the demo? Thanks!
I'm retiring in 2-3 years at age 62-63. It makes sense to me to start the Roth conversions now, doing a partial over the next 3 years while I'm still working and have the extra money to pay for the extra taxes, being mindful not to cross into the next tax bracket. This is what I'm doing, I'm not waiting until I actually retire to start the conversations. Plus, the better 2017 tax brackets are expiring starting 2026 tax year.
That sounds like a smart plan.
Careful about IRMAA look back.
@wdeemarwdeemar8739 Good point. I'm 4 yrs away from Medicare eligibility.
I'm doing the same, largely because in retirement health care costs (ACA or Medicare) increase with income. So, one has protection from this hidden cost of Roth conversions while health benefits are covered through company benefits. It's important to note that for Medicare, cost uses a 2-year look back. So, the income you show at age 63 will drive your Medicare cost at age 65. Here it helps if one was born closer to year's end instead of near the beginning of the year because increase Medicare cost would be limited based on the number of age-65 months is the first year it is taken.
Even though tax rates will go up in 2026, trust the numbers. For example 15% in 2026 is less than 22% now.
Glad I stumbled onto your videos. Truly kicking myself for neglecting this topic, along with other issues the last 10 years … work distractions, gun shy from very poor advice 40 years ago, laser focused on paying off the house mortgage as fast as possible ( 6 years rather than the 30 year mortgage we took out @3.0% … a house is a roof over your head, not ant investment). Thank you.
I hammered a low interest home loan to almost paid off, for me it was a mistake.
The cash using to pay off a 3% home loan can get a safe 5% CD, the cash from laddering CDs can be used to live on to have anemic taxable income, with a low taxable income 401K money can be rolled over to Roths at a low tax rates
Why would you pay down a 3% mortgage when you could put that money in a 401K S&P500, avoid state/fed tax, and reap 8% on average (last year 20%). (Also, if you itemize, you would be losing ‘some’ mortgage deduction). Or put it in a Roth IRA? As the guy above said, even banks are offering 5% CDs. If you have enough to max out on a 401K AND pay down the house and have emergency money, then great, pay off the house early.
wise! good peace of mind sleeping at night! once it's paid off, it's paid off! everything else (investments) will fluctuate over time. the price of a peaceful nights sleep (paid off house) is priceless!
@@1MinuteFlipDoc You're still paying property taxes and insurance on your house, which I assume will increase over time. Possible HOA, too. I didn't want to pay off my mortgage but I refinanced at 3% so my mortgage payment is just under the total of my property tax & insurance every month. That works well in my retirement cash flow without gutting my investments for it.
Once again, great video. Can you explain how to determine Fill Up The Tax Bracket tax rate?
Thanks! We use software called Holistiplan to do those calculations each year for clients.
I would like an analysis on pre-tax vs roth contributions. I would love to go all in with the roth, but the tax savings at tax time with the pre-tax route keeps me from making that jump.
How do you find the link you mentioned to try different scenarios. Can't find link. Love your videos Thank you
Excellent information! I look forward to reviewing the tax consequences page once turned on. How long will the free access to Right Capital be extended?
As long as possible. There may be a cap on how many people (not sure).
You mention "stealth taxes" but I think they deserve more attention. The "Inflation Reduction Act" limits heathcare premiums to 8.5% of income and is effective through 2025, this includes Roth conversions. Someone who early retired with $100k in income might have $20k in insurance premiums so that's 8.5% additional on income over $100k up to $235k. It's significant. For someone in this situation I'd say wait until 2026 for any Roth conversions.
Glad that 100% of my retirement contributions are Roth IRA/Roth 401k. Only have to worry about converting my employer match in the future.
No point converting if the amount you’ll be withdrawing is below the standard deduction. Also if you want to utilize ACA subsidies you need to show some income otherwise you’ll be thrown in Medicaid
@@rickyaz8640 I don't think I have to worry about that I inherited 325,000 from a family member in 2020. Because of this only about 13% of my net worth is in Roth 401K Roth IRA.
