Great video. Regarding Roth conversions, I think the sweet spot is the years between retirement; say 65 and start of Social Security at 70. You also need to consider the changes in the tax rates after 2025. The other consideration, if you are lucky enough to not worrying about outliving your portfolio, is to pay lower taxes while living rather than leaving large taxable IRAs to you heirs while they are likely in their maximum tax bracket years. Your gross estate may be smaller but your after tax estate will be larger for your heirs.
Great video James. I'd be interested to see a present value calculation for the total lifetime taxes, with and without converting, to see if there's really much of a difference. With the conversion strategy front loading the taxes, I think the present value for both would help show a fair comparison. Thanks
Indeed, especially if one retired early like mid 50s, paying taxes early would mean large opportunity cost in the future. Assuming 10% return rate, every 50K of taxes paid early would means missing ~336K of loss opportunity at age 75....
James @rootfp, I have this same question. Does the software show the total tax liability on an equal playing field since one scenario has higher taxes in the early years and the other is in the later years when the dollar isn't worth the same? Could you please answer this for us?
Hi James, It's good to see how much they could save in taxes in later years. Yes, that is a good goal. However, the earning power in Pretax accounts of those dollars paid to the IRS early was lost. Could you present the break-even point in time (number (10, 15, 20, 25) of years from the start of retirement) for which the loss of the earnings from the capital paid to taxes in the earlier years is offset by the reduced taxes in the future? Also, are they saving 595K$ in taxes, or has 595K$ in value been switched from PreTax to Roth? Lastly, what were the additional taxes they had to pay each year before the break-even point? Thank you, Sir.
I want to maximize the money i have at each age Could you show an after tax asset value graph before and after doing this? So, if i retire at 62, convert up to the 10% bracket until 67... then i have less money early (62 to 67?) and break even later ... when? 77? thanks.
James, the thing I got most out of this video is that my own simple, self-taught approaches are pretty valid. I've just retired and am working on spreadsheets to sort through some of this. Partly to try to do the best I can with our money (and yes, I need to find a guy to talk to), and partly to stay out of my wife's hair. Win win! I sincerely appreciate the videos!
omg, i see it a little. James just has a fuller face, where Ryan is leaner. 😅 Maybe they're long-lost brothers. I hope James manages his brother's portfolio. 👍
I absolutely appreciate this example. Im single, but do understand how to apply the same concepts to the single taxpayer numbers. Just keep doing examples. The software and illustrations are invaluable in your videos. Most of us are visual learners. Thank you!
James, I am so glad I stumbled on your videos. They are great. Like the details, and the straightforward, easy explanations you present. The overall approach including growth, taxes, conversions make sense. I Plan on reaching out to Root for some follow thru.
So why did your scenarios stop doing conversions when social security kicked in? There was no reason to stop those conversions, just reduce them to have the same total income. You could have targeted a total income of $170K (not quite the top of 22%). To me it seems like the optimum strategy over a lifetime would be to make that taxable income basically flat for the rest of their life. If it is increasing over their life, you have not optimized it. Keep in mind this doesn't have to be cast in concrete, adjust it annually based upon market gains/spending, etc.
All your content has been so informative! Any examples for conversion strategies for those with less saved in taxable accounts to pay for taxes but still with a lot saved in pretax accounts would be great to see.
Yes...I am working in doing small roth conversion in the 22% bracket in the next few years to reduce my tax liability considering my majority of my retirement money is in my 401k/traditional ira...great example!
Fantastic video. The years between retirement, say age 65, and the start of Social Security at age 70, are, in my opinion, the sweet spot for Roth conversions. The adjustments to tax rates after 2025 must also be taken into account. If you are fortunate enough to not have to worry about outliving your portfolio, you should also think about paying less in taxes while you are still alive instead of giving your descendants substantial taxable IRAs when they are probably in their highest tax bracket years. Your heirs will get a higher after-tax estate even if your total estate may be lower.
It just depends on where you live. A 1.7M home in Incline Village, NV has taxes of around $7k per year, which is $5k less than we pay here in NJ for a $600k home.
They would only pay real estate taxes on 1.7 million if the county assessed it at that value, which I doubt given that it is their long-term primary residence
I like how your software shows a much more refined way of looking at the projections to enable good decision-making. I had started down the road of looking at the early vs. later social security decision, and built a spreadsheet with a discounted cash flow. What seemed odd was that due to a discount rate of anywhere from 4 to 6%, deferring didn't make much sense. It really didn't make for a huge difference, just about 6% between the smallest and largest DCF present value. In terms of our overall net worth, it was less than 1%. There's not really an opportunity cost, because we are living comfortably on pension plus small retirement earnings and a very modest drawdown of the 401K every year. I've asked a few advisors, and they all tout the "big increases" by waiting until FRA or 70, but that's only in actual monthly dollar payments, it really didn't add up to much in DCF.
James great video, as usual, but I did not see how much the couple had to pay in taxes now during a Roth conversion verses the 565k they would pay in taxes in the future.
It's there at 16:25. The main problem with these comparisons is that it is not using real dollars, so most of the difference is due to inflation. The true "tale of the tape" is the difference in ending net worth, but it's still not as much as would seem since the ending net worth in both cases is over $11 million due in large part to 30 years of inflated dollars.
Wouldn’t it be reasonable to convert at least through the 24% tax bracket to avoid the one spouse unfortunately dies and you are in single payer tax bracket. Seems like a cheap insurance policy.
Agreed. That's my plan. I've been using New Retirement (as just a user, no affiliation). It's not 100% intuitive for me, but it does seem to indicate that is the best long-term savings. Plus the 24% bracket is going away after next year, unless Congress extends it.
the $6K monthly expenses in CA is very low but is doable. However this number is more doable if 2 things are assumed. 1, the home is paid off or monthly mortgage is very low. 2. the home was purchased at a much lower price than $1.7M hence the property tax would be lower
at aged 65, i'm gonna guess the house is either paid for, or close to - but figure they bought 20yrs ago in CA, present value of $1.7m, they probably paid less than $400k back then, and would have been able to refi for a 2.*% interest rate a few years ago, so either way, the mortgage would be minimal.
Thanks, James. If you don’t mind sharing, in all your work with retirees who were younger than 65, what has been an average cost of healthcare for them out of pocket (if they are married)?
