I watched the market and every time it tanked I moved stock from IRA to Roth. Now in less than a year that stock profit is worth way more than the taxes I paid.
Very well done. I would add the possibility of one spouse passing away and pre-tax monies being subject to single filer tax brackets as another major consideration for Roth conversions.
Excellent analysis of Roth conversions! There's also a psychological component that might arise in the context of Roth conversions. A former colleague of mine retired a few years ago and we've kept in touch. We've discussed Roth conversions and I asked if he was planning on doing some. He said he'd done a little bit, but his financial advisor told him he could do more as the tax savings and RMD reductions seemed to work for him. When I asked him why he didn't do more, he looked me in the eye and said: "There's no way I'm writing a six-figure check to the IRS!" 😀
Another great episode! We are converting through the 22% bracket for 24 and 25 while we KNOW the tax factors. Future years will depend on how/if things change. IMO - the real win w/ Roth money is the flexibility and 'tax insurance' it provides, whether it be a large one-time draw in retirement, SS taxability, legacy tax on heirs, hefty tax increase for surviving spouse, etc.
Extremely comprehensive overview on Roth Conversions! Thank you James. The one discussion point that I didn't hear you cover was should your spouse inherent your IRA (because you passed) and now will pay federal taxes as a single person vs married filing jointly! Part of both a life expectancy and legacy discussion. Perhaps too, emergency should one spouse pass unexpectedly.
Thanks, always good. Also know that the conversion has an access cost of 5 years, should probably be done after retirement but before taking social security, with a bigger window if you take SS at 70, but could impact IRMA. So it is quite complex. Also, I think of conversion as a hedge against a big bear market - do it when market is down.
Fantastic explanation of Roth conversions, when and when not to do them. This is a very nuisanced decision. There are some many planners preaching Roth conversions without taking the full picture into consideration. I applaud your efforts to educate people.
Great info... I'm hoping someday your company will accept clients with sub 2 million portfolios (1-2 million) but in the meantime I am about to retire at 56 and all the info that you and Ari have been putting out on youtube is great for all those saving and entering retirement early. I have seen many other youtube information on retirement and ROOT outshines them all. In a few months I plan on getting the retirement academy you guys offer for more information on an early retirement. Thanks.
Great explanation with easy to understand scenarios. If someone brought this up already, apologies...."Trump" tax rate sunset period is next year so basically almost all of us wont be able to use the "same tax rate as you're presently in" discussion. I'm also dubious as many others when you here analysts say "You'll be in a lower tax break when you retire"...that one KILLS ME. Most retirees have lost write-offs for dependents, home mortgages, business expenses unless still working...so being in the same tax bracket in a lot of cases is a pipe dream. Also, I'm fully bought into the hype about what congress will have to do to make its obligations with the national debt in the future (read that as incrase rates.) I really appreciate the comments about IRMAA as well. The "Tax Torpedo" is real!
Would LOVE call in show with “real” experiences. Long ago on PBS there was an excellent Saturday morning finance show with Chris Farrell - Sound Money. I even spoke to Mr. Bogle on that show and asked for advice:)
One of my primary reasons for conversion is the widow’s tax penalty. Based on longevity estimators, my wife will likely outlive me by at least 10 years. She’ll have RMDs on our combined IRAs after I’m gone, so I want to get most of it converted since she’ll be filing single (I assume 😆). I do plan to leave enough in the IRAs for a year or two of long term care; she may end up getting a good tax deduction on that expense. Thanks for the video.
You are the first person I’ve seen explain how the potential gain on the money used to pay the Roth Conversion taxes would be fully taxable! Paying the taxes from non-IRA funds essentially adds that amount to your Roth account.
Another reason to possibly convert is to minimize the widow tax trap if you have a spouse. Same RMD but potentially in a higher tax bracket when filing as a single.
