Thanks for this and all your previous videos (and the rightcapital links). This did not change my mind, but based on your previous videos and my goals for charity, I had already been looking at this, including using rightcapital to model, but I wanted to +1 your comment about sometimes needing more detailed analysis, Playing with Right capital I did not find any models where Roth conversion helped my rather complex case. However, after realizing that AGI limits for charitable are different for donated assets (30% limit) vs cash (60% limit), I felt I could use Roth to both reduce RMDs and also to have cash for charitable donations, which further reduced the AGI . Could not figure this out in right capital but verified with detailed Excel modeling. ( I had previously used right capita to validate the Excel models that I've been using for years). It looks like doing Roths combined with charitable to give me more room to convert at low tax rates, we can increase our charitable giving by 25-50%, depending on market performance and lifetime, which is millions more for the charity vs taxes. So, to anyone watching this, don't give up on Roth just because you want to do or want to maximize charitable giving. It just might need a more detailed analysis.
Conversions affect income guidelines for Obamacare assistance grant eligibility, as well. Also, overall income affects the cap gains rate, from zero to 15%. Are those things factored in? I'm not changing my mind but there are a lot more moving parts to work around.
I believe the retirement crisis will get even worse. Many struggle to save due to low wages, rising prices, and exorbitant rents. With homeownership becoming unattainable for middle-class Americans, they may not have a home to rely on for retirement.
You got it! Buying stocks during a recession when prices are down could be a good move. You might get them at a lower price and sell them later when they go up. Just do your homework and be aware of the risks before diving in!
@@CharliesMcCormicks The issue is people have the "I want to do it myself mentality" but are not equipped enough for a crash and, hence get burnt. Ideally, advisors are reps for investing jobs, and at the first-hand encounter, my portfolio has yielded over 300% since 2020 just after the pandemic to date.
@@JacobReynolds-t7v Your advisor must be really good. How I can get in touch? My retirement portfolio's decline is a concern, and I could use some guidance.
@@MarcoWanner-h8j The beauty of MARGARET MOLLI ALVEY approach is her dual focus: while aggressively pursuing profit opportunities, she's equally tenacious about shielding investors from potential pitfalls. It's a balance few can achieve.
@@JacobReynolds-t7v Thank you so much for your helpful tip! I was able to verify the person. She seems very proficient and I'm grateful for your guidance.
My concern is whether I can continue to sustain my standard of living with $550k and avoid outliving my savings. Every withdrawal makes me a bit unsettled
@@ClemonSteve I'm approaching retirement and having a financial advisor has been helpful. I started investing later than most, so relying on compound interest from Etf's or bonds alone wasn’t enough for me. Despite that, I’ve managed to do well and am on track to retire with around $2 million
@@ClemonSteve I usually avoid making specific recommendations because everyone's situation is unique. However, my experience with Julie Ann Lerch has been quite positive. You might find it worthwhile to see if her approach fits your needs
@@EbrahamAljalil I looked for the name online and found her page.I will get in touch with her,Thanks for the help I emailed and made inquiries. Thanks for the help
The key is to convert little by little if you have time on your side. I am doing a few thousand at the time. I have no idea the tax rates by the time I retire. So, I have some in traditional 401k and some in a Roth account, and converting as I go.
@@harryl7946 Excellent choice! Be aware though that any match is pre-tax. You actually have a Roth & a traditional. Shud you ever rollover you will need to roll each portion into a different rollover acct.
@punknhead23 Every year ask them to change it, have your coworkers also ask. If they is enough demand they might change it, it won't cost them anything, or at least no major cost.