I notice this on the prior Roth conversion video…is there a way to show the competitive tax payment charts on the same scale? Both visually appear to pay more under the Roth conversion scenario (by area) but that’s only because the non-converted scenario has such a differing vertical scale. Love the content! 🌟
4:02 I see their goal was 25k for a vehicle. mine is 40k. I'm 34, and my last vehicle was brand new, but my goal going forward in life is to keep vehicle purchases close to the 40k mark. essentially, cars are where the coffee principle shows greater return on lifestyle adjustment. foregoing daily coffe at $5/day isnt worth the money, muchless the quality of life nuisance of caffeine deprivation. (just be efficient with caffeine intake, buy an at home coffee pot, or have a thermos. personally my caffine intake is Dr Pepper, i digress. its about saving the money in smarter ways to the same solution. Back to the car. repetitive purchases of 50k upwards vehicles, while nice, does have great impact on retirement goals. buy a cheaper car or have it cost less. (shorter term, lower interest rate, pay it off sooner, more money down, negotiate a lower price) again, say you buy 7 cars between age 21 and 55 at 40k per vehicle. that's 280k. if you buy less cars or spend less on the cars, the money can be better spent. so yeah for me, 40k per car is my magic number for now. its a Toyota Rav4 hybrid with amenities or a Toyota Venza. i just like hybrid compact suvs. but the numbers are the key takeaway. then again, im the guy who drops his jaw at certain vehicle prices.
A new car every five years costing $25k? That’s not even realistic today, let alone down the road (even if you adjusted with 3% annual inflation). A decent (not extravagant) car today is getting up towards $50k. That being said, I don’t think that could have a significant impact on your main topic, tax liability. Overall, excellent video James!
I think it was a delta for new car minus selling the old car of $28K. That's believable, especially if it's not a high-end car and the car sold is low mileage
Great video, but I'm shocked they can maintain a 6K monthly budget assuming they are in CA? Especially with the property taxes on a 1.75M home , insurance, gas, food prices, elcectricity, etc.
CA property taxes don't go up for home owners, at least not since 1978s Proposition 13. It's a sweet deal. And in 2020 another deal happened with Proposition 19 allowing age 55+ to transfer their assessed value to a new home - limiting the property tax increase if you move. (It increased property taxes on inherited property, resulting in a big net increase in tax revenue immediately on effect, but who knows long-term).
Per Prop 13, property taxes depend on when they bought their house. If they've bought that house 24 years ago, they may have paid about $500K, meaning their property taxes are about a third of what they would be if buying it today. It's not fair to younger generations, but that's the law in CA.
16:20 paying tax upfront for about 70K federal tax per year for 5 years. That is 300K in tax. What we did not say is that that 300K in tax we pay early has a Future Value of 600K in 15 years. Yes, you may save 600K in tax for your proposal, but then you lost 300K in Future Value because you paid down the tax first.
Very interesting case, James. Thanks for laying this out. I did not realize the potential longer-term implications for marginal tax rates, if we leave our tax-deferred funds untouched until required distributions kick in.
In a future video, can you please show at what age of retirement tax savings, from any tax strategy (Roth Conversion and IRMAA avoidance), breaks even? Also, for married couples, can you show the effect of basing longevity on a standard last survivor actuarial table (such used by the IRS or SS), perhaps with some reasonable additional years as a longevity risk factor? In this video, it appears both live to 96 from 64/65. I don't think this is a reasonable baseline assumption for tax savings planning; however, I realize both living until 96 will present a much more favorable picture for Roth Conversions.
I would like to have you run this exercise on my case but when I went to your website - since I didn't need portfolio investing advice - I was told to look elsewhere. Is the software you used in this example available to me? thanks and your videos are very helpful
Does paying the $197 for the academy give you access to the same tool you show in this video? It's not clear on the sign up page. I'm thinking about retiring (actually this very week) and would love to validate my assumptions with your tool.
A $600/mo pension hardly seems worth the complexity of dealing with yet another provider. Keep your address up to date, keep the bank account up to date, fix any problems that happen, ... And with no inflation adjustment it just gets less significant every year. Hopefully it is joint-life. I was projected to have a $900/mo single life pension some 20 years in the future, but I took the opportunity to roll it out as a lump sum into an IRA. Even at 3% inflation, 20 years leaves only about 60% purchasing power. Now with a few years still to go, the dividends are more than $900 per month and the companies increase their payments every year. Plus those payments are likely to continue forever unless ALL the companies I own fail. Also the current value is 3.5x that initial lump sum and it is mine to spend or give away at any time. Oh and maybe the best part... I converted it to a Roth in 2010. It's not enough to make me rich, but as a tax free pension for joint life it is better than it might have been!
Excellent video.. I absolutely love watching these to get the advice now to adjust before it is too late.. Exactly what I am looking to do is adjust the conversions to reduce the tax bill but not increase Medicare on either end of retirement 🎉
I want to maximize the money i have at each age. Could you show an after-tax asset value graph before and after doing this? So, if i retire at 62, convert up to the 10% bracket until 67(SS) ... then i have less money from 62 to break even ... at age 78? thanks.
Very interesting example. Could you do an example at some point comparing Roth conversions to equivalent moves from a pre-tax account to an individual investment account. I recently heard an assertion that the overall advantage of A Roth conversion is extremely small in this case. I don't know if there's nuance I didn't get in the comment, or if it is completely off base.
I had the same thought. I do think it’s a net positive as you won’t be paying taxes on any growth, income, or distributions in the Roth. Probably not a big deal over 10 years but for me I am doing it to lower the tax impact for myself while alive but mostly for my kids when they inherit the Roth account and have to take RMDs. If they can wait 10 yrs after I die to let the money grow tax free and then empty the account in year 10 that should be of great benefit.
That is my plan. I am single with a financial situation comparable to this example, my home is only worth half as much. I will retire this year at 64. At 65 I want to have income that keeps me in the IIRMA free zone. That will look like one third from SS, one third from brokerage with mostly capital gains and one third drawdown from 401k. This will reduce my future RMDs. I may adjust and take even more out of 401k and pay IIRMA depending on tax rates and my portfolio growth. I don't see much advantage to doing a Roth and paying taxes up front so that I can have a large tax free pile at my demise. Somewhere online is a calculator that allows you to play with this scenario. When I ran it is showed I would pay a small amount more in taxes this way without huge tax payments in todays dollars vs lower value dollars in the future.
A Roth is a clear win if you do not need to spend the money right away. If comparing a simple withdrawal vs. a Roth, the Roth wins hands down every time. The tax bill is the same. The future is owned by the Roth. Growth? Tax free in Roth. Spending? Comes out of the Roth tax free. Leaving taxable to your heirs they get a step up in basis and they start paying taxes immediately growth, or Roth is tax free inheriting and they can keep it growing tax free for 10 years and/or take it out any time tax free. Less than 59-1/2? Penalty for withdrawal, not for conversion. On the converted dollars, you need to wait until 59-1/2 or 5 years whichever comes first before taking the converted dollars out of the Roth or you must pay the avoided penalty when you withdraw. If you have other money in the Roth already, contributions can come out any time tax free, and conversion dollars after 5 years from each conversion, or 59-1/2 whichever comes first. Any withdrawal is assumed to be in the most favorable order (for once). The only time to choose a simple withdrawal is if you need to spend it right away. Then you might as well just spend it rather than moving it thru the Roth account.