Hi James. I agree with all your analysis however, I think you left out some other very important variables that I think it would be a good idea for you to let your viewers know so they can make a more complete decision. Those would be: 1) Psychological 2) IRMAA surcharges for Medicare 3) Provisional income for Social Security Number 2 and 3 I know that they don’t require explanation on my part to you. Number 1, Psychological. When people reach their retirement age and the one that has let’s say $1,000,000 in their IRA accounts and another has $800,000 in their Roth IRA account what I believe normally will transpire is the account owner with the IRA account, will psychologically fail to account for taxes when calculating their expenses and believe they can afford much more then the account with the Roth. I know that I would if I didn’t have the financial education that I do and that I believe that 90% of Americans don’t have. And even though no one has a crystal ball, it isn’t hard to imagine with government spending out of control and the national debt now at 35 trillion to rise to 50 trillion in 10 years and the government’s source of revenue only coming in from taxes, that taxes have a much higher bet of going up then staying the same or going down. I can’t see the pace of economical growth be fast enough to overcome this exorbitant government debt. Just saying, only my opinion.
Consensus among my retired friends is to convert to the top of the 24% bracket through next year, then reevaluate based on what happens to the tax brackets after the Trump tax cuts expire.
Don’t forget when you convert you pay all the tax up front in today’s dollars at your highest marginal rate. When you defer you pay slowly over many years with some of the income taxed in lower brackets so even if you are in a higher marginal bracket your effective (average) tax can be lower. In your example of converting to the top of the 24% bracket will create or increase an IRMAA surcharge, and put you into the 3.8% investment tax income threshold if not already there prior to conversion. Even if you will eventually hit the 28% bracket later, your effective rate can be less than 20%. Finally when you defer you take advantage of the standard deduction and tax brackets that adjust for inflation every year.
My plan is to retire early at 59, and to live off of cash savings for several years and to take an amt each year from IRA/401k to convert to add to our existing roths that will fill up the 10% tax bracket after the MFJ standard deduction. I *might* venture above 10% but we'll see. We have pretty low expenses. We will have a lot of cash outside of tax advantaged and tax free that we will be living off for years and delaying SS payments - that will leave my Roths to grow as part of our legacy for family.
Great video! I would add the impact on taxes if one spouse of a married couple dies. While the remaining spouse may stay in the same tax bracket, their standard deduction will decrease leaving them with a greater tax burden unless they withdraw needed income from a Roth, Health Savings Account, or similar tax free account. Also, while waiting for RMDs to kick in, if you can live solely on Social Security, Roth, HSA, etc. tax free withdrawals then you will pay no federal or state income taxes effectively dropping your tax bracket to 0%. These are the primary reasons I'm making Roth conversions prior to taking SS so please let me know if I'm wrong!
Great video James. I wish you would have also talked about including in your decision how making Roth Conversions to allow you to reduce taxes on Social Security and effects on IRRMA too!
Also consider in your early examples where the tax bracket is the same, even if one is paying the same amount, those $$ are worth way more up front due to inflation. Add in theoretical opportunity cost, and it gets even dicier. It all comes down to both the tax bracket at the time the tax is paid, and inflation/value of the dollar at the time the tax is paid.
Everyone always misses the inflation impact. The government taxes investments on “nominal gains.” If half of your “gains” are inflation but you’re taxed on the nominal gain your taxes are effectively doubled. Also consider that true inflation is underreported. Meaning that the tax brackets don’t move as much as they should pushing even more of your nominal gains into higher relative brackets than they should be. When you consider this the bar for doing conversions is much lower than what you think it is. I could easily make the case to do conversions on 50% of your retirement accounts as a baseline, all the way up to 100% if you have a pension or other retirement income. We haven’t even touched on the idea that taxes will likely be higher in the future. The case for leaving a portion out is to fill up lower tax brackets and for charitable donations.