Even if you pay the taxes out of available taxable accounts…shouldn’t the time value of money matter here? In other words, should the tax payments with/without Roth conversions over lifetime be compared on a present value basis? If I pay taxes now, that PV $ is more expensive than PV $ paying later. The off setting factor is, of course, portfolio growth (tax free or not). So, maybe, the only thing that matters is effective net worth (ie. Netting out IRA rolling tax liability)…since that’s cash flow based…and shouldn’t there be PV overlay on that too in terms of spend power? E.g if I pay PV$1M in taxes in the relative now (ROTH conv period) vs PV$1M in relative taxes later (RMD period) then is, really is about when my net worth is better off…that might not be until my 80s…this becomes a life expectancy question. Anyway, the more I think about this the more complex the equation gets
I enjoy your channel. Always have managed my portfolio myself. I’ve made some stupid mistakes but also have persistently saved and worked hard so hopefully that makes up for it. I enjoy learning about money and retirement scenarios. I get a lot from channels like yours. You have an easy fun way of presentation. If there are a few things I have learned it is don’t try to swing for the fences. It’s ok if you want to do this in small ways but it can crush your overall returns if you try to pick the next Amazon too often and with too large amount of your portfolio. And even IF you DO pick the next Amazon remember you gonna have to hold it for a substantial period of time through fearful pullbacks which rarely anybody can stomach. I have picked several stocks that started out in the sub dollar and went parabolic. People don’t realize it’s extremely difficult to know how much to invest and when to add and when to sell. You can loose loads of money if you get any one of these wrong. Also don’t look at your portfolio too often. Maybe once a month. Have a good plan and ride it out. Also beyond a certain point money doesn’t provide any more level of happiness. Money can give choices.
Use both types. I’m 35% but an employee so I need the up front tax savings but I also do back door Roth and invest on my own outside of retirement accounts. On paper, I plan to be at a lower tax bracket bc I will only pull out of my 401 k each year up to the lowest tax bracket, I will pull out of my general investing account up to the max amount at 0% capital gains and if I need more money the rest will come from Roth tax free. In the years I sell property I will only pull from Roth and non retirement account up to 0% capital gains tax level. Rinse and repeat every year in retirement.
I converted a few years back and paid a hefty tax bill. Now my ROTH is growing tax free! I think it depends on each person's situation. I'm glad I did it!
A trad IRA also "grows" tax free. The only difference is when u pay the tax. The growing part is the same. You only need to worry about the tax situation before or after, or if you need or want more money now compared to later.
I know this and my logic in paying upfront is that taxes will continue to rise, so therefore, I'm paying less tax on my conversion now rather then later. Even, if you could convert small portions and pay taxes now, it outweighs kicking the can down the road!
@TT-00000 But the facts still remain that we don't know for sure if taxes will be more or less, we assume gov will raise rates but historically they can rise or fall, and we have guessed wrong before. I just know many people believe that paying the taxes now gives a greater overall yield down the road even if the tax rate will be the same, and that is of course not true. There are still advantages to both, but are tied to each individual whether those matter.
@@alanpedrick1562True. But all signs suggest taxes have to rise to cover national debt and obligations. More importantly, unless my spouse and I die at the same time (e.g., in a car crash), one of us will be paying taxes at the single rate for the rest of our lives. And that is a _big_ tax bite. Better to pay at MGJ rates today.
Agree, depends on your tax bracket and overall financial circumstances. We did our Roth conversions in some accounts in our late 40s at the advice of our CPA. We have traditional accounts too from pension lump sum rollover’s. We retired in our 50s and our financial advisers confirm it was a smart move. My wife just hit 59 and half and I’m almost there. Life is good. Cheers!
7. You'll be getting a sizable pension, your spouse will still be a high earner, and the conversion puts you in a higher bracket. My solution is to draw on the pre-tax and delay SS until my spouse retires.
@@samkitty5894 IRMAA my friend...IRMAA. It looks at joint income. SS isn't free...I paid into it. Also, I may plan on working p/t doing something I enjoy after I retire from f/t work. That would mean delaying SS and delaying draws on my pre-tax. I have to keep income below the IRMAA threshold while she's still working f/t - I'm not giving the gov't any more money than I need to.
