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.
I have not yet filled out the tool but am looking forward to it. Sounds promising. One very important thing this video made me realize is that I can save even more tax money by not converting the amount in my IRA that I want to donate to charity upon my death. To be more precise, since I can donate IRA money to non-profits without paying taxes on gains of what I donate, I would actually pay more taxes if I convert what I plan to donate. If I learned just that from this short video, I can only imagine what more I will learn from the rest of your videos. I've been watching a lot of Roth Conversion videos - some good, some bad - and this is the BEST!!! Thank you!
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.
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
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.
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.
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.
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.
If your increase occurs because work and conver sion but expected income is expected to change because of life changes (retirement) you can file notice of expected change and avoid extra Medicare charges for that past income because working.
EXCELLENT! We are using a recent inheritance to pay the taxes on Roth Conversions each of 5 years before RMD starts at age 73. That reduces substantial tax brackets during RMDs and when we die our heirs inherit the Roth tax free.
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.
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.
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.
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.
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.
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..
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).
Social Security for me is taxed up to 85%. I am old enough to need to make an annual RMD. I don’t have a use for the $30,000 ish RMD. I use the RMD to pay the taxes for a $100,000 annual ROTH conversion. The tax bracket stays the same at 22%. If one spouse dies, then the tax bracket increases for the conversions. The ROTH conversion is an easy way to put surplus money into a ROTH at no change in taxes. Eventually, all the 401k will get converted.
Your videos are all really helpful. I also used the software to see if a Roth conversion would help me, but it won’t. However, the tool helped me to see that I should wait until 70 to take social security, and it also got me thinking about equity location, which I had never considered before.
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.
True, in general, but there are possible "tax cliffs" where deductions or benefits are no longer available because you exceeded income thresholds, or 1/2 of soc sec income can suddenly become taxable by crossing a threshold.
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
Good info, lots to consider here. I have a large IRA/401k, and small Roth accounts. We’re flirting with a 24% bracket, so it doesn’t make sense to do a conversion this year. But wife is planning to retire next year at 59. That will be a good time to start.
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.
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!
Wow, thanks for the walkthrough and the pointer to the tool. I’ve been working with my own spreadsheet trying to make these calculations. Interesting all the variables you can tweak to maximize the result.
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.
As someone who maxed pretax limits for about the last 12-15 years of my career, I wish I'd known more about RMDs and the IRMAA surcharges back then. I was totally focused on building the retirement balance while minimizing taxes. Did a Roth too for most of the last 20 years. Now I'm doing Roth conversions and pretax distributions for spending. The goal is to take taxable income to the edge of the edge of the lower IRMAA threshold to reduce the pretax balance in the golden years post-ACA until SS starts at 70, with limited conversions at age 70&71. It's a PITA to run all these calculations.
appreciate these videos a lot! Thank you. I too noticed the client age goes up to 106! Wonder this: if bring endpoint to "more usual" life expectancy of, say, 92, how do these final savings numbers change?
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.
Please do consider that the dividends and interest in your taxable accounts will be taxed as ordinary income EVEN IF they are invested back automatically without taking a distribution. When determining what your income bracket would be while determining how much Roth Conversion you can afford to take in a given year while staying within a target tax rate.
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.
The account growth does not change the math unless it is negative in which case conversion is less attractive. Positive growth whether 5% or 15% per year if you pay the same % tax will not change the result.
if you have a few million in tax deferred accounts and take out an extra $50K / year to convert before RMDs let's say 8-10 years, that's $400K to $500K total conversions that would have been taxed as ordinary income; but if you have a few million tax deferred and it's still growing for those 8-10 years, that $400K - $500K conversion isn't going to make a big impact on your future RMDs...this is my issue: I'd have to take out too much each year to convert, pushing my tax bracket higher during those early retirement years before RMD, for it to matter when RMDs hit. I'm unable to find a path where Roth IRA conversions make sense. If my combined SSI and withdrawals from deferred accounts keep me in the 24% tax bracket, my tax deferred accounts will continue to grow faster than my withdrawals, unless the markets drop for an extended period of time or I move up to a higher tax bracket and withdraw more.