James, I watch your videos quite often so thank you. In this scenario I believe you indicated a wash if you are at the same tax bracket when converting Roth or not converting Roth with your doubling of $10,000 vs $2,000. You did mention once that it would be a taxable event if you took the $2000 and invested instead of converting however, I think that this video did not emphasize how taxing changes the out come of projecting $2k. Here's how I see it. You have $10k and you don't convert but it doubles to $20k in 10 years. You take it out and pay $4k in taxes if in a 20% tax bracket or instead you take $2k cash, convert and the $10,000 turns to $20,000 tax free but the future value of current money (original $2k to convert) with the same doubling would have given you $4,000 and you indicate it's a wash. Maybe I am missing something but here's how I see it. Let's say you don't convert and the $10k doubles to $20k and you pay taxes when you withdraw and are left with $16k in ten years. You also took the $2k and doubled it and it turned to $4k and now it seems you have the same $20k but, the $2,000 of the $4,000 is taxable leaving you with$3,600 not $4k added to the $16k is $19,600. Where as the $2k conversion with cash allows the $10k to be $20k netting a $400 gain over not converting but investing. Did I not understand a certain part of this? Thanks
Maybe I missed it. Did he mention the extra big tax bracket for widows after your spouse passes? Roth helps in the later years for that big RMD tax bracket.
I really don't know my situation in ten, twenty, or thirty years, so I don't have confidence in what my tax rate is going to be. I plan to live off of retirement savings for over ten years before taking Social Security, and we plan to engage in significant QCDs soon after taking SS. By the time RMDs roll around, my current guess is they'll be manageable even without doing Roth conversions. That said, I'll still plan to do Roth conversions to fill any low tax rate brackets if it makes sense during early retirement.
One factor that I have not heard anybody address is the impact of Roth conversions on the future taxability or social security. Does it not make sense to convert and consume most of your tIRAs in the years before you take social security so that one can avoid social security being taxed when you take it. Everyone talks about the tax rate now and the tax rate in the future being the determining factor of whether one should convert, but if I can avoid having social security being taxed for 10. 20 or 30 years in the future, isn't it a smart choice to pay slightly higher taxes for a few years (in my case, 11 years before I turn 70) to do conversions?
Thank you, again, for this clear overview of what to consider in terms of Roth conversions. I am trying to determine whether it makes sense to defer SS until 70 to allow for more Roth conversions. If I convert up to the 24% bracket this year and the equivalent bracket in the future for the next seven years, I will still have over half of my traditional IRAs remaining and gearing up through RMD starting at age 75 to put me in a much higher bracket. I can't figure out whether to forego 3 years of SS distributions to allow for more IRA conversion/future tax savings. Is there a calculator somewhere to help with this? I live overseas so no state income taxes, but I do have to think about taxes in my new country even with the tax treaty with the US. (Capital gains on Roth is taxed.) But that's just to say I don't need to worry about IRMAA or state income tax for now. And it's a given that my SS will always be taxed at the highest percentage. Tchau.
You ignored the tax on the outside money. i.e. the $2k doubles in value, but since it's taxed, you only end up with about $3600. Therefore, even if the tax bracket stays the same, you may still be better off doing the conversion.
I am 50yrs old & originally from the UK. I am now a US citizen. I had a final salary pension with an old company & converted that to a SIPP that is managed in Guernsey. Currently the SIPP is valued ~$900k, with it mostly invested in S&P index. I have ~$450k in my 401k. I have no IRA or ROTH savings. What’s the best tax strategy if I were to retire at 60 with the UK based SIPP?
I could possibly benefit by converting but I already have more in tax free assets (mostly cash value life insurance) than I will ever need in my lifetime. The only thing that can mess up my plan would be a major market decline such as 2008 financial crisis which would be made worse by converting and paying tax on the higher balance. I do plan on reducing RMDs by withdrawing and spending from the tax deferred over the next 10 years, delaying SS and letting all other assets grow. I don’t sell stocks other than to take advantage of losses so will have minimal other income after the IRA withdrawals and SS and RMDs down the road. I project eventually hitting the 28% marginal rate at age 75+ with an effective rate less than 20%. I could convert $100k at 22% today which won’t really move the needle on RMDs, won’t provide meaningful tax benefit and would mean pulling from other assets to live or moving into higher brackets tripping IRMAA surcharges and 3.8% investment tax.
Good content and video. However, and I'm sure it is much more work, having an occasional inset of a "whiteboard" or spreadsheet with the numbers you are discussing would be helpful.