James, great video as always! Would you consider how the market is doing at the time when you recommend Roth conversions? What if the market is down 15-20%? Should you delay Roth IRA conversions?
a down market is the perfect time to do a conversion because you pay taxes on the withdrawal amount. Market goes down - convert - market goes back up and the returns are tax free.
These models seem to assume you are healthy and happy until the day you suddenly drop dead. In reality, many of us will need long term care at some point, which is very expensive. These expenses are mostly tax deductible, meaning your tax bill can go way down later in life. Taking large RMDs in this case may not incur a large tax bill. I helped care for my bed-bound father during the final three years of his life. I also prepared his tax returns, and the medical deductions took his taxes to zero for several years.
Great video. Idea for a future video: For a mid career earner who is part of a defined benefit plan, should that member contribute outside money into a Roth or Traditional IRA?
Yes, contribute to IRAs and an investment account. The defined benefit plan can always be eliminated or reduced and you don’t want to be left high and dry - speaking from experience.
There should be enough money in the tax deferred account to fund future medical expenses, major portion of the LTC could be for the medical reason which are tax deductible.
Is there a video that shows this same thing but starting these conversions before retirement. With the idea of, is it better to do a Roth conversion from a traditional IRA and lowering your Roth contributions by the amount of extra taxes you are paying. So if I had an extra $10,000 in tax liability from a conversion but reduced my Roth contribution in that year by the same amount, would I end up in a better position at a retirement age of 67 if I did it from age 57 to 67? Also I’m looking at converting a trad to Roth at that 22% income tax cap.
What I don't understand is the white space from what appears to be the ages from 69 to 71. Why wouldn't you also fill that up to the 12%/15% line? I don't understand why it's remaining empty unless there is something that I missed while watching.
What would be helpful is a description of what the required minimum distributions do to the annual cash flow (spending) plans. For example, in 20 years, when the annual routine spending becomes, say, $130,000, and they have, say, $8 million under investment, they will need to take out 4% RMD, say, $320,000. From that, they can EASILY pay the living expenses, and give approximately a quarter of that to the federal tax authority. What becomes of all that extra cash? What's the issue simply paying those taxes, given all that un-needed extra money available?
13:13 does your software (that you're selling) cover California state tax? California taxes brokerage accounts at ordinary income, none of the long term or short term capital gains business at the federal level 😢
If you have the money to pay taxes ON INCOME then taxes shouldn't be a major concern. Financial planners who have no skin in YOUR game can be a bigger burden than income taxes. One worth their salt should work for a percentage of your estate and be happy to wait.
How do they have near zero tax rate today at 65? Not working? No high salary professional wages? What do they live on? Living on inherited money? Not everyone has that kind of fortunate life. Please explain time 8:29
2:18 they already retired as mentioned in this time frame. The takeaway is a strategy to retire but not taking social security and use those years to do Roth Conversion.
1 comment on the expenses, the budgets being presented do not account for house maintenance. House maintenance on a $1m plus house can add up per year, it can be as high as 1% of the cost of the home. This needs to be in everyone's budget even though your house is owned outright.
Hi, Does your software includes calculations of opportunity cost? What I meant is 100K in T-IRA today, assuming future tax bracket is the same current your rate 24%. By 20 years later, 100 becomes 1000 (10X), government owns 240 you owns 760. Take extreme example, if you convert 100K to ROTH today, you are left with 76, by 20 years later, you have 760 (10X) because your rolling snow ball starts smaller. The number is the same 760. Of course I am ignoring unpredictable elements and standard deduction portion. Unless your RMD and SS forced you into next bracket 32%. Not many people can get above 182K AGI. If the market still grows 12% APR for the next two dacades, you sure can, but that is not a norm. What is the percentage bet of that?. You do save future tax by conversion but you also miss out the amount today you pay to government that won't grow for you for another 20 years. I am not a CFP but i also have a MBA and MS from tier 1 university. Please explain.
So, they own a 1.7 million dollar home and their monthly living expenses are 6,000$. I call BS. The taxes and insurance on a 1.7million dollar home would be $$50,000 a year in most states and even in my state of SC with some of the lowest property taxes would be about 25,000$.
yes very difficult to keep $6K monthly expenses if the home was recently purchased at $1.7M. However, more doable if they had purchased it 20 years ago when it was only $300K and maybe only currently assessed at around $500K now. Also need to assume they paid off the mortgage and did not refinance later and still have a sizable mortgage payment
They could have bought the home years ago at a lower price and today it’s worth more, so the tax on the home is a percentage of what they bought it for not what it’s worth today. For example my home here in SoCal worth 800k but I only pay 4k a year tax on it which is a certain percentage of the purchase price, if I sold the home today at 800k the tax for the new owner will be more than 4k a year possibly be more than doubled.
They talk about driving to Yosemite etc. so they are in California. Thanks to Prop 13 if they've lived in that house for a long time they may only be paying a pittance in property taxes (I know of folks paying < 2,000 a year in property taxes on homes valued over 2 million). Most of the value there is in the land so the insurance ends up being less expensive then you might expect (the replacement value of the structure may only be a couple of hundred thousand or so giving an insurance cost < $1,000 / yr).
Property taxes should STOP when the house is paid off! If you buy a $1.7 million house with CASH you should pay a one time tax and done. Example? In Colorado you buy a toaster in Walmart you pay 10 per cent tax. Property taxes are dumb period! Sadly, we are taxed to death even at death. Why? Also, what do we get from higher property taxes? More police? Better schools? Cheers!
Question: Why do you tend to discuss everything in nominal dollars rather than inflation adjusted terms (i.e. present day spending power)? I've always found it much easier to understand things using adjusted dollars myself. Also, the goal for retirement is not to run out of money in a bad market. Shouldn't I optimize the available dollars under a bad outcome rather than an average or above average growth scenario? In other words given the unknowable future, shouldn't we optimize the success rate rather than the average ending balance?
Inflation adjustment just adds more assumptions and more complexity and does not change the illustration in any way. The risk is using adjusted returns but not adjusted expenses. As long consistent, it's more simple to just always compute in today's dollars since we know what those are.
Not many people have $4 million in total assets at age 65. This is like top 4% of all retirees. I have planned $1.3 M in house, $0.7 M in 401K and $0.2 M other investments for $2.2. Yes, I have 1/4 in Roth. But I am like way ahead of most but very far behind the $2 M in Roth/IRA that only a few I know have. Average 401K balance is $70,000. Not $3 million these guys have.
Watching this, it sounds like the couple met with Root to find out how they are doing, versus handing over all control to Root. I tried to schedule some thing Root for check up and maybe a plan tweek. I was unable to schedule as the website said something to the effect that Root does not provide a one-time consultation. Has anyone been able to schedule a one time consultation with Root?
I see these Roth conversion proposals being run and they show significant tax savings but what it doesn’t appear to take into account is the time value of paying significant taxes up front versus in 20-30 years. I think it would still be a net benefit but just not as much as they show.