@@rickyaz8640yeah, loads of people don't understand this and just think 100% Roth is better. It's often actually better to have as much pretax as possible since pretax contributions "come off the top" of your income while working but "fill up from the bottom" when retired, including the 0% standard deduction "bracket".
Thanks Kevin. I actively manage a taxable brokerage acct. and have taxable capital gains and dividend income, in addition to a large IRA. I am not taking social security yet but I am past full retirement age. I pay very high IRMA on the Medicare premiums for my wife and I which really pisses me off given the high taxes I have had to may in my life time. Roth conversion would just put me in a higher bracket now for many years up to RMDs. I guess I just let it grow till then.
Sometimes there’s just nothing you can do.
I am in the same situation with IRMA. I found that out the hard way after my first year of Medicare (had to pay double the norm). I am not taking SS (67 yrs old) either in gap years trying to burn down some 401k early on. Retired just living on tax paid savings and 401k. Now trying to strategize, but looks like all efforts will lead me to the first tier IRMA increase. Yes this IRMA crap is hard to swallow and I don't think that it is fair. Noted in Kevin's sample, I think they were in IRMA territory for stealth tax too for some years.
one problem with roth conversions early before social security kicks in is it increases your income level and can eat into any price subsidies on healthcare through the ADA
Will you elaborate on this?
I am contributing 100% to the Roth 401K. I am 42 and started to do In Plan Roth rollovers. The main reason I am doing this is because currently my effective tax rate is 18.5%. That is for the state and federal combined. I guess anything is possible. But I highly doubt it that my effective tax rate will be this low in the future!
Don’t forget there are several states that have zero income tax. Personally, I’m considering a move to a warmer state and the fact there is zero state income tax is a big bonus.
You want to make your decision on whether to do Roth conversions on your marginal tax rate, not your effective tax rate. If your marginal tax rate on your conversion is lower than your predicted future tax rate avoided on your Roth withdrawals, then that's advantageous. You may also need to factor in IRMAA & NIIT taxes.
What software do you use in the video?
Good video.
Glad you mention that Roth Conversions are not always a good idea.
So many think that a Roth leaves you more money no matter what, and that tax free growth is automatically better than pretax growth, which then causes those with smaller portfolios to over convert.
I find those analysis about Roth conversion always a bit oversimplified. For example, they are assuming the tax bracket can be filled up with the Roth conversion. But during the year of Roth conversion, need to leave on some revenu, which also most likely will be taxable in some way ( unless it is seating in a checking account bringing close to 0% interest). Another risk is being obsessed with the Roth conversion and target lowering the tax bracket, which means not enjoying the Gogo years.. for getting more money at age 85..
totally agree...IMHO the only reason to worry about this is the viability of your retirement style...
Agreed. To get the most bang out of Roth conversions is to have an influx of tax free money, or nearly tax free money (withdrawals from a taxable account are partially taxable; just the capital gain is taxed at 0% or 15%, usually).
I had an influx of tax free money (inheritance & cash-out refinanced mortgage money), which allowed me to maximize the benefit of Roth conversions. I've convinced no one to do a cash-out refinance, but it was key for my plan.
I started my Roth conversions in 2015, and I'll finish up in 2026. My future avoided federal, state, IRMAA & NIIT totals $2,300,000. My conversions are being done in a no state income tax state (Texas), while my Roth withdrawals will be in a high income tax state (California).
I have searched this site and I can't find the Tax tab link you mentioned in your video.
Love the info here thank you. My question is in your example where Phil and Claire withdrew 12 to 15% annually, what did that equal in dollars for them for that year?
Thanks! That’s the tax bracket, not a conversion percentage. So, you’d just look at the federal tax brackets to get a sense of what they converted.
Hi I'm not seeing the link to the software you used in the video. The demo was very helpful!
foundryfinancial.typeform.com/rightcapital
@@foundryfinancial Thank you!!
I'm not sure I agree with your example at 8:12. In 2049, it shows tax of 37,063 on 215,153 of income. This approximates 2024 tax tables, however 2049 is 25 years from now and the brackets will have changed. What I do is use the current tables, calc the tax of the PV of the income, then calc the FV of the tax. Something liike FV(Tax(PV(215153))). This gives me a tax of $26,617 in 2049 dollars, assuming a 3% inflation rate. Granted this is a major assumption but so is assuming the brackets will not change.. This one change convinced me not do do rollovers at my stage in life. Good video.