I think assuming the $2K paid out of cash account for taxes would have doubled or grown at the same rate as the money in the Roth is incorrect unless you can achieve 7% CAGR in a "cash" account, fairly unlikely
Gotta also factor in the annoying 5 year hold period on Roth gains, and forecasted withdrawal timeline on Roth. What’s the point of Roth accumulation if you don’t have a plan to consume/utilize it
Thanks. You bring up many great points. There’s another, what if one’s investments lose value? For example, if someone has an IRA which they deliberately use for high risk investments … Investments that could generate a very high return, but could also incur huge losses. Then it might be better not to convert, wouldn’t it?
Roth vs Traditional is only a wash for the same tax bracket now and in the future if one is in the 0% tax bracket for capital gains (which is not likely once SS and RMD's begin). Otherwise, Roth is always the winner. Using the scenario provided and assuming a more realistic 15% capital gains tax rate, the wash situation would be a 20% tax rate now and 17% in the future.
Don’t forget state…I’m in California, sticking with traditional unless I ever spent time somewhere else. Roth conversions would come with 9.3%-11% state tax but since CA doesn’t tax social security my traditional withdrawals will pay 0-1% state tax.
2k in cash would not have doubled because it would never have been invested in the market. It would remain in cash, in an emergency fund, or consumed. This assumption that it would be invested in the market is not realistic.
There is no way to keep up with all of the numbers you discussed. You need a chalkboard, whiteboard or spreadsheet to show examples of the numbers you are spewing out. IMHO.
As someone gets closer to Medicare, your conversion impacts IRMAA penalties. If someone have a million or more to convert, its requires a little more thought.
I will be 62 in a few months and have been retired for almost 4 years and living off my savings. I've been watching a lot of YT videos on retirement , specifically the topics on Roth conversion and when to claim social security benefits. Just wondering what is your take if one's retirement strategy is to simply evaluate the "total net take home amount" from start (All income, Roth conversions, claiming Social Security benefits, RMD, less federal and state taxes, etc.) up until to one's assumed end of life? I understand that numerous assumptions have to be made in any retirement strategy but was wondering if a simpler metric such as looking at the" total net take home amount" makes any sense.
I always hear about decisions based on future tax brackets but I find that guess/determination to be unclear. How would you recommend people forecast their future tax bracket?
James, In your first example you did not include the tax on the $20k gain. The correct calculation: Option 1: Convert $10k from IRA using $2k savings. Result: $20k tax free Option 2: Don't convert, invest $2k. Result 24k taxable at 20% or $19.2k after tax.
I understand you can’t withhold from the converted amount and you would be correct. To pay tax on the conversion you have to have sufficient assets elsewhere.
Not really true. If you now live in NY, NJ or CA and will be moving to FL or TX, you know for a fact you will not be paying a high (top rate over 10%) state income tax.
I watched the market and every time it tanked I moved stock from IRA to Roth. Now in less than a year that stock profit is worth way more than the taxes I paid.
I like this idea ... I guess you move some of it because it going to be a lot of taxes.
Now that was a smart strategy.
Very well done. I would add the possibility of one spouse passing away and pre-tax monies being subject to single filer tax brackets as another major consideration for Roth conversions.
Excellent analysis of Roth conversions!
There's also a psychological component that might arise in the context of Roth conversions.
A former colleague of mine retired a few years ago and we've kept in touch. We've discussed Roth conversions and I asked if he was planning on doing some. He said he'd done a little bit, but his financial advisor told him he could do more as the tax savings and RMD reductions seemed to work for him. When I asked him why he didn't do more, he looked me in the eye and said: "There's no way I'm writing a six-figure check to the IRS!" 😀
Another great episode! We are converting through the 22% bracket for 24 and 25 while we KNOW the tax factors. Future years will depend on how/if things change. IMO - the real win w/ Roth money is the flexibility and 'tax insurance' it provides, whether it be a large one-time draw in retirement, SS taxability, legacy tax on heirs, hefty tax increase for surviving spouse, etc.