If tax rates are the same, the TVM paying now vs later makes no difference. In other words, the growth on the money saved by not paying taxes now, will be the exact same amount needed to pay the taxes in the future. They equate to $0 ONLY if tax rates are the same. If tax rates go down or you can get into a lower bracket, waiting would have been a win. But if tax rates go up or you move to a higher bracket (perhaps by losing a spouse) then paying earlier is the win.
This software simulates the impact of that; your taxable account gets hit by the conversion costs in the short term, so you earn less there. But the money it let you move to the Roth grows and is tax-free when withdrawn. If you live long enough, you end up way positive. If you die shortly after rolling over, you end up behind (though your beneficiaries may still benefit from inheriting a Roth instead of a 401K/IRA, which would have required distributions fairly quickly).
1: Plan with a Financial Advisor . 2: Be frugal and minimal on spending (don’t buy what you don’t need). 3: Save and invest money towards retirement (Roth IRA/401k) 4: Save to(Invest) it’s a proven way to get richer very important to financial success.
How are they funding about $500k in expenses in 2024-2029? If they're taking the money out of investment accounts aren't they going to use up the lower tax brackets?
I have a question if anybody can answer for me please- Once the RMD starts, what if I pull out more money from tax deferred upto the next tax bracket & get the unused amount into my brokerage account & not do any Roth conversions & save on step up basis. Are there any drawbacks to this maneuver besides the capital gains?
So you want to pull from pre-tax (at which point no matter where it goes you’ll pay income taxes), but put it in a brokerage account instead of a Roth? That won’t affect your income taxes at all but as you noted, you will have to pay taxes on the dividends and capital gains on the brokerage account assets, so why?
The money that satisfies the RMD cannot be moved to a Roth. Anything above that can be converted into a Roth. Any gains, interest and dividends are taxable in your brokerage account. In a Roth it’s all tax free. Personally I’m putting in a Roth.
For this example, your fees would be about .5% on their net worth ~4.15 million? So that is around $20.7k a year. If they keep you for 30 years and nothing changes in their net worth, that is equal to what you saved them. There are a lot of variables though. I think the biggest question is do they need to continue to employ you after you helped them come up with the early strategy. Is the financial advice something you pay for an initial period of time (like the first year), then come back to every 5-10 years for a sanity check? I'm sure some people would continue to pay for the financial advice every year because they want someone to manage their investment portfolio - but if I'm comfortable doing that on my own, then it seems like your advice is only needed for the initial planning period.
Currently, there is no limit on the amount or frequency of conversions from traditional IRA to Roth IRA. This is a separate category from traditional Roth contributions, presumably the federal government is incentivizing people to pay those big tax bills earlier rather than later.
I just realize that 30% of my current IRA balance is not mine. Prepaying with tons of valuable cash up front is rolling the dice. Just use the dividends rolling in from preferred/high yield in the Roth account to pay the taxes on the RMD's from the pretax account. 70/30 split between pretax/post tax accounts, respectively, seems sensible to me. Gaming conversions is just that for 75% of the people doing them.
RMDs are high because their investments are growing over time. The tax liability just depends on how fast your investments grow, and what investments they are invested in.
Excellent discussion. But, ‘not so sure a $4mil net worth with a $1.7mil home is “simple people”. These amplified IRA/401K strategies don’t look like a half million $ of savings for more typical retirees, more likely $100-150K at most, over 30 years. If you have large IRA/401K’s like this scenario, you might find it remains worthwhile to suck it up and pay the IRMA Medicare surcharges due to the much larger future tax savings.
It’s all relative. This is “simple people” where I live in North County San Diego. Actually describes many around here. What doesn’t describe many around here is 25K for a new car. That would be about double for the requisite Tesla Model 3, lol.
simple means they don't want large spending type of living. It is nothing to do with what they have. Billionair can live a simple life too if they are happy with.
Can you do a common man example? Dude makes 72K at age 55. Has 45K in 401K and 50K split between a Roth and basic investing accounts. (putting 7.5K in roth each year and about 5K in to basic investing). He plans to work till he's 70 and get SS at age 67 (about $2300/mo) to help bump up his later years investing. How likely is he able to continue to live same lifestyle, assuming home is paid for by retirement age of 70. Basically, what happens to a normal dude who doesn't have a grand nest egg to early retire on? I am hoping to live off of dividends and RMDs and leave some savings to my son.
Perhaps do this same demo with not such crazy high portfolio and getting such a huge pension, most people don't have that much money or even a pension. How about showing example of a million dollars and no pension
Great video. Regarding Roth conversions, I think the sweet spot is the years between retirement; say 65 and start of Social Security at 70. You also need to consider the changes in the tax rates after 2025. The other consideration, if you are lucky enough to not worrying about outliving your portfolio, is to pay lower taxes while living rather than leaving large taxable IRAs to you heirs while they are likely in their maximum tax bracket years. Your gross estate may be smaller but your after tax estate will be larger for your heirs.
It's not what you make. It's what you keep. Thanks, James.
Great video James. I'd be interested to see a present value calculation for the total lifetime taxes, with and without converting, to see if there's really much of a difference. With the conversion strategy front loading the taxes, I think the present value for both would help show a fair comparison. Thanks
Indeed, especially if one retired early like mid 50s, paying taxes early would mean large opportunity cost in the future. Assuming 10% return rate, every 50K of taxes paid early would means missing ~336K of loss opportunity at age 75....
James @rootfp, I have this same question. Does the software show the total tax liability on an equal playing field since one scenario has higher taxes in the early years and the other is in the later years when the dollar isn't worth the same? Could you please answer this for us?
Hi James, It's good to see how much they could save in taxes in later years. Yes, that is a good goal. However, the earning power in Pretax accounts of those dollars paid to the IRS early was lost. Could you present the break-even point in time (number (10, 15, 20, 25) of years from the start of retirement) for which the loss of the earnings from the capital paid to taxes in the earlier years is offset by the reduced taxes in the future? Also, are they saving 595K$ in taxes, or has 595K$ in value been switched from PreTax to Roth? Lastly, what were the additional taxes they had to pay each year before the break-even point? Thank you, Sir.
Exactly
I want to maximize the money i have at each age
Could you show an after tax asset value graph before and after doing this?
So, if i retire at 62, convert up to the 10% bracket until 67... then i have less money early (62 to 67?) and break even later ... when? 77? thanks.
James, the thing I got most out of this video is that my own simple, self-taught approaches are pretty valid. I've just retired and am working on spreadsheets to sort through some of this. Partly to try to do the best I can with our money (and yes, I need to find a guy to talk to), and partly to stay out of my wife's hair. Win win! I sincerely appreciate the videos!
Thanks James, I'm currently retired, did my first Roth conversion last year and will continue to do them for the foreseeable future.
Excellent video. I'm in the process of viewing other posted videos from James. Learning a lot.
Glad to see a scenario for those of us who are already retired - very informative!