How about same situation, but with Munis in the brokerage account.
I'm looking to retire next 5 years..at age 62.. I would like to withdraw part of my 401k then invest that money overseas instead converting to Roth Ira. What are my penalties or tax dues? ..Thanks for any info
Nice video thanks. Even greater thanks for the access to the tool. Is this a 14day trial or anything or can I keep playing with it later (not a lot of time now)?
I’ll give you access as long as I can. Not limit as far as I know right now.
@@foundryfinancial Great thanks.
where are the tools? Links to your "non-sponsored" financial firm to make an appointment, but none of the spreadsheets you demo'd
Thanks Kevin for another great tutorial. However, the version of planner software you are using is not similar to the one we have access to. For example, on the Roth conversion page, we don't have an Edit option (bottom right corner) that you have to customize (like number of years to convert). Is there any work around this?
What is the link called for the software you used to generate this excellent video?
Hey Dianne, it's called Right Capital. You should see the link in the description.
How much did i save in taxes during my heavy 401k withdrawls?
Excellent summary. Really clear explanation. Thanks!
I'm fortunate enough to retire this year (I'm 53). I'm also fortunate enough to receive a lifetime pension starting this year from the military. The pension puts me in the middle of the 22% tax bracket - which may become the 25% bracket in 2026. I fall into the majority that you mentioned in the video; most of my retirement savings is in a Traditional IRA (Thrift Savings Plan) so I'm not sure of the benefit of converting some or most into a Roth IRA. I also have a Roth IRA but the Traditional's value is about twice as much (because I was able to contribute so much more to the TSP compared to the Roth IRA).
Because of the pension, I'll remain in the 22% (or 25%) bracket forever. Paying 25% is a big fee on the amount I convert from the Traditional IRA. Certainly gives me something to think about! Thanks again.
Thanks, David. Yeah, it’s tough when you have a pension - although that’s a good problem to have. I’d still model it out.
@@foundryfinancialIndeed…the pension is a nice problem to have! It’s funny (and very predictable) how much I think of taxes now that I am on the verge of retirement compared to when I was in my 20s trying to save as much as I could.
@@davidrowland2773 Don't forget IRMAA & NIIT in your calculations.
Many people worry about paying taxes out of pre tax Ira money, but the fact is that the balance you see on your statement is not all your money. In my case, 20 to 25% of that balance belongs to the Federal and State governments. You can pay it now or let it grow and pay it later, but unless you give it to charity, taxes will claim their share. Our son is in a higher bracket than us so we are annually converting to the top of our bracket to a Roth. If the market rewards you, I feel fine using some of that gain to pay taxes.
How charitable of you. 😂
Good points. 👍🏼
Hi Kevin suscribe today hopefully you can answer my question iam already retire iam 67 is it to late for me with the roth conversion taxes have been absorbing my 401k
You only pay taxes on the basis, not the entire withdrawal, correct?
I'm 72, and must start takingRMDs this year (don't want to wait till 73, because then I'd have to take two RMDs in the same year, increasing my taxes.) I really wish I'd known to do conversions much earlier, but better late than never, I guess. I converted about $75K over the last 5 years, paying the taxes due from non-IRA sources. The conversion caused me to have to pay income taxes on 85% of my SS, but because my RMDs will only be about a third of my yearly previous conversion amounts, I'm betting that my SS taxable rate will drop to 50%. And I'm betting that federal income taxes will keep going up during the rest of my lifetime.
Something for people to keep in mind is to actually do the math. Most people don't realize hitting a higher tax bracket isn't necessarily that bad.
For instance married filing joint 24% bracket starts at $201,051. You DON'T pay 24% on the entire amount. If you go over by $1K you only pay 24% on that $1K NOT the entire $202,051. Most people don't seem to know how brakets work. You pay exactly the same takes on the first 100K that someone who only makes 100K total.