Extremely comprehensive overview on Roth Conversions! Thank you James. The one discussion point that I didn't hear you cover was should your spouse inherent your IRA (because you passed) and now will pay federal taxes as a single person vs married filing jointly! Part of both a life expectancy and legacy discussion. Perhaps too, emergency should one spouse pass unexpectedly.
Thanks, always good. Also know that the conversion has an access cost of 5 years, should probably be done after retirement but before taking social security, with a bigger window if you take SS at 70, but could impact IRMA. So it is quite complex. Also, I think of conversion as a hedge against a big bear market - do it when market is down.
Fantastic explanation of Roth conversions, when and when not to do them. This is a very nuisanced decision. There are some many planners preaching Roth conversions without taking the full picture into consideration. I applaud your efforts to educate people.
Great info... I'm hoping someday your company will accept clients with sub 2 million portfolios (1-2 million) but in the meantime I am about to retire at 56 and all the info that you and Ari have been putting out on youtube is great for all those saving and entering retirement early. I have seen many other youtube information on retirement and ROOT outshines them all. In a few months I plan on getting the retirement academy you guys offer for more information on an early retirement. Thanks.
You covered all the angles really well. Thank you for such a thorough explanation.
Great explanation with easy to understand scenarios. If someone brought this up already, apologies...."Trump" tax rate sunset period is next year so basically almost all of us wont be able to use the "same tax rate as you're presently in" discussion. I'm also dubious as many others when you here analysts say "You'll be in a lower tax break when you retire"...that one KILLS ME. Most retirees have lost write-offs for dependents, home mortgages, business expenses unless still working...so being in the same tax bracket in a lot of cases is a pipe dream. Also, I'm fully bought into the hype about what congress will have to do to make its obligations with the national debt in the future (read that as incrase rates.) I really appreciate the comments about IRMAA as well. The "Tax Torpedo" is real!
Would LOVE call in show with “real” experiences. Long ago on PBS there was an excellent Saturday morning finance show with Chris Farrell - Sound Money. I even spoke to Mr. Bogle on that show and asked for advice:)
best explanation I've heard in awhile -although others have given the same information, this was given in a more digestible version
Particularly useful data. SO glad I have found James.
One of my primary reasons for conversion is the widow’s tax penalty. Based on longevity estimators, my wife will likely outlive me by at least 10 years. She’ll have RMDs on our combined IRAs after I’m gone, so I want to get most of it converted since she’ll be filing single (I assume 😆). I do plan to leave enough in the IRAs for a year or two of long term care; she may end up getting a good tax deduction on that expense. Thanks for the video.
You are the first person I’ve seen explain how the potential gain on the money used to pay the Roth Conversion taxes would be fully taxable!
Paying the taxes from non-IRA funds essentially adds that amount to your Roth account.
Another reason to possibly convert is to minimize the widow tax trap if you have a spouse. Same RMD but potentially in a higher tax bracket when filing as a single.
Hi James.
I agree with all your analysis however, I think you left out some other very important variables that I think it would be a good idea for you to let your viewers know so they can make a more complete decision. Those would be:
1) Psychological
2) IRMAA surcharges for Medicare
3) Provisional income for Social Security
Number 2 and 3 I know that they don’t require explanation on my part to you.
Number 1, Psychological.
When people reach their retirement age and the one that has let’s say $1,000,000 in their IRA accounts and another has $800,000 in their Roth IRA account what I believe normally will transpire is the account owner with the IRA account, will psychologically fail to account for taxes when calculating their expenses and believe they can afford much more then the account with the Roth. I know that I would if I didn’t have the financial education that I do and that I believe that 90% of Americans don’t have.
And even though no one has a crystal ball, it isn’t hard to imagine with government spending out of control and the national debt now at 35 trillion to rise to 50 trillion in 10 years and the government’s source of revenue only coming in from taxes, that taxes have a much higher bet of going up then staying the same or going down. I can’t see the pace of economical growth be fast enough to overcome this exorbitant government debt.
Just saying, only my opinion.
Consensus among my retired friends is to convert to the top of the 24% bracket through next year, then reevaluate based on what happens to the tax brackets after the Trump tax cuts expire.
