Converting to a Roth? Answer These 3 Questions First
Вставка
- Опубліковано 8 кві 2015
- Ask yourself when you'll need the money, what your future tax bracket may be, and where you'll find the money to pay the taxes due upon conversion, says retirement expert Ed Slott.
For all Morningstar videos: www.morningstar.com/cover/vide...
Insightful video. I just want to know best how people split their pay, how much of it goes into savings, spendings or investments. I'm 27, and earn nothing less $150k per year, but nothing to show for it yet.
When people have money, they spend it. And some people spend more money when they have more of it. If you want to improve your financial management, you should consult with a financial advisor.
@@McElvinn That's right, you can avoid the traps of lifestyle inflation by consulting an expert advisor to help you plan for your short- and long-term goals; it all comes down to proper guidance. Over the past two years and six months, I have seen my income build wealth and now have a fully paid off house and at least $650,000 in stocks. All this is the result of subsequent investments with my savings and the application of expert advice.
@@corrySledd Nice, who is the Financial Advisor aiding you if this is not much i'm asking? my retirement plans are going down the drain with my 401k particularly losing everything it gained ever since 2021.
@@AUstinnesc Sure. NICOLE DESIREE SIMON, a well-known person in her field, is my advisor. I got to know her through my wife. It's my wife that has her number, but you could further investigate her credentials and contact her yourself.
@@corrySledd Thank you for the lead. I searched her up, and I have sent her an email. I hope she gets back to me soon.
There are no more recharacterizations, so you need to convert the right amount the first time!! Do NOT convert everything and think you can undo it. The law changed since this video!!
Just learning about SDRIRAs. Could you please elaborate?
I know I would have to pay tax on the converted portion of 401K to Roth IRA but do I have to report the converted amount as income for the year? I think it was reported previously when earned but just no tax deducted.
Amy Hoang Yes, Roth conversions are considered taxable income. Be careful how much you convert so that you don’t put yourself in too high of a tax bracket and end up paying a higher tax rate on that portion of your income.
Nik Nak People used to be able to adjust (aka recharacterize) the amount they converted from tax-deferred accounts to after tax accounts. They could decide the amount they wanted to convert after they saw what their taxes turned out to be. That is no longer permitted. You need to accurately assess your expected tax bracket and try to convert only what will keep you in your desired tax bracket. If you convert too much, you’ll be putting yourself in a higher bracket and will be paying a premium rate of tax on some of that money.
@@kimcowling3296 If you are on Medicare also watch your earned income to make sure the Roth conversion amount doesn't cost you more in Medicare premiums due to IRMAA.
It would nice if he did an updated version of this because i think the recharacterion rules have changed.
One of the lessons I picked early in life was to save maximum before marriage. And by God it was one of the best one. I used to save two thirds of salary at that time. I invested the same in a diversified MF. My patience was tested in year 2017, when my portfolio was down 30%, but still I continued investing. After foreshortening, I used to save on an average 90% of my salary (crazy right!), but my first big break came in 2019, with the help of a trade analyst, I had accumulated enough money to retire! I booked profits and reinvested according to change in objectives I am living a happy and satisfied life! Thanks for the content. Keep them coming!
But frankly, it's often not feasible for people to go into making wise financial choices for their future. Your choice of management should be influenced by your investment style, and that is why I choose se to work with Hestrel. You can look him up Hestrelegan..info on his webpage.
Good to see how you came up here to show keen appreciation to Egan’s prowess, and for others to benefit as well. You’re the real deal.
it has been easier to trade in the market under Hestrel, make the same returns or better, and not have to deal with having a bunch of irregularities that have been taken care of.
Also remember the 5 year rule. You cant take out any investment gains on money converted for 5 years after the conversion without paying taxes on that money. You can take out the priciple, but not the gains.
Great info, thanks!