I think an easier, back of envelope, way to figure out if you want to do Roth conversion is to compute the breakeven, in terms of dollar amount. Let's say that you are in the 35% tax bracket and expect to drop down to the 24% tax bracket in retirement. Let's assume you have $100,000 in your 401K. The tax you would pay would be about $35,000. The breakeven point is the value of the account when you would have to pay the same amount from taking withdrawals from your 401K. In this case, you would need 35K X 100K / 24K = 146K. ie. You would pay the same taxes if you had 146K in your 401K account. ie. a 46% growth. If you paid for the taxes during the Roth conversion out of a taxable account, you would end up with $100,000 in your Roth IRA, so only need to make 46% gain to break even. Beyond that, all the compounding growth is tax free. If you paid with taxes from the 401K, you would end up with $65,000 in the Roth IRA, which would require 146/65 = 124% growth to break even. 46% seems reasonable. 124% is much harder. The growth of the market last year was such that people who did the conversion a year ago would almost have broken even. If someone is in the 24% tax bracket and would be in the 22% tax bracket in retirement, then the decision is a lot simpler as the amount of growth needed to break even is a lot less. The hard part is saving enough to pay the taxes out of a taxable account, so you can get maximum impact out of the Roth account.
Maybe for a basic estimate, but really need to comprehend full picture of income/expenses, taxes social security, conversions, widow tax on spouse, etc
This ALMOST made sense to me, but not quite. If I convert my entire trad IRA of $450,000 and pay 35% tax from my taxable account, how does that work out? Not sure I understood the early paragraph’s calculation.
@@candecarro The breakeven would be about paying the same amount of tax now, versus in the future. If you are at 35% and have $100,000, you would pay $35,000. To break even, it means you have to figure out how much your would need the IRA to grow to also have to pay $35,000 if you take it out later. 24% of $146,000 would be $35,000. ie. The same tax paid now to convert as what would have to be paid in the future. This assumes that you are paying all the tax out of your taxable account. The difficulty is in saving up enough in your taxable account in order to pay the taxes. This means doing the conversion over a number of years as you save up cash. If your retirement tax bracket will be very low (e.g. 12%), the breakeven would be $100,000 X 35 / 12 = $291,000. That is a lot of growth required.
@@candecarro If all your total tax deferred accounts is 450k, i wouldn't do roth conversions at all. I would just withdraw what I needed annually and try to stay in lower marginal tax brackets. And also figure how not to run out of money if 450k is the total of all savings.
So, what is the actual amount of tax-deferred dollars that were converted to Roth ... did I miss that?
Great video and explanation on ROTH conversions. I'm 72 and turning 73 in 2024. Therefore, RMD's come into play. I have been making conversions from traditional IRA'S to Roth and keeping it below the taxable mark in the 10 % bracket. I did $9,500 in 2023, and it turns out I could have done $14,000 without being taxed.
Now that I'm required to take RMD'S it will reduce my conversion amounts drastically. How can I maximize conversions in this situation?
Also, can I take payments from my Roth annuity and transfer to my Roth stock account, therefore making it grow in a better interest or dividend account.
Thanks! You should be able to, although there could be a surrender charge.
Hi Kevin, thanks so much for your video, it was very easy to understand and informative. I have a couple questions... I'm 60 and retired and I recently converted my Roth 401k to a Roth IRA both with the same administrator /company.. which I had opened for more than 5 yrs. 1. Do I now have to wait 5 years before I pull the existing money out? 2. If I do conversions from my regular IRA to the Roth do each of those have a separate 5-year waiting . Before I can access the money? Thanks again!
I just had the same question. Waiting..,
As long as u are over 59.5 and have had the roth for 5 years there are no further restrictions or penalties
I am a CFP who LOVES Roth. Don’t get me wrong…. But the obsession on RMDs out of traditional has always been a little strange to me… you’re mid 70s. It likely makes sense to unwind traditional at that age anyways
That’s why you run the numbers and show clients various options. But, as you said, you’re forced to unwind at age 73/75. If you don’t control the withdrawal - it could create a larger tax bill for you and your heirs if you don’t plan properly. And trigger IRMAA and a higher tax rate.