Don’t forget when you convert you pay all the tax up front in today’s dollars at your highest marginal rate. When you defer you pay slowly over many years with some of the income taxed in lower brackets so even if you are in a higher marginal bracket your effective (average) tax can be lower. In your example of converting to the top of the 24% bracket will create or increase an IRMAA surcharge, and put you into the 3.8% investment tax income threshold if not already there prior to conversion. Even if you will eventually hit the 28% bracket later, your effective rate can be less than 20%. Finally when you defer you take advantage of the standard deduction and tax brackets that adjust for inflation every year.
Thank you for that concise and very useful summary.
I enjoy and appreciate your posts. Being a visual person, I'd appreciate some graphics to help me to better follow along
My plan is to retire early at 59, and to live off of cash savings for several years and to take an amt each year from IRA/401k to convert to add to our existing roths that will fill up the 10% tax bracket after the MFJ standard deduction. I *might* venture above 10% but we'll see. We have pretty low expenses. We will have a lot of cash outside of tax advantaged and tax free that we will be living off for years and delaying SS payments - that will leave my Roths to grow as part of our legacy for family.
Thanks James for another very helpful video!
Great video! I would add the impact on taxes if one spouse of a married couple dies. While the remaining spouse may stay in the same tax bracket, their standard deduction will decrease leaving them with a greater tax burden unless they withdraw needed income from a Roth, Health Savings Account, or similar tax free account. Also, while waiting for RMDs to kick in, if you can live solely on Social Security, Roth, HSA, etc. tax free withdrawals then you will pay no federal or state income taxes effectively dropping your tax bracket to 0%. These are the primary reasons I'm making Roth conversions prior to taking SS so please let me know if I'm wrong!
Great episode. Thank you! Looking forward to that call-in type format you have cooking.
Great video James. I wish you would have also talked about including in your decision how making Roth Conversions to allow you to reduce taxes on Social Security and effects on IRRMA too!
This was a great video, I learned a lot. If you could add visuals for the examples, that would be awesome.
Also consider in your early examples where the tax bracket is the same, even if one is paying the same amount, those $$ are worth way more up front due to inflation. Add in theoretical opportunity cost, and it gets even dicier.
It all comes down to both the tax bracket at the time the tax is paid, and inflation/value of the dollar at the time the tax is paid.
Appreciate these Vids. Some stuff might be easier to understand with illustrations. Just a thought
Great information 👍
Everyone always misses the inflation impact.
The government taxes investments on “nominal gains.”
If half of your “gains” are inflation but you’re taxed on the nominal gain your taxes are effectively doubled.
Also consider that true inflation is underreported. Meaning that the tax brackets don’t move as much as they should pushing even more of your nominal gains into higher relative brackets than they should be.
When you consider this the bar for doing conversions is much lower than what you think it is.
I could easily make the case to do conversions on 50% of your retirement accounts as a baseline, all the way up to 100% if you have a pension or other retirement income.
We haven’t even touched on the idea that taxes will likely be higher in the future.
The case for leaving a portion out is to fill up lower tax brackets and for charitable donations.
James, I watch your videos quite often so thank you. In this scenario I believe you indicated a wash if you are at the same tax bracket when converting Roth or not converting Roth with your doubling of $10,000 vs $2,000. You did mention once that it would be a taxable event if you took the $2000 and invested instead of converting however, I think that this video did not emphasize how taxing changes the out come of projecting $2k. Here's how I see it. You have $10k and you don't convert but it doubles to $20k in 10 years. You take it out and pay $4k in taxes if in a 20% tax bracket or instead you take $2k cash, convert and the $10,000 turns to $20,000 tax free but the future value of current money (original $2k to convert) with the same doubling would have given you $4,000 and you indicate it's a wash. Maybe I am missing something but here's how I see it. Let's say you don't convert and the $10k doubles to $20k and you pay taxes when you withdraw and are left with $16k in ten years. You also took the $2k and doubled it and it turned to $4k and now it seems you have the same $20k but, the $2,000 of the $4,000 is taxable leaving you with$3,600 not $4k added to the $16k is $19,600. Where as the $2k conversion with cash allows the $10k to be $20k netting a $400 gain over not converting but investing. Did I not understand a certain part of this? Thanks
Maybe I missed it. Did he mention the extra big tax bracket for widows after your spouse passes? Roth helps in the later years for that big RMD tax bracket.