Great job but one improvement suggestion. When you show two graphs side by side - use the same scale on the Y axis
Is there anything this Ryan Gosling guy can't do? 👏 👏 👏
😂😅... he can do it all.
Right? Plus his right bicep vein is 🔥
omg, i see it a little.
James just has a fuller face, where Ryan is leaner. 😅
Maybe they're long-lost brothers. I hope James manages his brother's portfolio. 👍
Lol
His voice is Ron Howard - comforting
Seeing the forms is more helpful than just verbal explanation. Thank you!
I absolutely appreciate this example. Im single, but do understand how to apply the same concepts to the single taxpayer numbers.
Just keep doing examples. The software and illustrations are invaluable in your videos. Most of us are visual learners. Thank you!
James, I am so glad I stumbled on your videos. They are great. Like the details, and the straightforward, easy explanations you present. The overall approach including growth, taxes, conversions make sense. I Plan on reaching out to Root for some follow thru.
So why did your scenarios stop doing conversions when social security kicked in? There was no reason to stop those conversions, just reduce them to have the same total income. You could have targeted a total income of $170K (not quite the top of 22%). To me it seems like the optimum strategy over a lifetime would be to make that taxable income basically flat for the rest of their life. If it is increasing over their life, you have not optimized it. Keep in mind this doesn't have to be cast in concrete, adjust it annually based upon market gains/spending, etc.
Absolutely fascinating and so well thought out. Thank you for sharing!
All your content has been so informative! Any examples for conversion strategies for those with less saved in taxable accounts to pay for taxes but still with a lot saved in pretax accounts would be great to see.
Yes...I am working in doing small roth conversion in the 22% bracket in the next few years to reduce my tax liability considering my majority of my retirement money is in my 401k/traditional ira...great example!
Fantastic video. The years between retirement, say age 65, and the start of Social Security at age 70, are, in my opinion, the sweet spot for Roth conversions. The adjustments to tax rates after 2025 must also be taken into account. If you are fortunate enough to not have to worry about outliving your portfolio, you should also think about paying less in taxes while you are still alive instead of giving your descendants substantial taxable IRAs when they are probably in their highest tax bracket years. Your heirs will get a higher after-tax estate even if your total estate may be lower.
Nice case study review. Surprised expenses are that low. Can only imagine how much property tax would be on a 1.7M home.
It just depends on where you live. A 1.7M home in Incline Village, NV has taxes of around $7k per year, which is $5k less than we pay here in NJ for a $600k home.
If they are in CA (most probably), depends on what you paid for the house due to prop 13. It won't be small but not $20k+ either.
I’m guessing they live in California so don’t pay taxes on the appreciated value
They would only pay real estate taxes on 1.7 million if the county assessed it at that value, which I doubt given that it is their long-term primary residence
This video is exactly why I will need to talk with someone in the near future.
Excellent video as this is sooo important in the long run. Thank you!
I like how your software shows a much more refined way of looking at the projections to enable good decision-making. I had started down the road of looking at the early vs. later social security decision, and built a spreadsheet with a discounted cash flow. What seemed odd was that due to a discount rate of anywhere from 4 to 6%, deferring didn't make much sense. It really didn't make for a huge difference, just about 6% between the smallest and largest DCF present value. In terms of our overall net worth, it was less than 1%. There's not really an opportunity cost, because we are living comfortably on pension plus small retirement earnings and a very modest drawdown of the 401K every year. I've asked a few advisors, and they all tout the "big increases" by waiting until FRA or 70, but that's only in actual monthly dollar payments, it really didn't add up to much in DCF.
Great review. Very useful. Keep these going.
Thanks James for another great case study! I really like this type of case study since it's one that I'm in the process of thinking about.
James great video, as usual, but I did not see how much the couple had to pay in taxes now during a Roth conversion verses the 565k they would pay in taxes in the future.
It's there at 16:25. The main problem with these comparisons is that it is not using real dollars, so most of the difference is due to inflation. The true "tale of the tape" is the difference in ending net worth, but it's still not as much as would seem since the ending net worth in both cases is over $11 million due in large part to 30 years of inflated dollars.
Wouldn’t it be reasonable to convert at least through the 24% tax bracket to avoid the one spouse unfortunately dies and you are in single payer tax bracket. Seems like a cheap insurance policy.
Agreed. That's my plan. I've been using New Retirement (as just a user, no affiliation). It's not 100% intuitive for me, but it does seem to indicate that is the best long-term savings. Plus the 24% bracket is going away after next year, unless Congress extends it.
It happened to my neighbor. She's paying high tax....
Thank for the thought process on the Roth conversions and the lifetime tax impacts.
the $6K monthly expenses in CA is very low but is doable. However this number is more doable if 2 things are assumed. 1, the home is paid off or monthly mortgage is very low. 2. the home was purchased at a much lower price than $1.7M hence the property tax would be lower
at aged 65, i'm gonna guess the house is either paid for, or close to - but figure they bought 20yrs ago in CA, present value of $1.7m, they probably paid less than $400k back then, and would have been able to refi for a 2.*% interest rate a few years ago, so either way, the mortgage would be minimal.
Great video James. Is that Money Guide Pro Software? I haven't found a favorite one yet.
He provides a link to this software in his comments. It looks to be self developed as he allows access to it for $197.
Excellent video and very helpful. Is this software part of what can be purchased from you.
Thanks, James. If you don’t mind sharing, in all your work with retirees who were younger than 65, what has been an average cost of healthcare for them out of pocket (if they are married)?
I notice this on the prior Roth conversion video…is there a way to show the competitive tax payment charts on the same scale? Both visually appear to pay more under the Roth conversion scenario (by area) but that’s only because the non-converted scenario has such a differing vertical scale. Love the content! 🌟
Thank you, James! Very helpful!
Thank you James. Good stuff !
4:02
I see their goal was 25k for a vehicle. mine is 40k.
I'm 34, and my last vehicle was brand new, but my goal going forward in life is to keep vehicle purchases close to the 40k mark.
essentially, cars are where the coffee principle shows greater return on lifestyle adjustment.
foregoing daily coffe at $5/day isnt worth the money, muchless the quality of life nuisance of caffeine deprivation. (just be efficient with caffeine intake, buy an at home coffee pot, or have a thermos. personally my caffine intake is Dr Pepper, i digress. its about saving the money in smarter ways to the same solution.
Back to the car.
repetitive purchases of 50k upwards vehicles, while nice, does have great impact on retirement goals. buy a cheaper car or have it cost less. (shorter term, lower interest rate, pay it off sooner, more money down, negotiate a lower price)
again, say you buy 7 cars between age 21 and 55 at 40k per vehicle.
that's 280k.
if you buy less cars or spend less on the cars, the money can be better spent.
so yeah for me, 40k per car is my magic number for now.
its a Toyota Rav4 hybrid with amenities or a Toyota Venza.
i just like hybrid compact suvs.
but the numbers are the key takeaway. then again, im the guy who drops his jaw at certain vehicle prices.
i have driven my used 4Runner for 20 years - that 30k is now ... a lot.