Why would you need money from another bucket to pay for the taxes on a ROTH conversion? Wouldnt the taxes (or a reasonable approximation of them) be withheld by the brokerage upon conversion? Or do they not do that and you always have to pay the taxes from another fund source? Thanks.
How Roth IRA conversion works if I already max out the 2024 contribution? Can I convert for example 20K from 401K straight to Roth IRA, or I have to convert from 401K to IRA and then to Roth IRA like the back door? Thanks
Awesome video as always. Using the same numbers laid out in the example provided in your video, what impact would adding combined pensions for Phil and Claire of 100K per year (and thus taxed as income) have on the benefits of a Roth Conversion? Would it still make sense to convert at age 60?
You know it probably would have helped, because the one thing I forgot to mention is that living on a large portion of the investment proceeds - also hurts the impact of the conversion.
What does Roth conversion in your example do to net worth? In my own analysis, I found that could ultimately save on Federal taxes doing a Roth conversion of some of my 401k at age 62/63. The break even point on taxes was around age 80, but my net worth was reduced compared with not doing a Roth conversion and did not recover until age 90.
Yep a lot of these strategies require longevity so be careful. He was using numbers out to 105yo which is nuts
Your net worth is reduced after Roth conversions because the pre-tax IRA or 401k was never really all your money. You have a hidden partner, the IRS. So if you have 1 million in a pre-tax and are counting that full amount in your net worth instead of the approximately $700k that is actually yours, you are just fooling yourself.
How do i get free software access
Two questions. At time stamp 13:26 you mention taking money out of pre-tax account and putting it into a taxable account to help drain the pre-tax bucket. When would that ever be better than a ROTH conversion even if the money will be spent in the next couple of years? We feel filling the 12% tax bracket with ROTH conversions is a no brainer. Even if we are going to spend the money in the next few years, if we need a large sum of money, it will keep us from taking a large tax hit, in a higher bracket, in the future. We will still have plenty of pre-tax money to fill the 0% tax bracket (standard deduction), 10% tax bracket, fund QCD's and pay deductible LTC expenses in the future. Does this make sense?
@@1-Wheel-Drive That was the point I was making. I am glad you agree.
Add +1 on your path to 1 million helped!
Thanks. That means a lot.
Any other considerations when one spouse receives a pension w/o SSI? Do you just look at filing MFS when the spouse w/SSI does the conversions? Thx
Great video Kevin!..I'm considering a Roth conversion now at 61 yrs old with $875k in a traditional pre-tax 401k contribution. I'll probably work til 65-67yrs old. I'm wondering if it's still worth doing, but taxes never go down, do they:) Though my question is that since I'll be retired and not making an income except drawing from retirement accounts, won't my tax bracket be that much lower anyway?..and being that retirement is only 5-7yrs away, would a Roth conversion make up the difference in what I'll pay in taxes now?
Great question. I hope someone responds.
I wonder if i can offset the conversion due to investment losses. Im thinking yes, but I cant be completely sure.
Yep.
Focusing on tax savings is the wrong way to look at it. The only thing that matters is the tax rate you are paying now to convert vs the tax rate in the future. An important point is that with a conversion you are paying all the tax up front at the top of your income tax bracket and that is money that is no longer available for you to invest. With a traditional IRA, you can defer to age 75 before having to withdraw and the taxes will be paid slowly over many years and will be paid with future dollars which are worth less due to inflation. If at age 75+ you only have SS in addition to the IRA withdrawals and take advantage of the standard deduction, you will be pulling out money in a mix of low and high tax brackets. Here is a simple example. You are in the 22% tax bracket and convert $100k per year for 5 years at ages 60 to 65. Total tax on $500k is $110k. Let’s assume that doubles to $1m by the time you are 75, which is all tax free. Instead if you do not convert, your $500k still doubles to $1m at 75 when you need to start RMDs. It is taxable but if you take the $110k you would have paid to convert that also doubles to $220k. In year one, RMDs are about $40k of the $1m. If you have SS of $40k plus the $40k RMD your total taxable income will be about $30k after standard deduction which will mostly be in the 10% bracket with a little in the 12% or about $3500. The income on the $220k at a conservative 4.5% is $10k, more than enough to pay the tax and not touch the principal. Yes RMDs increase and eventually you will pay more in taxes, but you have had more money working for you for many years to offset it. I know this is an extreme example as it is unlikely you will only have SS plus the RMD as income, but the points made above still hold true as long as the “average” tax rate paid later is equal to or lower than the conversion tax rate paid. So if you are in the 22% bracket today you pay all conversion taxes at that rate. If you are in the 25% bracket later, you pay a blend of rates, which depending on your circumstances could be some at zero, 10%,12% etc with only a small portion at the highest rate. And it’s spread out over many years as well.