Thanks for the video and the understandable presentation of an often complex topic. I just retired at 67 and I’m considering moving to Spain where Roth IRA and Roth 401(k) are not recognized. So, Roth is not a panacea. Roth income would be considered as ordinary income and taxed as such. Although you’d be exempt from US federal income taxes, Spain will ask for its share of taxes as you did not pay taxes to them. Effectively raising your taxes in retirement. There is also no benefit in the double taxation treaty between US and Spain on this. Some European countries do recognize Roth generated income like the UK, France and Belgium but Spain and Portugal, two popular retirement destinations do not. I haven’t done my 2023 tax return yet but I expect to be in the 32% tax bracket. I’m not filing for social security benefits until I’m 70 and will take distributions from my 401(k) in the interim. My SSB will be substantial thus pushing me into the 85% (of SSB) taxable category. Between now and 70 I can control the withdrawal amount out of my 401(k) to lower the RMD when I reach 73. My calculations and projections on my 401(k) future growth and annual income generated there from will likely keep me in the same or slightly higher tax brackets. Since Roth is not an option for me, can you suggest other strategies to shelter future income from taxes?
My wife and I are in a very similar situation. We are planning to move to Spain this fall. I will soon be 62, and I intend to work another couple of years remotely on the DNV. I'm still doing Roth conversions now. We recently spoke with a Spainish tax lawyer. They will only tax the gains within the Roth, and only if you make withdrawals. I don't intend to even touch this Roth money for a long, long time, and who knows, may return to the states to live one day where it will be completely tax-free. We will live off of other income while residing in Spain. Also, move to Spain after July 1st, 2024, and you won't be paying any Spanish taxes until Apr 2026. Best wishes to you! Maybe we will run into each other there!
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'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.
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.
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.
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!
Thanks for the video. One thing to touch on is the comparison of paying for the Taxes out of Converted Funds or pay the taxes from Brokerage Accounts or Savings. If you don't have a Brokerage Account, it will come from savings. If not enough savings, it will have to come from the 401K account which will impact future earnings after the conversion. For those already retired...... If you are receiving ACA subsidies it could wipe those out also. Insurance is not getting cheaper. Lots to unpack if you are considering a conversion and just like SS decisions, everyone has a different scenario. There is a limit to how much most of these Financial Videos can share.
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.
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.
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.
I don't understand your suggestion that instead of a Roth Conversion you may want to take a distribution from your Trad IRA and put it in savings. Savings accounts have virtually no growth, so why not convert to ROTH where presumably you are getting a higher return? You can withdraw funds from the Roth as needed and any growth will be tax free, whereas you'll pay tax on the interest from savings account. Of course this is assuming one is over 59.5 years old.
My daughter has a medical problem that will need life long assistance . I would like to financial , how can I put the Roth in a special needs to take advantage of the normal ten year period ? I realize you just cannot transfer to trust without cashing it out but I heard there is a way . Thx u
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.
@@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.
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.
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.
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.
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.
Why would you not convert the entire IRA in one year? 2/3s to the Roth 1/3 to pay the tax owed. IRMAA goes to max value in two years, but the Medicare surcharge only lasts one year and drops back when the income goes back to normal.
How much would it cost to get additional or full access to the software? I subscribe to new retirement but find RC to be better suited for my needs. However, I don't believe the numbers are realistic. Inflation seems to be set at 2.5% for the first year and 1.5% for the remainder of the plan. Of course I've seen many training videos that show enhanced capabilities that are not present in the version I'm working with so I'm wondering if it's possible to gain more access to those capabilities.