This was helpful. Thanks. I can’t wait till retirement at 52!!! 14 months to go.
You got this!
A new car every five years costing $25k? That’s not even realistic today, let alone down the road (even if you adjusted with 3% annual inflation). A decent (not extravagant) car today is getting up towards $50k. That being said, I don’t think that could have a significant impact on your main topic, tax liability. Overall, excellent video James!
They should be able to sell their car to get a portion of it back
I think it was a delta for new car minus selling the old car of $28K. That's believable, especially if it's not a high-end car and the car sold is low mileage
Perhaps, but if they trade in or sell their old car, that would be the net cost.
Since they plan to change vehicle every 5 years, it be done as they would have residual/trade-in value from the previous vehicle.
Buy a Tesla once and keep it until end of your lifetimes. Be sure to buy FSD!
Very helpful! Do you mind sharing what planning software you use. I like the simplicity of your software!
James, what would happen to that tax graph if Luke were to pass away around 78-80?
Great video, but I'm shocked they can maintain a 6K monthly budget assuming they are in CA? Especially with the property taxes on a 1.75M home , insurance, gas, food prices, elcectricity, etc.
CA property taxes don't go up for home owners, at least not since 1978s Proposition 13. It's a sweet deal. And in 2020 another deal happened with Proposition 19 allowing age 55+ to transfer their assessed value to a new home - limiting the property tax increase if you move. (It increased property taxes on inherited property, resulting in a big net increase in tax revenue immediately on effect, but who knows long-term).
No indication they were in CA. And they indicate they don't want to spend extravagantly.
$6K monthly in CA is low but doable. It largely depends on whether the home is paid off or what the remaining monthly mortgage is
Per Prop 13, property taxes depend on when they bought their house. If they've bought that house 24 years ago, they may have paid about $500K, meaning their property taxes are about a third of what they would be if buying it today. It's not fair to younger generations, but that's the law in CA.
16:20 paying tax upfront for about 70K federal tax per year for 5 years. That is 300K in tax. What we did not say is that that 300K in tax we pay early has a Future Value of 600K in 15 years. Yes, you may save 600K in tax for your proposal, but then you lost 300K in Future Value because you paid down the tax first.
The fun part is knowing how much in taxable interest, dividends, and distributions you'll have so you don't make an oopsie and convert too much.
Very interesting case, James. Thanks for laying this out. I did not realize the potential longer-term implications for marginal tax rates, if we leave our tax-deferred funds untouched until required distributions kick in.
In a future video, can you please show at what age of retirement tax savings, from any tax strategy (Roth Conversion and IRMAA avoidance), breaks even? Also, for married couples, can you show the effect of basing longevity on a standard last survivor actuarial table (such used by the IRS or SS), perhaps with some reasonable additional years as a longevity risk factor? In this video, it appears both live to 96 from 64/65. I don't think this is a reasonable baseline assumption for tax savings planning; however, I realize both living until 96 will present a much more favorable picture for Roth Conversions.
Very interesting. Thanks
I would like to have you run this exercise on my case but when I went to your website - since I didn't need portfolio investing advice - I was told to look elsewhere. Is the software you used in this example available to me? thanks and your videos are very helpful
Does paying the $197 for the academy give you access to the same tool you show in this video? It's not clear on the sign up page. I'm thinking about retiring (actually this very week) and would love to validate my assumptions with your tool.
AWESOME video!! I enjoy the real life scenarios.
Would filling in the "V" right at the 70 y.o. point be an even better tax result?
A $600/mo pension hardly seems worth the complexity of dealing with yet another provider. Keep your address up to date, keep the bank account up to date, fix any problems that happen, ... And with no inflation adjustment it just gets less significant every year. Hopefully it is joint-life.
I was projected to have a $900/mo single life pension some 20 years in the future, but I took the opportunity to roll it out as a lump sum into an IRA. Even at 3% inflation, 20 years leaves only about 60% purchasing power. Now with a few years still to go, the dividends are more than $900 per month and the companies increase their payments every year. Plus those payments are likely to continue forever unless ALL the companies I own fail. Also the current value is 3.5x that initial lump sum and it is mine to spend or give away at any time. Oh and maybe the best part... I converted it to a Roth in 2010. It's not enough to make me rich, but as a tax free pension for joint life it is better than it might have been!
Thanks
Excellent analysis
Excellent video.. I absolutely love watching these to get the advice now to adjust before it is too late..
Exactly what I am looking to do is adjust the conversions to reduce the tax bill but not increase Medicare on either end of retirement 🎉
Glad it was helpful!
Definitely helpful! My exact concern.
I want to maximize the money i have at each age.
Could you show an after-tax asset value graph before and after doing this?
So, if i retire at 62, convert up to the 10% bracket until 67(SS) ... then i have less money from 62 to break even ... at age 78? thanks.
You nailed my current situation. There’s so many possibilities. Your straightforward approach is golden. Thank you.
Very interesting example. Could you do an example at some point comparing Roth conversions to equivalent moves from a pre-tax account to an individual investment account. I recently heard an assertion that the overall advantage of A Roth conversion is extremely small in this case. I don't know if there's nuance I didn't get in the comment, or if it is completely off base.
I had the same thought. I do think it’s a net positive as you won’t be paying taxes on any growth, income, or distributions in the Roth. Probably not a big deal over 10 years but for me I am doing it to lower the tax impact for myself while alive but mostly for my kids when they inherit the Roth account and have to take RMDs. If they can wait 10 yrs after I die to let the money grow tax free and then empty the account in year 10 that should be of great benefit.
That is my plan. I am single with a financial situation comparable to this example, my home is only worth half as much. I will retire this year at 64. At 65 I want to have income that keeps me in the IIRMA free zone. That will look like one third from SS, one third from brokerage with mostly capital gains and one third drawdown from 401k. This will reduce my future RMDs. I may adjust and take even more out of 401k and pay IIRMA depending on tax rates and my portfolio growth. I don't see much advantage to doing a Roth and paying taxes up front so that I can have a large tax free pile at my demise. Somewhere online is a calculator that allows you to play with this scenario. When I ran it is showed I would pay a small amount more in taxes this way without huge tax payments in todays dollars vs lower value dollars in the future.
A Roth is a clear win if you do not need to spend the money right away. If comparing a simple withdrawal vs. a Roth, the Roth wins hands down every time. The tax bill is the same. The future is owned by the Roth. Growth? Tax free in Roth. Spending? Comes out of the Roth tax free. Leaving taxable to your heirs they get a step up in basis and they start paying taxes immediately growth, or Roth is tax free inheriting and they can keep it growing tax free for 10 years and/or take it out any time tax free. Less than 59-1/2? Penalty for withdrawal, not for conversion.