I didn't read all of this but got the gist of it and agree. In short, it seems the assumption of the video is that you quit working and delay taking social security. That won't be the case with me and the Mrs. and at this point in our lives, we're at the highest income levels that we'll see for the last 2 years of our working lives. We also only have one non-employer sponsored tax-deferred account (previous employer) so that would be the only one available. I don't see us doing the conversions.
Great info, I wouldn't have run out the example to age 100 as that's not the average. I would have loved to the numbers to age 80, but I am going to do the exercise for myself.
I have way too many friends and family live well into late 90s, so I’ve the expanded the horizon. I used to do till 90. But yeah, run it for yourself and you can choose anytime you like.
@@foundryfinancial Glad you did, thanks. One can always look at the graphs at earlier stages do see what happens at age 85 or so, but nearly impossible to push if its not computed.
Have a 35000 per year pension. No matter how I slice it I appear to have to pay social security taxes. It kills my Roth conversion plans at lower tax brackets.
I think, There can be conversions on the other side of the SS tax torpedo, where SS has already been taxed as much as it can be.
Hi, are you a RIA...Registered Investment Advisor, registered with SEC with a ADV form Part 2, disclosing all your fees and services? I was told by Eldermann if you talk to a advisor and they can not produced a ADV form, RUN away as fast as you can!
I am.
Didnt notice a mention of medicare costs. Convert too much and your medicare costs go up. Two spaces both get the increase.
Did I not mention it? I thought I did. You’re right. I definitely mention it in the buckets video right before this one.
I'm 62 and feeling like I should retire to start this conversion (though I still want to continue to work.)
It’s all about income brackets. I’d run a model with your current salary and see what happens.
Where to find the free tools to calculate my future tax bracket? Anyway I’m 62 and started to do the conversion last year ,40k from my 401 to Roth IRA without paying taxes because I’m still in my tax bracket after conversion and wife(retired) pays 11%taxes in all of his incomes( Rmd,SSS and pension) and I will continue the conversion till 65
In the show description.
How do you download your program for viewing Roth conversion
There should be a link in the description to access it.
Thank you for the software link. Can you tell me where to find the edit tab in order to change the number of years to convert up to certain tax bracket? I see it on your video but not on the link. Thanks
I thought this was a super helpful video, and I’m looking forward to looking at my analysis and maybe reaching out to Foundry to help me, but I don’t see a link to the software… Can someone point me to it?
- Nevermind-found it! It’s super helpful, and I’m sure it’ll be a great tool. Thanks!
Where is the link to the tool you mentioned?
In the show notes. Just confirmed it was there.
Can you run the analysis for me please? Looks confusing. Thank you!!
We manage this for clients all the time. Feel free to reach out.
@@foundryfinancial I did, thank you. Talk to you soon! 😊
Can you discuss any rule that says when you do the IRA to Roth conversion, you can’t touch that new money in the Roth for 5 years from the date it is deposited? So your Roth contents would stair step in availability every 5 years?
Maybe I can do a quick YT short talking about this.
Please let me know when you do. Thanks!!
Great video!!! Question...Is Roth conversion money taxed at the same rate as normal wage income? I'm already retired and not eligible for Social Security for 2 years, but I am eligible to take out of my Roth & 401K accounts without penalty. Contemplating my next move. I think I want to start taking out the amount each year to stay in the minimum tax bracket from the 401K and put it in savings first and but not touch my Roth until later. BUT another option is to convert the 401K into another Roth or put it into one of my existing Roth's. Thanks in advance!!