@@vernshird711 Some of my friends thought the same as you. They wanted to delay SS until the age of 70, for maximum benefit. Until then they wanted to live off of 401K RMDs and their bank account savings. Well, some died...something they didn't plan on. I started my SS at 66 and will be drawing RMD at 73 (if I live that long). Why not take SS? If I don't, I lose it...Why let the government keep it while I wait for RMDs. Passing up SS and living off of other sources of income doesn't sound good. But, to each his own... Good luck and may you live to be 122, for maximum RMD draw.
@@samkitty5894 I should have clarified that the SS wouldn't be delayed until 70, but only until my wife retires so I can avoid the IRMAA surcharge. I'd be in my mid-60s. Waiting a few years to collect isn't a big deal in the grand scheme of things.
@@samkitty5894 For me the main reason not to take SS early is if you're married to a younger spouse that also has a lower SS benefit. An inflation protected guaranteed income is a nice safety net for the surviving spouse.
Glad that you mentioned ACA subsidies. We receive an excellent subsidy but need to keep a close eye on our taxable income to qualify for it. Our annual Roth conversion is closely tied to that number.
The government should run a completely free, first rate financial advisement for all citizens especially since they deliberately omitted these “tricks” from our high school curriculum. Thanks for your sound advice. It’s very appreciated
It took you perhaps 35+ years to get to this size of a nest egg. Can anyone guarantee I will get outsize returns after I convert? No. I will leave it be and let the person after me worry about taxes. I worried my whole life. Now is the time to enjoy
I agree 100%. My dad passed away and I inherited his IRAs. He was a private person so I had no idea he had this money and I was pleasantly surprised at the amount. Never for a second did I think “I wish he would have paid the tax so I won’t have to”. It is found money and I am happy to pay my tax.
@@keithmachado-pp6fv Yeah, but now you have 10 years to use it up, AND pay the taxes on it. And if it's a sizable amount, your tax bracket will go up resulting in even higher taxes. But it's found money.
Yes, but I retired this year so it will be at lower rates. I did not take anything out during the first 4 years so will have 6 more years to deplete the account which will be what I live on and aligns with when I expect to start SS.
Definitely. I have a pre- and post tax column and reduce all income by 24% to be conservative. Reality is, if rates stay high I'll put some 401k money into tax free bonds
Charitable contributions....totally agree. Very good reason. Reasons 3/4 very good.❤ Need to look at where you live now and where you are going to live.
I think you missed a big reason. If you have no children to leave the money to or choose not to leave money to kids for whatever reason. RMD's are only in issue if you are trying to preserve big wealth for the next generation. All of these calculators are using the mean path, what if you are on the unlucky path RMD's won't be an issue as the amounts will be small. If you are on the lucky path and have so much money you are in a 34%+ bracket, Awesome!! Pay the tax and count yourself lucky. I think burning all of that money to pay taxes early for something that may be an "issue" later might cause an issue by lowering your balance compounding the sequence of return risk.
IRA's were set up initially to help people save for retirement. If you pay more taxes when you are retired than when you are working, you didn't need to save IMO.
You are correct converting examples seldom show the compounding effect of not converting and exaggerate the time frames beyond logic. Lots of different tax policies over the next 20-30yrs will come and go, plus remember you may pay your taxes as you convert but what if your portfolio goes down-you cant write off your losses
I’m going to have to watch this about ten times and stop to look things up, because it seems like there is some very useful information here that is worth digging into.
I’m 38 and have done Roth conversion a few times. My thought is to pay taxes while working so I do not have to when I’m retired. The goal is to have your taxable income in retirement under the married tax deduction.
On Reason #2, whether you pay the tax from other funds or the IRA funds makes no difference if you are over 59 1/2. In both cases, you are using funds you could otherwise invest for growth.