Here is where I struggle. I currently at the top of the 22% bracket with a 7 figure IRA. Advice is often to convert to the top of the 24% bracket before 2026 when it turns into the 28% bracket. I would also have 5% state tax. If I do nothing and wait for RMDs and live off other money to draw it down so by RMD age all I have is SS plus my taxable IRA withdrawals. If my IRA grows to $5m the year one RMD will be about $200k and increase annually. Added to my SS that seems to be about what I project is needed to live on adjusting for 15 years of inflation and should be well below inflation adjusted IRMAA limit. That would put me in the 25% bracket adjusted for inflation. Assuming SS eats up the standard deduction, I will pay 10% and 15% on some of my RMD and only pay 25% on a portion. The average will be less than the 24% paid today to convert and I am paying with future dollars and avoided the potential disaster of a market drop soon after converting. Also if I move to a zero tax state in retirement I will save another 5% in state tax.
I’m in similar position. Think you’re going to find a very large portion of your social security is going to become taxable when your RMDs kick in. That creates zones of double taxation that can/will elevate your marginal tax rate well above 25%.
in a few years, due to medical conditions, I will be off of work. I will be, hopefully, living off of rental income from my properties. Would that be an ideal time to Roth convert?
Hi Kevin, Just checking if you saw my recent question, as I cannot see in RC the edit button you show at 11:35 to limit the number of years you do the Roth conversions. Thanks
I'm not fully done with this video yet but if you didn't mention it; if your age is before 59 1/2 years old and you convert or roll over money from a retirement account do Not take out money from the account as you will be hit with the 5 year rule where then you will be subjected to the 10% Tax anyways.
Great video, I have worked all my life without thinking about my retirement. Now my kids are growing fast, the way I am spending my savings, it has come to my attention that at my old age, I will have no jobs, no money left and no retirement funds to fall back to. So I am asking what do I need to do and how do I begin investing in my retirement. I just need professional advice. Thanks.
I am 69, retiring next spring. Will use a little out of the IRAs for living expenses. Should I do a Roth conversion? I already have some money In a Roth.
Is it too late for us?! We came to retirement planning late in the game. I'm 66, my husband is 68. We're both still working making more than ever, but we figured we couldn't retire before 70 because we only have like $750k in 401ks. Would converting to Roth's still make sense for us?
Im confused. This has nothing ro do with mega backdoor roth conversions? It is about taking your already 401k tax deferred and converting to roth ira earlier? This strategy is about getting tour money out of an already tax deferred 401k? Do i understand that correctly?
Big sequence of returns risk by pulling that much out in the early years (to pay the tax), would definitely be worth running Monte Carlo, not just assuming x% return every year.
Through divorce I will be getting a portion of the community 401k/ira account. What would you advise me to make sure I will not pay any tax on the amount. I currently have a Roth IRA account to which I’m thinking of moving my share to. I am 66 yo. My only asset is the equity on my house. Thanks for your thoughts.
Is the fact that your converting it to a Roth and a son or daughter inherits it she has 10 years of tax free growth before she has to dissolve the Roth is this taken into account considering it could double as well someone could easily be above the max inheritance by well over a large Ira you convert.
What I think is missing is what the amount you would have from leaving the money needed to pay the taxes on the conversion. It would far exceed the tax savings. Even after paying tax on the growth for the money that you didn’t use to pay for the taxes on the conversion.
If pension and $61k traditional IRA are your only source of income it makes little sense to convert t-IRA to Roth IRA as you're at essentially on a "fixed" income that's unlikely to propel you to a higher federal tax bracket.
I am really mad at myself as I learned this stuff. My biggest traditional IRA is $622K. Over the years, I contributed $232k pretaxed with a company match of $81k. I wish now I had pay taxes back then and did a conversion.. I now have $300k taxable profit that could have been tax free😢. I am 62 and retired now for 3 years. Hubby still working. We are in the 22% bracket. I can convert about $83k before moving to the next bracket so that is my plan. Also keeping an eye on IRMAA.
@@foundryfinancial Thanks for the heads up. I do have a rental property and interest bearing accounts. I also read currently it is not indexed for inflation. Is NIIT based on MAGI and IRMAA based on taxable income?