If you are paying less in taxes now than you would be later, convert. otherwise, don't convert. If you don't touch your IRA till RMDs are due, it might shock you into the 22/25 or greater tax brackets. It can make sense to either convert or drain the IRA before RMD's is required. What also can make sense is living on IRA and delaying SS, this may help keep you from paying higher taxes while drawing SS. It is a complicated analysis that you can only know the answer if you study your situation.
Totally agree. I am retired and do both roth conversion and take ira to live and I have to bite the bullet to pay higher taxes because I need to slowly drain the ira. By 72 when I am forced to take RMD, I'll have SS income that pays all my basic living expenses and my taxes will go up too much if I don't reduce the amount in my ira now. Another point is not to forget if you invest well in your IRA account, it is going to compound to a much larger amount at 72 depending on your time horizon before that.
They should take this down and re~do it. The rules and numbers of all changed since this was made.
He left out the biggest risk of converting. How much do you trust Congress to not change the rules and tax Roth growth returns? It would really suck if you convert and pay the tax and 15 years later Congress needs more tax revenue and there's a couple of trillion dollars in Roth accounts so they decide to tax them.
In effect this would make the Roth accounts almost like traditional ones so I don't think this will happen. However Congress can do other things like reimpose income limits on conversions and change the income limits for Roth IRA contributions to exclude people from using them.
So, if you do nothing, then it doesn’t even matter based on your scenario.
You are correct Kim. This is no longer applicable.
great points!
Awesome advice from Ed as always. One thing I would say though is don't put non-deductible contributions into the same account as deductible contributions. It makes it much more difficult to determine which dollars need to be taxed on withdrawal and which amounts are tax free. Just don't do it.
Thanks for the advice! I have a question: namely does it make more sense to convert over several years or all at once? If I convert all at once my tax bracket could be the max. If I convert over several years, the tax bracket would be lower. I think I would run this through a simulator (computer software) as it's not intuitively obvious how to optimize this in my mind.
Around mid November, do a mock tax return given what you know about your current years income (especially consider long term cap gain and qualified dividends). increase your conversion until you near max out your tax bracket. LTCG and QD are at 0 % at the lower brackets but if you go too far re characterizing your IRA to roth, you might cross a boundary and cause your tax free gains to go to the 15% rate. What it looks like though is a marginal tax rate on the recharacterization is the 12 % plus the 15% added to the dividends/cap gains which is a 27% bracket. Keep up with the tax law changes since you'll probably use an older tax software to do the study but it will have older standard deductions, etc so you'll have to correct your estimates for those changes.
Awesome. Thanks!
You can also lower your RMD by marrying someone 10 years younger than you but has to be listed as the sole beneficiary of the IRA/401k
That would cost you way more in the long run. We're trying to maximize ROI over the life of the retirement savings portfolio.
I wonder if Fidelity keeps track of that last point that Ed mentioned. What parts of your contributions were already taxed or not. When I do my conversion in retirement in about 10 years I'll have to figure out if Fidelity keeps track of that. I have been doing trad 401k for about 25 years, but one of those years I moved my contributions to Roth IRA. I then went back to Trad 401k but I don't remember what year that was.
You should probably figure that out sooner than later
If paying someone to do all this unwinding, you might end up paying an Acct $5k
so you can save $4k.
No. Significantly more
If a retired person who is using 401k money for household expenses, say $40K a year, also has funds outside 401K, is it good to convert $40K per year to Roth, while drawing down funds outside 401K/IRA for household expenses?
Start with traditional and compound your tax savings into the fund. Later start a Roth and have both.
After Tax monies into an IRA, good point on that. I made a point of contributing the allowable amount to my IRA as well as my 401k. I filed a 8606 form to the IRS every year I made a contribution. 20% of these contributions will act like a 'Roth' when RMDs kick in. At least for the first few years of RMDs.
Gary Olafson : I just can’t make sense of what you and he are saying here. I guess I just have to immerse myself further down that rabbit hole to try to understand it more:(
@@knittingknut let me know if you need help ill break it down simple for you knittingknut
The problem with taxable income at retirement is it is double taxed. Taxed as regular income and increasing how much tax on your social security. One of the great tax scams that does not get reported.