This article below explains the math behind why he’s correct on reason #2. The Arithmetic of Roth Conversions By EDWARD F. MCQUARRIE AND JAMES A. DILELLIO May 2023 from the Journal of Financial Planning: May 2023
Nope. If you withdraw $100k and pay 20% tax, you have $80k after tax. It does not matter how you pay the $20k, that is $20k you cannot invest in anything, whether it’s a Roth or otherwise. If the funds are coming from a brokerage account, your heirs get a step up in basis, so you will never need to pay tax during your lifetime if you don’t sell and they won’t need to withdraw funds in 10 years like they would with an inherited Roth. . You can also harvest losses during your lifetime which you can’t do from a Roth.
I read the article and get the point, but it is too simplistic on multiple fronts. 1. It assumes the money is invested in stock and tax will be paid. I have invested in stocks for 40 years and never paid $1 of capital gain. I do take my $3k of cap losses every year against ordinary income however. 2. You can invest in other assets that will not be taxed such as municipal bonds, universal life insurance or real estate (primary home). 3. It assumes you will have gains, which investing in stock is not guaranteed. The biggest issue with all the Roth conversion analysis is that they assume you will eventually pay tax someday on ALL of your traditional IRA money. Given that RMDs start at about 4% and it takes into the 90’s to get over 20% of total, it is conceivable you will pay tax on less than half the total in your lifetime. Yes eventually your heirs will be paying the tax but that is the only way I get the math to work to make conversion worthwhile
@@Toomanydaysbut the assets don’t have the same tax status anymore… that will impact the after tax rate of return and therefore the future value of your assets. Paying taxes from the conversion will reduce the amount of tax advantaged funds in your portfolio. While paying from a taxable account improves the quality of your tax-deferred assets to tax-free without decreasing them!
Now I remember one reason I passed on Roth a while ago Heirs making less pay less tax than I would doing a conversion. Thanks; I will tell the kids to kick it in gear while I spend the RMD.
With Secure 2.0, little reason to do conversion. I will not have to take RMDs until age 75. I live in a blue state with high taxes. I will live in a tax free or low tax state when I retire and start taking RMDs. Depends on where you live NOW. Do the math. I have converted a portion only...also had to consider how long money will be there and purpose for the money. Money converted will be left to family. Agree 100%...it's a personal decision. Great video.
I was hoping to prolong taking social security and convert small portions for 4 or 5 years… like 60k a year to grow the Roth portion and then stop when I start drawing social security. Am hoping to convert at a much lower rate - like 10 - 12 percent. I wouldn’t do large portions… just trying to reduce amount of RMD’s later in retirement. If I can get even a small portion moved over in 5 years, think it’ll be worth it in the long run.
If you are in the 10-12% tax bracket then do as much as you can convert as long as you have enough cash on hand to cover the taxes on it and not deplete your cash too much.
Working through some of this now. The big issue that comes up is Healthcare and ACA subsidies. If you are already on Medicare, then it won't matter. For me (I'm 55), I may just end up converting everything this year and paying the higher taxes, so I can save 7K or more a year (depends on how much I convert, 70k rollover will cost about an extra 7K in insurance premiums) on healthcare. It won't take many years to make up the difference in tax rates. There is also the added benefit of how much of your SS gets taxed, if you get to 62 and start collecting. Converting everything means my only source of income is SS (Roth's don't count), so I won't have to pay any taxes on those earnings. If I'm converting every year, then I'll be paying taxes on 85% of my social security, every year until those conversions are done. If everyone is healthy, you can buy a simple private insurance policy while converting and hope no one gets real sick. Not an option for me.
@@jamesleonard4713 my wife will have a good pension starting at 60… along with that, they allow her to buy into her medical plan at same rate as state employees I believe. Was going to hold off collecting SS so I can get a good portion converted and don’t have to deal with IRMA issue later. Right now we’re in the 24% bracket, so not really wanting to convert much right now. So, I have roughly 5 years to get a good chunk converted. Edit: If the market dips quite a bit, may be tempted to convert some as converting when markets down is ideal.