The thing I do not understand is…. If someone is transferring $50,000 from 401K to Roth… in addition to that $50,000 being transferred, they have to pay Tax on it.. If 15% Tax Bracket that would be and additional $7500 I will have pay to do this deal. Less money to invest in my other accounts.
All of this is a headache....however, I have a 401K with my employer and starting in 2014 we were are are allowed to put that money into ROTH 401K. So now I have money in both ROTH and the old traditional. These monies are in stocks so my headache is from what stock does this money come from. All I got from FIDELITY was a value number for traditional and ROTH. 🤔 Would it have been better to convert the traditional amount when the stock mart hit its low with Joe Biden a year or two ago? As of March 2024 the market has been on a roll at least the last 6 months. More to convert yes with a higher market? What a headache 😷
Converting from a pre-tax account to a Roth IRA during a stock crash provides powerful results. As the market recovers, all those gains are tax free. And, you paid lower taxes on the lower stock prices when you converted.
The conversion only counts as income if you deducted the money from your taxes for the year you contributed. If you leave it as a non deductible contribution you can convert to roth with no penalties. You have to leave it in for 5 years as well.
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
Hello, the IRS says and i quote... "Social Security does not count pension payments, annuities, or the interest or dividends from your savings and investments as earnings. They do not lower your Social Security retirement benefits." However I hear you cautioning that investment income may reduce SS benefit in your videos?
Because there’s a difference between taxes and lowering payments. It can trigger a tax on Social Security. I have an entire video where I cover Social Security and provisional income.
As an enthusiast, I would like to know the most effective strategy during this period of volatility with the rates? My portfolio is in (20% Index funds, 20% ISA/SIPP and other assets). Right now I want to explore different strategies to benefit from a potential bubble.
This is the exact thought process of most persons handling their portfolio themselves. I will advice you engage with expert guidance to help you make smarter portfolio decisions and avoid any fiasco
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?
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.
Hi..I have a question about inheritance iras..I would like to convert the taxable money coming out of the inheritance account and transfer to a Roth..is that a possibility? I'm 53 and still working..I don't want to just cash out the inheritance iras without putting it to good use. I know I'm supposed to take all the money out within 10 years with the inheritance..what are my options? Thanks
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.
I have not yet filled out the tool but am looking forward to it. Sounds promising.
One very important thing this video made me realize is that I can save even more tax money by not converting the amount in my IRA that I want to donate to charity upon my death. To be more precise, since I can donate IRA money to non-profits without paying taxes on gains of what I donate, I would actually pay more taxes if I convert what I plan to donate.
If I learned just that from this short video, I can only imagine what more I will learn from the rest of your videos. I've been watching a lot of Roth Conversion videos - some good, some bad - and this is the BEST!!! Thank you!
This video represents exactly how UA-cam can democratize financial planning and freedom. Excellent content. Thank you!
Thank you!
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.
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.
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.
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.
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.
@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.
If your increase occurs because work and conver sion but expected income is expected to change because of life changes (retirement) you can file notice of expected change and avoid extra Medicare charges for that past income because working.
EXCELLENT! We are using a recent inheritance to pay the taxes on Roth Conversions each of 5 years before RMD starts at age 73. That reduces substantial tax brackets during RMDs and when we die our heirs inherit the Roth tax free.
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.
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.
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.
Thank you very much Kevin. The demo makes this topic a lot more relatable rather than simply explaining the components. Much appreciated.
My pleasure.
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.
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 already made enough profit in my Roth to cover the taxes I paid last year on my conversion. Yay!
Social Security for me is taxed up to 85%. I am old enough to need to make an annual RMD. I don’t have a use for the $30,000 ish RMD. I use the RMD to pay the taxes for a $100,000 annual ROTH conversion. The tax bracket stays the same at 22%. If one spouse dies, then the tax bracket increases for the conversions. The ROTH conversion is an easy way to put surplus money into a ROTH at no change in taxes. Eventually, all the 401k will get converted.