Yeah, the same rate as ordinary income.
I’m like the Dunphy’s with what I have in my retirement accts but I’m widowed (2020) and I’m 76. My SS and other investments easilycover my living expenses. I want to convert all of my tax-deferred IRA now to get rid of RMDs and eliminate taxes for my kids when they inherit.
Feel free to set-up an appointment if you’d like me to run the calculations.
Thank you, Kevin!
If you don’t have the money to pay the taxes, can you use part of the moved proceeds to pay the taxes?
Yes.
What is the stealth tax? Can’t seem to find its details on IRS website
It’s not an official government term. Just Google it and you’ll find lots of information.
@@foundryfinancial I found lots of varying information, that’s why I asked. Actually most related to UK taxes. Is it related to a 50% jump to 85% with regard to social security?
My only reason to do Roth conversions is for when my wife or I die before the other and then have to file as a single filer.
It's a savings, but not such a huge savings. You need to show the results using real rather than nominal dollars. That $1+ million savings is inflated future tax dollars vs current dollars. A better measure is ending net worth.
I understand why you use a death age of 106 in that software in an effort to make sure money doesn't run out, but in this case doesn't that skew the calculations of what the moving taxes to a younger age does? If you moved the death age to more of an average age like 85 would the calculation change a lot?
It would most likely improve the outcomes. If you move it up a lot it will impact the Social Security calculation. I actually set it to age 100, it just shows 106 because of the younger spouse. It doesn’t actually model that far for Phil.
How about annuity.
Are you asking if you should convey it to a Roth?
After doing a Roth conversion, I understand the EARNINGS on that conversion cannot be withdrawn for 5 years without paying taxes on those earnings. If I am converting more to a Roth conversion each year, does each annual contribution roll into the original conversion or is a new Roth IRA account created each year? How are the 5 year windows managed for each subsequent year’s contribution if rolled into one Roth IRA account?
5 year starts when you made your 1st contribution in the 1st roth account you created
Wondering please, what is the scenario you mention where it would not make sense to do a ROTH conversion, but does make sense to withdraw $ adn place in a savings account/other savings vehicle. TY
Roth conversions are a bad idea if the tax rate you pay on the conversion is greater than the estimated tax rate you would avoid upon withdrawing from your Roth in future years. If the tax rate you pay on a Roth conversion is equal to the estimated tax rate you would avoid on Roth withdrawals, then the result is nothing gained/nothing lost.
Thank you Kevin. Does it make sense for someone in her early 70s to do conversion? Can I pay the taxes from my individual account. or taken out from the original amount converted?
Yeah, you can definitely convert in your 70s - but you’d want to run the numbers first. It’s best practice to pay from an outside account to allow as much of the conversion to grow as possible. But not required.
@@foundryfinancial thank you so much for your clear and comprehensive answer.
When doing a Roth conversion aren’t we limited to $8,000 pp a year?
No. You’re probably thinking of a contribution limit.
Another factor this did not hit on, but is my biggest question. Example: I have an extra 5k to invest for the year. Would it be better to contribute 5k to a ROTH or do a conversion that creates a 5k tax bill?
It depends on a number of factors, but I’d be tempted to do the contribution.
Although, with taxes going up in 2026 - you’ll want to weigh that as well.
Why in the simulator are there only 2 tax brackets? 15% & 25% instead of 10, 12, 22, 24, 32, 35 & 37? It also looks like it jumps to 25% at 150k of household income even tho it should only be 24% for income between 190k and 360k?
I think it’s based on the 2017 tax bracket that it will convert back to in 2026.
My thoughts as well. Federal brackets are graduated, so a bracket does not apply to all income as you indicate - rather multiple rates are applied at various income thresholds. Also the life span of 106 years does not seem realistic either. A bit more detailed analysis is needed than what is presented, I think.
How does other income such as real estate rental income impact this?
That all impact it. But you can sometimes depreciate that income.
I think this video should be titled, "How to save a million bucks in only 14 minutes and 49 seconds." Fantastic video and big thanks, Kevin!
Thanks. It really is a powerful concept.