@@jamesleonard4713Run some numbers. Leaving some funds in pretax could also yoeld tax free income since you'll have the standard deduction giving you some tax free income. If half your SS plus some pretax income stays below the current $25K limit, none of your SS will be taxed either.
No mention of the real probability that taxes will he higher for everyone in the future due to the out of control national debt. So Roth conversions make more sense than ever before.
Increasing tax rates are the reason I rolled over my 401k to a Roth. I don’t want to be 59 paying taxes on current income on withdrawals made from my retirement account.
Pre-tax contributions may help reduce income taxes in your pre-retirement years while after-tax contributions may help reduce your income tax burden during retirement.
Both have their perks but you can also save for retirement outside of a retirement plan, such as in an individual investment account or employing the services of a retirement planner/investment advisor.
Reason 6. The ACA adds an effective 8.5% marginal rate to the taxes due. 22% becomes 30.5%. Ouch. It wrecks the effectiveness of a conversion really well.
Depending on your health and how many you are buying for, you can find private insurance that's not as expensive. Which is what I'm doing for a few years.
I am surprised that all my friends that have retired early with large 401k balances are not converting because they don't trust that the government will not somehow undo the rules and tax the accounts. I don't think that will happen, but my concern is the risk that my tax rates will be low enough in retirement as I draw down the accounts that I will not have needed to convert, but I think that is in general pessimistic, so I think converting at the 22% rate might be worth it for me.
We are 5 years off from huge RMD starting at the age of 73. Using recent inheritance to pay taxes on each Roth Conversion from 401k every year until RMD. Another advantage is heirs get tax free inheritance when we die. Considerations include IRMAA, social security taxes, minimizing federal and state income tax liability.
Did a rollover for a client...have converted a small amount so as not to cross any tax threshold past few years. We won't convert it all but he was in position to. Plus, the 5 year rule on conversions wouldn't impact him.
Reason #1 baby. Not paying a nickel until I have to. There are no longevity or growth guarantees and who knows what could change in the future for rules. I will take my chances.
Roth conversions are a great option for many people. I've been converting Roth for several years. Peace of mind knowing my Roth grows tax free and keeps Uncle Sam's hands off of it. Remember what Ed Slott says, "Your IRA is an IOU to the IRS. You don't own it...only partly.
Both Traditional and Roth accounts grow tax-free. The difference is Traditional accounts get a tax break on the front end when contributions are made, and Roth is not subject to income tax on the back end, when withdrawals are made, but no tax break when contributions were made. It can come down to tax rates when making contributions vs. expected rates when making withdrawals, life expectancy, and whether or not you are concerned about potential tax impacts to heir(s).
@@CSM-68 Roth IRAs weren't available to many of us who are in or nearing retirement until we were maybe mid-career,. Then Roth 401Ks came along later (none of my employers offered a Roth). So we went with the only option up until that point, which was Traditional. Now the question becomes would we still come out ahead tax-wise if we convert at this point, which is what this video is about.
@@CSM-68 Well, you are assuming that when Social Security is bankrupt and the Democrats are running things that they won't change the rules and then make you pay taxes on your Roth withdrawals because it's not fair that rich people aren't paying taxes.
The video didn't mention another important reason - if your current year income is already high enough already to hit the high tax brackets, then there is no saving on tax doing the conversion now and pay the conversion tax at the high tax brackets. Roth conversion only makes sense if your regular income is in low tax brackets allowing you do "some" conversion to fill up the low tax brackets (tricky to calculate). If you already in high income tax brackets and watch this video and say "Oh, none of these reasons apply to me, let me convert all my IRA to Roth" then you are mislead.