I really don't know my situation in ten, twenty, or thirty years, so I don't have confidence in what my tax rate is going to be.
I plan to live off of retirement savings for over ten years before taking Social Security, and we plan to engage in significant QCDs soon after taking SS.
By the time RMDs roll around, my current guess is they'll be manageable even without doing Roth conversions. That said, I'll still plan to do Roth conversions to fill any low tax rate brackets if it makes sense during early retirement.
One factor that I have not heard anybody address is the impact of Roth conversions on the future taxability or social security. Does it not make sense to convert and consume most of your tIRAs in the years before you take social security so that one can avoid social security being taxed when you take it. Everyone talks about the tax rate now and the tax rate in the future being the determining factor of whether one should convert, but if I can avoid having social security being taxed for 10. 20 or 30 years in the future, isn't it a smart choice to pay slightly higher taxes for a few years (in my case, 11 years before I turn 70) to do conversions?
I volunteer to call in !
Pleese do a session on step by sted QCD process for tax reduction on RMD taxes - specifically pitfalls in workig with IRA custondian/IRS.
Thank you, again, for this clear overview of what to consider in terms of Roth conversions. I am trying to determine whether it makes sense to defer SS until 70 to allow for more Roth conversions. If I convert up to the 24% bracket this year and the equivalent bracket in the future for the next seven years, I will still have over half of my traditional IRAs remaining and gearing up through RMD starting at age 75 to put me in a much higher bracket. I can't figure out whether to forego 3 years of SS distributions to allow for more IRA conversion/future tax savings. Is there a calculator somewhere to help with this? I live overseas so no state income taxes, but I do have to think about taxes in my new country even with the tax treaty with the US. (Capital gains on Roth is taxed.) But that's just to say I don't need to worry about IRMAA or state income tax for now. And it's a given that my SS will always be taxed at the highest percentage. Tchau.
What an explanation ?
Coulda, shoulda, woulda. my conversion made my tax bill in 4 months of gains. I'm paying my taxes from S.S. in 4 quarterly payments. It worked for me.
James,
You are only considering one doubling. Chances are it’s going to double more than once.
Thanks
You ignored the tax on the outside money. i.e. the $2k doubles in value, but since it's taxed, you only end up with about $3600. Therefore, even if the tax bracket stays the same, you may still be better off doing the conversion.
I am 50yrs old & originally from the UK. I am now a US citizen. I had a final salary pension with an old company & converted that to a SIPP that is managed in Guernsey. Currently the SIPP is valued ~$900k, with it mostly invested in S&P index. I have ~$450k in my 401k. I have no IRA or ROTH savings. What’s the best tax strategy if I were to retire at 60 with the UK based SIPP?
I could possibly benefit by converting but I already have more in tax free assets (mostly cash value life insurance) than I will ever need in my lifetime. The only thing that can mess up my plan would be a major market decline such as 2008 financial crisis which would be made worse by converting and paying tax on the higher balance. I do plan on reducing RMDs by withdrawing and spending from the tax deferred over the next 10 years, delaying SS and letting all other assets grow. I don’t sell stocks other than to take advantage of losses so will have minimal other income after the IRA withdrawals and SS and RMDs down the road. I project eventually hitting the 28% marginal rate at age 75+ with an effective rate less than 20%. I could convert $100k at 22% today which won’t really move the needle on RMDs, won’t provide meaningful tax benefit and would mean pulling from other assets to live or moving into higher brackets tripping IRMAA surcharges and 3.8% investment tax.
Good content and video. However, and I'm sure it is much more work, having an occasional inset of a "whiteboard" or spreadsheet with the numbers you are discussing would be helpful.