On the converted dollars, you need to wait until 59-1/2 or 5 years whichever comes first before taking the converted dollars out of the Roth or you must pay the avoided penalty when you withdraw. If you have other money in the Roth already, contributions can come out any time tax free, and conversion dollars after 5 years from each conversion, or 59-1/2 whichever comes first. Any withdrawal is assumed to be in the most favorable order (for once).
The only time to choose a simple withdrawal is if you need to spend it right away. Then you might as well just spend it rather than moving it thru the Roth account.
James, great video as always! Would you consider how the market is doing at the time when you recommend Roth conversions? What if the market is down 15-20%? Should you delay Roth IRA conversions?
a down market is the perfect time to do a conversion because you pay taxes on the withdrawal amount. Market goes down - convert - market goes back up and the returns are tax free.
These models seem to assume you are healthy and happy until the day you suddenly drop dead. In reality, many of us will need long term care at some point, which is very expensive. These expenses are mostly tax deductible, meaning your tax bill can go way down later in life. Taking large RMDs in this case may not incur a large tax bill. I helped care for my bed-bound father during the final three years of his life. I also prepared his tax returns, and the medical deductions took his taxes to zero for several years.
Great video. Idea for a future video: For a mid career earner who is part of a defined benefit plan, should that member contribute outside money into a Roth or Traditional IRA?
Yes, contribute to IRAs and an investment account. The defined benefit plan can always be eliminated or reduced and you don’t want to be left high and dry - speaking from experience.
Great information!
the scenario you outline above - what we be the approx cost for providing this level of analysis?
In high-tax states (CA, HI, NY, DC, NJ, etc.), then would the savings of the proposed plan be even higher?
There should be enough money in the tax deferred account to fund future medical expenses, major portion of the LTC could be for the medical reason which are tax deductible.
Is there a video that shows this same thing but starting these conversions before retirement. With the idea of, is it better to do a Roth conversion from a traditional IRA and lowering your Roth contributions by the amount of extra taxes you are paying. So if I had an extra $10,000 in tax liability from a conversion but reduced my Roth contribution in that year by the same amount, would I end up in a better position at a retirement age of 67 if I did it from age 57 to 67? Also I’m looking at converting a trad to Roth at that 22% income tax cap.
What I don't understand is the white space from what appears to be the ages from 69 to 71. Why wouldn't you also fill that up to the 12%/15% line? I don't understand why it's remaining empty unless there is something that I missed while watching.
What would be helpful is a description of what the required minimum distributions do to the annual cash flow (spending) plans. For example, in 20 years, when the annual routine spending becomes, say, $130,000, and they have, say, $8 million under investment, they will need to take out 4% RMD, say, $320,000. From that, they can EASILY pay the living expenses, and give approximately a quarter of that to the federal tax authority. What becomes of all that extra cash? What's the issue simply paying those taxes, given all that un-needed extra money available?
If you run the numbers, any distribution not needed immediately goes in to the taxable investment account
13:13 does your software (that you're selling) cover California state tax?
California taxes brokerage accounts at ordinary income, none of the long term or short term capital gains business at the federal level 😢
Isn’t there a maximum a family/couple can receive from social security?
Nice thanks James
If you have the money to pay taxes ON INCOME then taxes shouldn't be a major concern. Financial planners who have no skin in YOUR game can be a bigger burden than income taxes. One worth their salt should work for a percentage of your estate and be happy to wait.
So you think planners can support their families today with income 25 years down the road?
I am looking for a tax planning program on which I can run scenarios. Do you have a suggestion?
try New Retirement. they have a 14-day free trial. $120/yr if you want the full subscription. it includes a Roth Conversion analyzer.
How do they have near zero tax rate today at 65? Not working? No high salary professional wages? What do they live on? Living on inherited money? Not everyone has that kind of fortunate life. Please explain time 8:29
2:18 they already retired as mentioned in this time frame. The takeaway is a strategy to retire but not taking social security and use those years to do Roth Conversion.
great video since the norm is a 1.7 million dollar house and 2 million in a 401k
1 comment on the expenses, the budgets being presented do not account for house maintenance. House maintenance on a $1m plus house can add up per year, it can be as high as 1% of the cost of the home. This needs to be in everyone's budget even though your house is owned outright.
Hi, Does your software includes calculations of opportunity cost? What I meant is 100K in T-IRA today, assuming future tax bracket is the same current your rate 24%. By 20 years later, 100 becomes 1000 (10X), government owns 240 you owns 760. Take extreme example, if you convert 100K to ROTH today, you are left with 76, by 20 years later, you have 760 (10X) because your rolling snow ball starts smaller. The number is the same 760. Of course I am ignoring unpredictable elements and standard deduction portion. Unless your RMD and SS forced you into next bracket 32%. Not many people can get above 182K AGI. If the market still grows 12% APR for the next two dacades, you sure can, but that is not a norm. What is the percentage bet of that?. You do save future tax by conversion but you also miss out the amount today you pay to government that won't grow for you for another 20 years. I am not a CFP but i also have a MBA and MS from tier 1 university. Please explain.
Nice job. I liked this overview of RightCapital’s ability to run scenarios to reduce taxes by early action.
So, they own a 1.7 million dollar home and their monthly living expenses are 6,000$. I call BS. The taxes and insurance on a 1.7million dollar home would be $$50,000 a year in most states and even in my state of SC with some of the lowest property taxes would be about 25,000$.
yes very difficult to keep $6K monthly expenses if the home was recently purchased at $1.7M. However, more doable if they had purchased it 20 years ago when it was only $300K and maybe only currently assessed at around $500K now. Also need to assume they paid off the mortgage and did not refinance later and still have a sizable mortgage payment
They could have bought the home years ago at a lower price and today it’s worth more, so the tax on the home is a percentage of what they bought it for not what it’s worth today.
For example my home here in SoCal worth 800k but I only pay 4k a year tax on it which is a certain percentage of the purchase price, if I sold the home today at 800k the tax for the new owner will be more than 4k a year possibly be more than doubled.
Could be they can capitalize the prop taxes but they would still have repairs and maintenance
They talk about driving to Yosemite etc. so they are in California. Thanks to Prop 13 if they've lived in that house for a long time they may only be paying a pittance in property taxes (I know of folks paying < 2,000 a year in property taxes on homes valued over 2 million). Most of the value there is in the land so the insurance ends up being less expensive then you might expect (the replacement value of the structure may only be a couple of hundred thousand or so giving an insurance cost < $1,000 / yr).
Property taxes should STOP when the house is paid off! If you buy a $1.7 million house with CASH you should pay a one time tax and done. Example? In Colorado you buy a toaster in Walmart you pay 10 per cent tax. Property taxes are dumb period! Sadly, we are taxed to death even at death. Why? Also, what do we get from higher property taxes? More police? Better schools? Cheers!
Luv case studies !