Your videos are all really helpful. I also used the software to see if a Roth conversion would help me, but it won’t. However, the tool helped me to see that I should wait until 70 to take social security, and it also got me thinking about equity location, which I had never considered before.
Excellent video. Thoughtfully laid out and easy to understand.
Thanks, Troy!
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.
True, in general, but there are possible "tax cliffs" where deductions or benefits are no longer available because you exceeded income thresholds, or 1/2 of soc sec income can suddenly become taxable by crossing a threshold.
Agreed...there is a difference between the "tax bracket rate" and the "effective tax rate" (tax paid divided by taxable income)
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?
Good info, lots to consider here. I have a large IRA/401k, and small Roth accounts. We’re flirting with a 24% bracket, so it doesn’t make sense to do a conversion this year. But wife is planning to retire next year at 59. That will be a good time to start.
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.
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!
Wow, thanks for the walkthrough and the pointer to the tool. I’ve been working with my own spreadsheet trying to make these calculations.
Interesting all the variables you can tweak to maximize the result.
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.
Great job of making me very complex topic extremely understandable!
Thanks!
As someone who maxed pretax limits for about the last 12-15 years of my career, I wish I'd known more about RMDs and the IRMAA surcharges back then. I was totally focused on building the retirement balance while minimizing taxes. Did a Roth too for most of the last 20 years. Now I'm doing Roth conversions and pretax distributions for spending. The goal is to take taxable income to the edge of the edge of the lower IRMAA threshold to reduce the pretax balance in the golden years post-ACA until SS starts at 70, with limited conversions at age 70&71. It's a PITA to run all these calculations.
Love how these analyses always show people living into their hundreds! Wow.
My mother is 98
appreciate these videos a lot! Thank you. I too noticed the client age goes up to 106!
Wonder this: if bring endpoint to "more usual" life expectancy of, say, 92, how do these final savings numbers change?
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.
Please do consider that the dividends and interest in your taxable accounts will be taxed as ordinary income EVEN IF they are invested back automatically without taking a distribution. When determining what your income bracket would be while determining how much Roth Conversion you can afford to take in a given year while staying within a target tax rate.
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.
The account growth does not change the math unless it is negative in which case conversion is less attractive. Positive growth whether 5% or 15% per year if you pay the same % tax will not change the result.
if you have a few million in tax deferred accounts and take out an extra $50K / year to convert before RMDs let's say 8-10 years, that's $400K to $500K total conversions that would have been taxed as ordinary income; but if you have a few million tax deferred and it's still growing for those 8-10 years, that $400K - $500K conversion isn't going to make a big impact on your future RMDs...this is my issue:
I'd have to take out too much each year to convert, pushing my tax bracket higher during those early retirement years before RMD, for it to matter when RMDs hit.
I'm unable to find a path where Roth IRA conversions make sense.
If my combined SSI and withdrawals from deferred accounts keep me in the 24% tax bracket, my tax deferred accounts will continue to grow faster than my withdrawals, unless the markets drop for an extended period of time or I move up to a higher tax bracket and withdraw more.
Good content. I am looking forward to you activating the "Tax" tab so I can run through different conversion scenarios.
Should be live.
Investments are the roots of financial security; the deeper they grow, the stronger your future will be."
Thanks for the video and the understandable presentation of an often complex topic.
I just retired at 67 and I’m considering moving to Spain where Roth IRA and Roth 401(k) are not recognized. So, Roth is not a panacea. Roth income would be considered as ordinary income and taxed as such. Although you’d be exempt from US federal income taxes, Spain will ask for its share of taxes as you did not pay taxes to them. Effectively raising your taxes in retirement. There is also no benefit in the double taxation treaty between US and Spain on this. Some European countries do recognize Roth generated income like the UK, France and Belgium but Spain and Portugal, two popular retirement destinations do not.