I am stuck as what I should do, I am 28 years old I havent opened up a Roth IRA just yet. I do have a 401k with my former employer and am wondering if i should roll it all over into a Roth IRA. I was a W-2 employee but I am now 1099 as a Consultant.
You should roll it over to a Roth IRA, if the tax rate you'll pay on your rollover is lower than the estimated tax rate you will avoid when you withdraw from your Roth in the future. You should NOT roll it over to a Roth IRA, if the tax rate you'll pay on your rollover is higher than the estimated tax rate you will avoid when you withdraw from your Roth in the future. Bottom line: it's all about TAX RATE (federal, state, IRMAA & NIIT).
Very informative. However, you are missing one important piece of the puzzle. HEALTHCARE. I just retired at 61 1/2. For the next 3 1/2 yrs i need healthcare. Cobra way to expensive @ $900/month. Obama care is the way to go, But.... Subsidies to make the policy palatable come at a cost. With my wife who is 65 and on SSDI we have yearly income. We set a income level at $50,000/yr so our obama care subsidy would be fairly good. The more money you make, the lower the subsidy, the higher the monthly cost. This will all but alleviate any roth conversions for the next 3 1/2 yrs. Which are probably our best years to do conversions.
Now i plan to wait to collect ss so i can have 2 yrs of conversions before collecting at 67. Will also have to deal with IRMA at that time. So many in's and out's to deal with.
Yes, there are many conflicting options. In some instances, it may be better to take less ACA subsidies in some years and convert some each year. You have to model the numbers, and include RMDs, etc.
Couldn't agree more with your frustrations and I'm also in this same boat. Uncle Sam always has a way to put the screws to us!
Wouldn’t your wife be on Medicare? Then your ACA subsidy is going to be about $10k max per year for you. That is 20% of $50k if you don’t take it, which bumps your effective tax rate up to about 30%. A tough call. The effective tax rate on $100k of income for a couple is still less than 10% including SS discounts.
Is there is a link to this calculator that I can play with?
In the description
@@foundryfinancial I only see links to get connected for consultation. Is the roth calculator available to take for a test drive?
@WW-zn7lh it’s the Right Capital link. It’s there.
How does living in CA affect these Roth Conversion examples? 9.3% State tax.
Add an additional 9.3% to the tax bill…
is a Roth conversion the same as a Backdoor Roth? When I converted 401k to a Roth IRA, then withdrawal funds from the converted Roth IRA, I will pay tax on the pre-tax money and not the gains on the pre-tax gains?
You cannot withdraw converted Roth funds for 5 years. Something many don't think about
What is the right age to do the Roth conversion?
Depends. Lots of factors, but the sweet spot is when you retire before Social Security kicks in.
I'd say they don't have enough $ to retire that young. What insanely optimistic returns are you assuming to get those massive taxable income numbers down the road?
Historic returns on a 60/40. Compounding returns are a marvel. Also, the goal isn’t to answer the question should the retire, but instead it focus on the impact of Roth conversions.
@@foundryfinancial I don't know what your underlying assumptions for the couple are. If they have enough SS and pension income to cover their living expenses then maybe those assets grow. A lot of us don't have pensions and receiving 100% or promised SS can't be assumed.
I would love to determine if a Roth like work for me but I just don’t see it. I just retired at 69 years of age. I never did Roth because I was already in the 34% tax bracket. In my first year if retirement, I plan on starting Social security this July and I will receive the maximum amount allowed, about $4,973 a month. I have a pension of about $76,000 which like social security, will behind t to a cola. I did work in January and also cashed in unused vacation and between pay and vacation, that adds in another $56,000.
The bigger issue is that while I have private health and life insurance for life, I wanted to add Medicare part b as a wrap around and I’m already going to because to an Irmma so a Roth conversion will increase that irmma significantly. I will pay income tax on social security (85%) but no state tax on SS. I do have a 401k that after splitting it through divorce is still fairly large but since I have the pension and SS, it’s not clear I will need that money but will be hitting RMD in two years.
If you know a way that a Roth IRA conversion makes sense, especially with the 5 year holding period, I’m all ears.
Depends on your needs, but I could definitely see it making sense to do a partial conversion.