Damnnnnn they got rid of recharacterizing
The snowball concept cracks me up. A×B×C = A×C×B. Always, it's called math. The only thing that really matters is will your tax rate be higher or lower in the future.
Don’t forget RMDs!
Very well said. Nice explanation.
I always find it irritating when, during a conversation, a person starts talking before the other person is still speaking.
What about the 5 year rule to wait before you can touch gains?
Good but is old now, dont think you can undo it anymore .
Here I am age 38 just trying to understand what a Roth IRA *is* and how it's different/more beneficial compared to my regular Brokerage account.
Invest $100k into a regular broker account and it grows to $1M over the next 30 years. You would have to pay tax on the $900k profit as you sell off investment to pay bills. Invest $100k into a ROTH and it grows to $1M too, but this time you can sell off investments and owe no taxes.
Why didn’t my financial advisors tell me a long time ago to put money 8n ROTH instead of IRA?
Not sure what your definition of a long time ago is, but the Roth IRA wasn't created until the passing of the Taxpayer Relief Act of 1997. From then on, I am not sure why your adviser didn't recommend it.
Why do I care about my Roth if I’m dead. Use the Roth as a retirement account that you can tap in for retirement without having to wait 5 years.
So confusing from deadlines the ages on and on just pay Uncle Sam
8:30 Frankly, you should've told your mother to convert, and then not touch the account, and you could've inherited it-- or, assuming you could convert it, have her make your children or grandchildren the beneficiary. And you could've paid some of her expenses out of your own taxable account in order to compensate her. Elderly people who are on good terms with their children, and whose children are doing well financially, should ALWAYS do this. And of course you should also help her to avoid realizing capital gains, even if you have to pay for some of her expenses, because once she dies those capital gains are stepped up (so long as you're under estate tax thresholds).
Correct. On this point Ed Slott missed his own advice. His mom does not need the IRA money so she SHOULD convert it and extend the tax saving to her beneficiaries (her kids) or better yet, her grandkids.
Video is out of date. The Tax Cuts and Jobs Act ended recharacterizations.
This video should be either revised or removed. 8 years old, out of date.
No more conversions in 2019. Get it right the first time.
Roth conversions are still permissible 2019.
It's RE-CHARACTERIZATION that is no longer allowed.
I'm so confused...
This info should be updated...certain things have changed because of Trump (i.e. cant undo ROTH anymore)
This is totally out of date. Check out all the new rules for ROTH conversions!
I know I would have to pay tax on the converted portion of 401K to Roth IRA but do I have to report the converted amount as income for the year? I think it was reported previously when earned but just no tax deducted.
The brokerage firm will send you a 1099-R with the gross distribution amount that will be counted as income for the year of conversion.
She needs to up date this video, or take it down.
My wife and I are retired. She has a large conventional IRA and a Roth. She must take RMD's from the IRA each year. After we pay the tax I want the remainder of the RMD to go into her Roth. Our investment "advisor" says we can't do this. I think they are wrong. Any comments?
Froman Abe They are right. Any money you convert from an IRA to a Roth has to be in ADDITION to your RMD.
@@erniel7689 So, we can move money from her IRA to the Roth and, of course, add it to our taxable income for the year?
@@erniel7689 OK. But, once I've taken the RMD and paid the tax on it, it's just like any other money, isn't it?
@@fromanabe8639 - The RMD cannot be converted to.a Roth. However, if you withdraw MORE than the RMD, that money can be converted to a Roth. You will still have to pay taxes on the full amount withdrawn from your IRA/401k/403b.
@@freddieh5539 Thank you for the reply. I can't see how RMD money, after you've paid tax on it, is different from money withdrawn from an IRA after paying tax on it. But, hey, I'm just a taxpayer, not one of the incredibly deep thinkers at the IRS.
What is a "Roth"???
its a type of retirement account, where you put "after tax" dollars that grows "tax free" when you take a distribution from the account.
Hyman Roth. He did some business with Michael Corleone.