I haven’t done my 2023 tax return yet but I expect to be in the 32% tax bracket. I’m not filing for social security benefits until I’m 70 and will take distributions from my 401(k) in the interim. My SSB will be substantial thus pushing me into the 85% (of SSB) taxable category. Between now and 70 I can control the withdrawal amount out of my 401(k) to lower the RMD when I reach 73. My calculations and projections on my 401(k) future growth and annual income generated there from will likely keep me in the same or slightly higher tax brackets.
Since Roth is not an option for me, can you suggest other strategies to shelter future income from taxes?
My wife and I are in a very similar situation. We are planning to move to Spain this fall. I will soon be 62, and I intend to work another couple of years remotely on the DNV. I'm still doing Roth conversions now. We recently spoke with a Spainish tax lawyer. They will only tax the gains within the Roth, and only if you make withdrawals. I don't intend to even touch this Roth money for a long, long time, and who knows, may return to the states to live one day where it will be completely tax-free. We will live off of other income while residing in Spain. Also, move to Spain after July 1st, 2024, and you won't be paying any Spanish taxes until Apr 2026. Best wishes to you! Maybe we will run into each other there!
I’m 32 and have over $200k in my Roth IRAs. Good plan to convert in low income years.
You are in the good shape in your retirement life.
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'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.
Where is the link to the software? Thanks
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.
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.
Thanks for the video.
One thing to touch on is the comparison of paying for the Taxes out of Converted Funds or pay the taxes from Brokerage Accounts or Savings. If you don't have a Brokerage Account, it will come from savings. If not enough savings, it will have to come from the 401K account which will impact future earnings after the conversion. For those already retired...... If you are receiving ACA subsidies it could wipe those out also. Insurance is not getting cheaper. Lots to unpack if you are considering a conversion and just like SS decisions, everyone has a different scenario. There is a limit to how much most of these Financial Videos can share.
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!
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.
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!
Would be helpful to see the benefits offset by up front tax payments and the future benefits discounted back to today. Net present value calculation.
If I'm retired and living off my savings (no income) and convert an amount equal to the standard deduction, the I would owe zero taxes?
I don't understand your suggestion that instead of a Roth Conversion you may want to take a distribution from your Trad IRA and put it in savings. Savings accounts have virtually no growth, so why not convert to ROTH where presumably you are getting a higher return? You can withdraw funds from the Roth as needed and any growth will be tax free, whereas you'll pay tax on the interest from savings account. Of course this is assuming one is over 59.5 years old.
Maybe when he says savings he isn’t referring to a traditional bank savings account or mma that currently pays 3-5%?
Kevin, thanks for the video. So many things to consider! I need an advisor to help me through this.
My daughter has a medical problem that will need life long assistance . I would like to financial , how can I put the Roth in a special needs to take advantage of the normal ten year period ? I realize you just cannot transfer to trust without cashing it out but I heard there is a way . Thx u
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.
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.
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.
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. 👍🏼
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.
is there a link to the software?
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.
Why would you not convert the entire IRA in one year? 2/3s to the Roth 1/3 to pay the tax owed. IRMAA goes to max value in two years, but the Medicare surcharge only lasts one year and drops back when the income goes back to normal.
Tax brackets, NIIT, IRMAA, etc - can save a lot of money
Thank you very much, Kevin.
How much would it cost to get additional or full access to the software?
I subscribe to new retirement but find RC to be better suited for my needs.
However, I don't believe the numbers are realistic.
Inflation seems to be set at 2.5% for the first year and 1.5% for the remainder of the plan.
Of course I've seen many training videos that show enhanced capabilities that are not present in the version I'm working with so I'm wondering if it's possible to gain more access to those capabilities.
When would it make more sense to simply withdraw from the 401k first versus doing a Roth conversion?