I think assuming the $2K paid out of cash account for taxes would have doubled or grown at the same rate as the money in the Roth is incorrect unless you can achieve 7% CAGR in a "cash" account, fairly unlikely
Would you say that if you had a very large IRA balance that would translate to large RMDs would be worth converting some to Roth to reduce RMDs?
Absolutely worth considering.
Gotta also factor in the annoying 5 year hold period on Roth gains, and forecasted withdrawal timeline on Roth. What’s the point of Roth accumulation if you don’t have a plan to consume/utilize it
Thanks. You bring up many great points. There’s another, what if one’s investments lose value?
For example, if someone has an IRA which they deliberately use for high risk investments … Investments that could generate a very high return, but could also incur huge losses. Then it might be better not to convert, wouldn’t it?
Roth vs Traditional is only a wash for the same tax bracket now and in the future if one is in the 0% tax bracket for capital gains (which is not likely once SS and RMD's begin). Otherwise, Roth is always the winner. Using the scenario provided and assuming a more realistic 15% capital gains tax rate, the wash situation would be a 20% tax rate now and 17% in the future.
😊😊😅😅
😊😊😊😊so much 10:58
SD and RMDs are taxed ad ordinary income, not at the capital gains rates.
Don’t forget state…I’m in California, sticking with traditional unless I ever spent time somewhere else. Roth conversions would come with 9.3%-11% state tax but since CA doesn’t tax social security my traditional withdrawals will pay 0-1% state tax.
One more thing to consider if inheritance taxes comes back
2k in cash would not have doubled because it would never have been invested in the market. It would remain in cash, in an emergency fund, or consumed. This assumption that it would be invested in the market is not realistic.
There is no way to keep up with all of the numbers you discussed. You need a chalkboard, whiteboard or spreadsheet to show examples of the numbers you are spewing out. IMHO.
Yup. His planned videos are great, but video-taped podcasts are too hard to follow.
As someone gets closer to Medicare, your conversion impacts IRMAA penalties. If someone have a million or more to convert, its requires a little more thought.
I will be 62 in a few months and have been retired for almost 4 years and living off my savings. I've been watching a lot of YT videos on retirement , specifically the topics on Roth conversion and when to claim social security benefits. Just wondering what is your take if one's retirement strategy is to simply evaluate the "total net take home amount" from start (All income, Roth conversions, claiming Social Security benefits, RMD, less federal and state taxes, etc.) up until to one's assumed end of life? I understand that numerous assumptions have to be made in any retirement strategy but was wondering if a simpler metric such as looking at the" total net take home amount" makes any sense.
I always hear about decisions based on future tax brackets but I find that guess/determination to be unclear. How would you recommend people forecast their future tax bracket?
Maybe I missed it, but I didn’t hear you mention widow(er)’s tax trap, or IRMAA considerations.
Would be better with a white board.
IRMAA....IRMAA....IRMAA....IRMAA....IRMAA....IRMAA....
Raise your hand if you think tax brackets will be the same or lower in 10 years........
Silly question you posed. Yes, the taxes will be either higher or lower. The unknown is which it will be.
James, In your first example you did not include the tax on the $20k gain. The correct calculation:
Option 1: Convert $10k from IRA using $2k savings. Result: $20k tax free
Option 2: Don't convert, invest $2k. Result 24k taxable at 20% or $19.2k after tax.
Sorry, Option 2 should actually be $22k taxable at 20% plus the $2k cost basis or $19.6k
The initial $2k is not taxed, as that is already in savings. Only the gain is taxed.
I'm happy to pay more tax if my income bracket is higher after I retire. That means I will make tons of more money right?
if you withhold 2000 for the conversion, isn't that count as early withdraw and so needing to pay 20% penalty??
I understand you can’t withhold from the converted amount and you would be correct. To pay tax on the conversion you have to have sufficient assets elsewhere.
Nobody KNOWS what their tax situation will be TOMORROW….let alone what political tax laws will be to come.
Not really true. If you now live in NY, NJ or CA and will be moving to FL or TX, you know for a fact you will not be paying a high (top rate over 10%) state income tax.
First
Who thinks like this?? Even novice investors I know (including myself) don't think this way 🤦🏻♂️