Question: Why do you tend to discuss everything in nominal dollars rather than inflation adjusted terms (i.e. present day spending power)? I've always found it much easier to understand things using adjusted dollars myself. Also, the goal for retirement is not to run out of money in a bad market. Shouldn't I optimize the available dollars under a bad outcome rather than an average or above average growth scenario? In other words given the unknowable future, shouldn't we optimize the success rate rather than the average ending balance?
Inflation adjustment just adds more assumptions and more complexity and does not change the illustration in any way. The risk is using adjusted returns but not adjusted expenses. As long consistent, it's more simple to just always compute in today's dollars since we know what those are.
The assets will rise along with inflation
Very helpful.
CFPs love Roth Conversions because you generally need their help. Most people are in higher tax brackets before they retire.
Not many people have $4 million in total assets at age 65. This is like top 4% of all retirees. I have planned $1.3 M in house, $0.7 M in 401K and $0.2 M other investments for $2.2. Yes, I have 1/4 in Roth. But I am like way ahead of most but very far behind the $2 M in Roth/IRA that only a few I know have.
Average 401K balance is $70,000. Not $3 million these guys have.
if you have the average of 70K in pre-tax IRA, then there is no worry about high tax.
Watching this, it sounds like the couple met with Root to find out how they are doing, versus handing over all control to Root. I tried to schedule some thing Root for check up and maybe a plan tweek. I was unable to schedule as the website said something to the effect that Root does not provide a one-time consultation. Has anyone been able to schedule a one time consultation with Root?
I see these Roth conversion proposals being run and they show significant tax savings but what it doesn’t appear to take into account is the time value of paying significant taxes up front versus in 20-30 years. I think it would still be a net benefit but just not as much as they show.
If it didn’t, he would be guilty of malpractice. The software is made to take all factors into account.
One another issue not discussed is what if one of them passes away. Then the tax brackets would change significantly.
If tax rates are the same, the TVM paying now vs later makes no difference. In other words, the growth on the money saved by not paying taxes now, will be the exact same amount needed to pay the taxes in the future. They equate to $0 ONLY if tax rates are the same. If tax rates go down or you can get into a lower bracket, waiting would have been a win. But if tax rates go up or you move to a higher bracket (perhaps by losing a spouse) then paying earlier is the win.
This software simulates the impact of that; your taxable account gets hit by the conversion costs in the short term, so you earn less there. But the money it let you move to the Roth grows and is tax-free when withdrawn. If you live long enough, you end up way positive. If you die shortly after rolling over, you end up behind (though your beneficiaries may still benefit from inheriting a Roth instead of a 401K/IRA, which would have required distributions fairly quickly).
1: Plan with a Financial Advisor . 2: Be frugal and minimal on spending (don’t buy what you don’t need). 3: Save and invest money towards retirement (Roth IRA/401k) 4: Save to(Invest) it’s a proven way to get richer very important to financial success.
How are they funding about $500k in expenses in 2024-2029?
If they're taking the money out of investment accounts aren't they going to use up the lower tax brackets?
I have a question if anybody can answer for me please-
Once the RMD starts, what if I pull out more money from tax deferred upto the next tax bracket & get the unused amount into my brokerage account & not do any Roth conversions & save on step up basis. Are there any drawbacks to this maneuver besides the capital gains?
So you want to pull from pre-tax (at which point no matter where it goes you’ll pay income taxes), but put it in a brokerage account instead of a Roth? That won’t affect your income taxes at all but as you noted, you will have to pay taxes on the dividends and capital gains on the brokerage account assets, so why?
The money that satisfies the RMD cannot be moved to a Roth. Anything above that can be converted into a Roth.
Any gains, interest and dividends are taxable in your brokerage account. In a Roth it’s all tax free. Personally I’m putting in a Roth.
For this example, your fees would be about .5% on their net worth ~4.15 million? So that is around $20.7k a year. If they keep you for 30 years and nothing changes in their net worth, that is equal to what you saved them. There are a lot of variables though. I think the biggest question is do they need to continue to employ you after you helped them come up with the early strategy. Is the financial advice something you pay for an initial period of time (like the first year), then come back to every 5-10 years for a sanity check? I'm sure some people would continue to pay for the financial advice every year because they want someone to manage their investment portfolio - but if I'm comfortable doing that on my own, then it seems like your advice is only needed for the initial planning period.
I thought there was a maximum I could put into a ROTH. If I already max out my ROTH at $8,000, am I able to add more to it?
Currently, there is no limit on the amount or frequency of conversions from traditional IRA to Roth IRA. This is a separate category from traditional Roth contributions, presumably the federal government is incentivizing people to pay those big tax bills earlier rather than later.
Contribution to Roth IRA is different than Roth Conversion. You can convert to Roth for any amount independent of the contribution limit.
Suggestion: The great book Die with Zero by Bill Perkins.
I just realize that 30% of my current IRA balance is not mine. Prepaying with tons of valuable cash up front is rolling the dice. Just use the dividends rolling in from preferred/high yield in the Roth account to pay the taxes on the RMD's from the pretax account. 70/30 split between pretax/post tax accounts, respectively, seems sensible to me. Gaming conversions is just that for 75% of the people doing them.
the keypoint is to avoid a large RMD when it comes.
RMDs are high because their investments are growing over time. The tax liability just depends on how fast your investments grow, and what investments they are invested in.
Excellent discussion.
But, ‘not so sure a $4mil net worth with a $1.7mil home is “simple people”. These amplified IRA/401K strategies don’t look like a half million $ of savings for more typical retirees, more likely $100-150K at most, over 30 years.
If you have large IRA/401K’s like this scenario, you might find it remains worthwhile to suck it up and pay the IRMA Medicare surcharges due to the much larger future tax savings.
It’s all relative. This is “simple people” where I live in North County San Diego. Actually describes many around here. What doesn’t describe many around here is 25K for a new car. That would be about double for the requisite Tesla Model 3, lol.
simple means they don't want large spending type of living. It is nothing to do with what they have. Billionair can live a simple life too if they are happy with.
Can you do a common man example? Dude makes 72K at age 55. Has 45K in 401K and 50K split between a Roth and basic investing accounts. (putting 7.5K in roth each year and about 5K in to basic investing). He plans to work till he's 70 and get SS at age 67 (about $2300/mo) to help bump up his later years investing. How likely is he able to continue to live same lifestyle, assuming home is paid for by retirement age of 70.
Basically, what happens to a normal dude who doesn't have a grand nest egg to early retire on? I am hoping to live off of dividends and RMDs and leave some savings to my son.
he should bump up the contribution to 401k
Perhaps do this same demo with not such crazy high portfolio and getting such a huge pension, most people don't have that much money or even a pension. How about showing example of a million dollars and no pension
im not seeing any video
Honestly, he’s better-looking than Ryan Gosling. For one thing, James’ eyes both point in the same direction.
I could go for either.
How much do you charge for an analysis like this? Or just for access to the software tool?
They live in California! A high tax state. Yet state taxes are not mentioned!
where are they getting the cheap cars? What planet will have 3% inflation? And what makes them think social security will actually pay?