Here is where I struggle. I currently at the top of the 22% bracket with a 7 figure IRA. Advice is often to convert to the top of the 24% bracket before 2026 when it turns into the 28% bracket. I would also have 5% state tax. If I do nothing and wait for RMDs and live off other money to draw it down so by RMD age all I have is SS plus my taxable IRA withdrawals. If my IRA grows to $5m the year one RMD will be about $200k and increase annually. Added to my SS that seems to be about what I project is needed to live on adjusting for 15 years of inflation and should be well below inflation adjusted IRMAA limit. That would put me in the 25% bracket adjusted for inflation. Assuming SS eats up the standard deduction, I will pay 10% and 15% on some of my RMD and only pay 25% on a portion. The average will be less than the 24% paid today to convert and I am paying with future dollars and avoided the potential disaster of a market drop soon after converting. Also if I move to a zero tax state in retirement I will save another 5% in state tax.
Year one RMD isn’t the problem. Look at year 5,10,15 etc. to see the broader picture.
I’m in similar position. Think you’re going to find a very large portion of your social security is going to become taxable when your RMDs kick in. That creates zones of double taxation that can/will elevate your marginal tax rate well above 25%.
Yes RMD’s increase but so do the inflation adjustments to tax brackets and the standard deduction.
in a few years, due to medical conditions, I will be off of work. I will be, hopefully, living off of rental income from my properties. Would that be an ideal time to Roth convert?
Hi Kevin, Just checking if you saw my recent question, as I cannot see in RC the edit button you show at 11:35 to limit the number of years you do the Roth conversions. Thanks
I'm not fully done with this video yet but if you didn't mention it; if your age is before 59 1/2 years old and you convert or roll over money from a retirement account do Not take out money from the account as you will be hit with the 5 year rule where then you will be subjected to the 10% Tax anyways.
Great video, I have worked all my life without thinking about my retirement. Now my kids are growing fast, the way I am spending my savings, it has come to my attention that at my old age, I will have no jobs, no money left and no retirement funds to fall back to. So I am asking what do I need to do and how do I begin investing in my retirement. I just need professional advice. Thanks.
Could you please refer me to your expert, I will like to look him up.
Shouldn't the goal be to increase my net worth rather than just saving tax money? Can you incorporate scenario NPV into this analysis?
I am 69, retiring next spring. Will use a little out of the IRAs for living expenses. Should I do a Roth conversion? I already have some money In a Roth.
Is it too late for us?! We came to retirement planning late in the game. I'm 66, my husband is 68. We're both still working making more than ever, but we figured we couldn't retire before 70 because we only have like $750k in 401ks. Would converting to Roth's still make sense for us?
where are the tools? Links to your "non-sponsored" financial firm to make an appointment, but none of the spreadsheets you demo'd
Im confused. This has nothing ro do with mega backdoor roth conversions? It is about taking your already 401k tax deferred and converting to roth ira earlier? This strategy is about getting tour money out of an already tax deferred 401k? Do i understand that correctly?
Thanks for the great video!
Could you do the same scenario for the couple retired at 55?
Big sequence of returns risk by pulling that much out in the early years (to pay the tax), would definitely be worth running Monte Carlo, not just assuming x% return every year.
Through divorce I will be getting a portion of the community 401k/ira account. What would you advise me to make sure I will not pay any tax on the amount. I currently have a Roth IRA account to which I’m thinking of moving my share to. I am 66 yo. My only asset is the equity on my house. Thanks for your thoughts.
I have a Merrill Lynch advisor. As a CFP, would you be offended if your client told you they wanted to also see a CPA to discuss tax strategies?
Is the fact that your converting it to a Roth and a son or daughter inherits it she has 10 years of tax free growth before she has to dissolve the Roth is this taken into account considering it could double as well someone could easily be above the max inheritance by well over a large Ira you convert.
What I think is missing is what the amount you would have from leaving the money needed to pay the taxes on the conversion. It would far exceed the tax savings. Even after paying tax on the growth for the money that you didn’t use to pay for the taxes on the conversion.