Anyone know if you've got an IRA and are really ill and your death is imminent-would converting it to a Roth IRA be of benefit to the beneficiary (child) to save on the taxes they'd be charged as the beneficiary upon death?
There is no benefit if they will withdraw the money upon inheritance unless you think the tax rate on the amount in your IRA is about to skyrocket. Taxes will need to be paid by you when you convert from traditional to ROTH IRA so there is no avoiding paying the taxes. The benefit (as it states in this video) is to get the tax dollars out of the way now for long-term growth that will be untaxed upon withdrawal.
Look at a term called 'step up in basis'
paying taxes now to get them out of the way assumes a retiree will be drawing down their entire account in their retirement years. See my comments above: many retirees have other resources to live on and not just their IRA or 401K; some people die early in their retirement years or before they retire; thus paying taxes up front seems like a waste.
No step up basis for IRAs. Not applicable here
HUGE benefits could be had in this case. Completely depends on YOUR tax bracket vs. beneficiaries tax bracket. If your tax bracket is low and beneficiaries is high, absolutely this strategy makes sense.
If the scenario is reversed though, Nope.
Remember, standard deductions are almost doubled now, (2018), compared to last year, so makes even more sense to consider this option. If you are married and over 65, you have $26600 in Standard Deductions. Meaning even with $100k in Gross income, you are still in the 12% bracket.
this video, as good as it is, made no sense to me. i am such an illiterate :(
Traditional IRA /401k seed money is NOT taxed, so it drops your reported income ( and tax bracket) by the amount you put in, so you save on taxes. When you retire, your income (and bracket) are lower, so you pay taxes on the traditional IRA seed money and profits at that LOWER rate as you take the money out. Roth contributions are different. Roth IRA seed money is taxed BEFORE you put the money in, so it grows tax free, and both the seed money and profits are tax free when taken out. To save on taxes, people use the traditional IRA when working, but once they retire and their tax bracket drops, they start moving their $ from the traditional to the Roth IRA. The IRS taxes the rolled over $ as income, but the retired people pay less taxes on the money they're moving into the Roth than they would have if they put the money in while they were working because their tax bracket is lower in retirement. The Roth money grows tax free and is free to take out once converted.
This guy promotes WHOLE life as investment vehicle. Straight up horrible
Not necessarily. There are a lot of misconceptions out there about whole life insurance. Sometimes, it can be a great option
Not an investment. Its a tax shelter. People never understand that. Estate planning, inheritance adds another 200%+ ROI when it goes tax free to your family. Long term, insurance is one of the best savings vehicles, not investment. But everyone only knows what they hear about it.
Can no longer recharacterize Roth conversions due to new tax law
This video is dangerous. You can no longer recharacterize. If you covert to a Roth you owe Uncle Sam.
I think it is never good to pay taxes up front but to defer them as long as possible. These discussions that recommend circumstances under which it is good to convert to Roth and pay upfront taxes assume a person will be withdrawing all of their tax deferred retirement savings in their retirement years. However, we know that many middle class retirees have other resources--other savings, social security, pension income, part time income and spousal resources--that they might live on ahead of drawing from their 401K or IRA. Also, unfortunately many people die early into their retirement years or even before their retirement. Such persons might leave a considerable portion of their retirement savings to their surviving spouse and children. However, if they had paid taxes up front in order to fund a Roth account they would deprive their surviving spouse & children of the opportunity to benefit from the larger nest egg if the money had not been taxed away. Similarly, a surviving spouse might not draw down and thus not be taxed on all of their deceased spouse's retirement savings but would leave some of it to their children. Also the annual mandatory minimum withdrawal is so low that the tax liability will be stretched out over many years. At age 71 the first full year of mandatory annual minimums a person has 26 years to withdraw the full account.
A few years ago at age 45 I decided to take a look at what taxes in retirement would look like. I studied the forms, contemplated types of income and talked to as many seniors as I could. What I discovered was nothing short of astounding. Most had followed your plan, not converting and waiting until age 70 1/2 to begin making withdrawals. The problem is that with social security and pension payments or perhaps even earned income those RMDs push them up into the next tax bracket. Not only is their social security now 85% taxable but they also lose the zero percent LTCG and Qualified Dividends tax rate...expensive money indeed. I'm in the process of slowly and under taxable limits converting all or at least most of our tax deferred accounts to our Roths over the next 25 years. I've learned subsequently that this is referred to as the "Tax Torpedo" and should be avoided at all costs. Our retirement income will consist of social security that will be only fractionally taxed, well below standard deduction limits, tax free Roth distributions, a bit of taxable interest and tax free LTCG and Qualified dividends. I've taken Ed Slott's plan to it's furthest limits and it will save us hundreds of thousands of dollars over our lifetime.
Could NOT agree with you more TomJ.
Dont' forget surviving spouse LOSES a Standard Deduction too. THis means her(we'll assume the wife survives the hub) taxable income is $13300 HIGHER, her tax bracket is HIGHER most likely, the amount of taxes she pays on Social Security are HIGHER, and, yes AND, huge potential she'll pay double or more premiums on Medicare B and D, which is based on Modified Adj GROSS Income.
I call it the Widows Tax Trap and it's such a scam. Boggles my mind more people don't see this.
Widows LOSE income and pay MUCH more tax. Just wrong in every sense of the word.
ABSOLUTELY! This loomed large in my plans, as losing so much in taxes when you get down to one surviving spouse is at the worst possible time to have this happen. I also don't want my wife to have to worry about having to correctly calculate RMDs and face the severe 50% penalty if she doesn't get it right. Roth distributions in addition to being free from taxes and RMDs forever, also don't contribute to your "other" income that raises the amount of your Social Security that's taxable. This leaves the surviving spouse in the enviable position of having the taxable income goal of the $12,000 standard deduction to remain tax free (your ultimate goal). There are a few moving parts but it would look something like $10,000 of taxable Social Security and $2,000 taxable interest (combined $12k max), unlimited distributions from your Roth IRA, unlimited qualified dividends and whatever LTCG that you can take to keep the taxable amount of your Social Security and taxable interest under the $12,000 standard deduction AND under the upper limit of the 12% tax bracket ($38,600) with it's zero percent LTCG rate. Under these guidelines it's easy to see that you'll pay no taxes on an almost unlimited income, the limit being what you choose/need/want to take from your Roth IRA account...UNDER CURRENT TAX LAW. In reality, income taxes effectively act more as consumption taxes as the average person can easily control their income with tax deferred retirement contributions along with a few other deductions while building wealth and in retirement simply by controlling where your "income" is coming from and by controlling your spending so that you keep under taxable limits. The more you can control your income/spending, the better your tax situation gets...retire early and spend the next 10-15 years moving your tax deferred money to your Roth under taxable limits and at the same time max out your Roth IRA contributions as well. As I said, to it's furthest limits.
Well Tom, this is PRECISELY the reason I started my UA-cam channel for all the reasons you cite. Great job sir.
In fact, I'm about to publish a book, "21 Reasons You NEED A Roth" on the exact same topics.
Maybe I can have you write the forward! :)
A.K.A. RMDs!
Screw beneficiaries who cares. Does it make sense for me?! Uhgggg that’s ten minutes invested I won’t get back.
you sound like a selfish person. i feel sorry for the people who have to be around you. whether it be at work or wherever else.
When I’m 70 years old and no longer have an income my tax rate will be higher? Sorry Ed but I’m not buying it. I’ll take the gamble and pay later
Eastern you WILL have an income. It will be from your mandatory withdrawals and it may add up to quite a bit depending on your circumstances.
but if you have a large IRA balance you will be forced to take out money at a high tax bracket - RMDs after 70.5 years of age. This could gradually ramp up your tax bracket.
You will also have income in the form of social security.
he did mention that roth conversions do make more sense for younger people.
How do you know tax rates in America will not go much higher than now?
This video is very much out of date!
This video should be removed. If you follow 8 yr old advice today you will screw up.