I retired early as a teacher with a pension I would not get SS. I have only about 61,000 in a traditional IRA
Does a ROTH IRA make sense for me?
If pension and $61k traditional IRA are your only source of income it makes little sense to convert t-IRA to Roth IRA as you're at essentially on a "fixed" income that's unlikely to propel you to a higher federal tax bracket.
I am really mad at myself as I learned this stuff. My biggest traditional IRA is $622K. Over the years, I contributed $232k pretaxed with a company match of $81k. I wish now I had pay taxes back then and did a conversion.. I now have $300k taxable profit that could have been tax free😢. I am 62 and retired now for 3 years. Hubby still working. We are in the 22% bracket. I can convert about $83k before moving to the next bracket so that is my plan. Also keeping an eye on IRMAA.
Watch out for NIIT if you have taxable accounts.
@@foundryfinancial Thanks for the heads up. I do have a rental property and interest bearing accounts. I also read currently it is not indexed for inflation. Is NIIT based on MAGI and IRMAA based on taxable income?
The thing I do not understand is…. If someone is transferring $50,000 from 401K to Roth… in addition to that $50,000 being transferred, they have to pay Tax on it.. If 15% Tax Bracket that would be and additional $7500 I will have pay to do this deal. Less money to invest in my other accounts.
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.
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.
All of this is a headache....however, I have a 401K with my employer and starting in 2014 we were are are allowed to put that money into ROTH 401K. So now I have money in both ROTH and the old traditional. These monies are in stocks so my headache is from what stock does this money come from. All I got from FIDELITY was a value number for traditional and ROTH. 🤔 Would it have been better to convert the traditional amount when the stock mart hit its low with Joe Biden a year or two ago? As of March 2024 the market has been on a roll at least the last 6 months. More to convert yes with a higher market? What a headache 😷
Converting from a pre-tax account to a Roth IRA during a stock crash provides powerful results. As the market recovers, all those gains are tax free. And, you paid lower taxes on the lower stock prices when you converted.
The conversion only counts as income if you deducted the money from your taxes for the year you contributed. If you leave it as a non deductible contribution you can convert to roth with no penalties. You have to leave it in for 5 years as well.
457 plan?
If a Roth conversion is taxed as ordinary income, then can you lose your ACA subsidy by withdrawing too much?
Exactly my situation!
@@pinkmoonrisin Have you figured it out?
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.
Good video- Where can I download a spreadsheet to analyze
How about same situation, but with Munis in the brokerage account.
Why are there no limits on a conversion but there are limits on contributions?
You’ll have to ask Congress. :)
Hello, the IRS says and i quote... "Social Security does not count pension payments, annuities, or the interest or dividends from your savings and investments as earnings. They do not lower your Social Security retirement benefits." However I hear you cautioning that investment income may reduce SS benefit in your videos?
Because there’s a difference between taxes and lowering payments. It can trigger a tax on Social Security. I have an entire video where I cover Social Security and provisional income.
@@foundryfinancial Thanks for you prompt response Kevin. I am further examining...
As an enthusiast, I would like to know the most effective strategy during this period of volatility with the rates? My portfolio is in (20% Index funds, 20% ISA/SIPP and other assets). Right now I want to explore different strategies to benefit from a potential bubble.
This is the exact thought process of most persons handling their portfolio themselves. I will advice you engage with expert guidance to help you make smarter portfolio decisions and avoid any fiasco
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).
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.
Are the rules different with a 457 account vs 401? Do you have to be retired before you can do conversions?
How do I get access to the edit button where you can adjust how many years to convert?
It’s not available to non-advisors. Wish it was!
Hi..I have a question about inheritance iras..I would like to convert the taxable money coming out of the inheritance account and transfer to a Roth..is that a possibility? I'm 53 and still working..I don't want to just cash out the inheritance iras without putting it to good use. I know I'm supposed to take all the money out within 10 years with the inheritance..what are my options? Thanks
What about an inheritance?