Becoming a millionaire through a Roth IRA or a 401(k) involves different strategies for maximizing profits. A Roth IRA offers tax-free withdrawals in retirement, which can be advantageous if you expect to be in a higher tax bracket later in life. On the other hand, a 401(k) provides tax-deferred growth and potential employer contributions, boosting your savings. The optimal choice depends on factors like your current and future tax situation, employer match, and investment options. Consulting a financial advisor can help tailor a strategy that aligns with your financial goals and circumstances.
Prioritizing effective personal finance management holds greater significance than the sheer amount saved, irrespective of income source. Consulting a certified financial advisor can offer tailored strategies to optimize financial results by reducing expenses and enhancing income, regardless of whether it's earned through employment or investments.
tax free dividend is not wise. The money in roth does not have RMD and can also pass it to your beneficiary. So, you can put the roth money to more aggressive investment if you don't plan to use the principle of the roth. You will gain much much more than earning dividends.
wait until you are retired and are in low tax bracket then convert over a few years - you should be in the 10% bracket for the taxes --- don't forget - most of these conversions are from funds that came from 401k so think of the much higher rate you would have paid when working
That's what I'm doing. I deferred the pretax savings at the tax rate of 22- 25%, and am Roth converting at mostly 12%. Got to use Uncle Sam's money to grow my portfolio for a couple decades.
And any traditional IRA/401k balances that you have should be Roth converted now while you are low tax rate. Assuming you have the cash to pay that tax bill. Not worth it to used converted funds to pay the taxes. Reduces the Roth amount working for you over time.
I don't understand something. If I don't have outside post-tax accounts and thus must pay taxes from my IRA when I do the conversion, why is this a reason to not convert? After all, I must pay the taxes sometime. I know I will have less to invest now, but it seems to me that by converting now before my tax rates go up, then I'd still be ahead in the long run. Right? Is it still possible to get access to the tool? BTW - great videos!
If you believe tax rates will go down in 2026, then go ahead and stick with your taxable retirement accounts. If the state and federal government begin to take 50% of your distributions, you may regret not converting.
Thank you awesome video! I retired with a state pension affected by WEP & GPO. We are both 60 y/o no debt my wife will retire at 62 y/o and we both will claim SS at 62 y/o due her early stage breast cancer diagnosis 5 years ago. My SS monthly benefit at 62 y/o is $124 due to the WEP. My wife’s SS approx $2300 at 62. We need the income from the IRAs for our monthly expenses. Roth conversion in our case doesn’t make sense. My spousal/survival benefit for SS goes to ZERO because of my state pension (Gov Pension Offset) So claiming SS ASAP life expectancy is shortage for my wife before spousal/survival goes to zero😩
If you have a high income AND are a trader it's a no-brainer. We converted and paid the taxes. Our financial advisor has a huge problem with people refusing to sell because of taxes. After conversion we began with Amazon, Apple, MSFT, etc Two buddies, also techies, convinced me their companies were going to change the world - Google (2015) and Nvidia (2019). They may not have changed the world but they changed my life! LOL Yes to a Roth.
We have a 1st lean HELOC “no mortgage” we could pay Roth conversions with. we are taking S.S. @62 and with 1 pension is more than enough to cover all expenses with about 3k leftover each month. I worry about huge RMD’s 20 years from now. With about 900k in 401k and IRA we like to convert in chunks and stay in the 12% bracket. I welcome any all comments TIA😊
Some "experts" push IRA/401K saying when we retire we will be in a lower tax bracket. Other "experts" say IRA/401K are a bad idea because taxes later could go up dramatically and paying high taxes would eat away any benefits or profits. I learned not to listen to the "experts".
I agree. Do what is best for you bc nobody knows what is gonna to happen in the future. Even if tax will be raised in 2026 and if you won't convert a large size, the amount of taxes will be paid still marginal and likely irrelevant.
At the current government spending, if you think taxes are going down you are fooling yourself. You may be in a lower tax bracket because you are not making as much money, however Pensions, Social Security and 401K RMD's are all taxed as ordninary income. If you are married filing joint, you may be in one tax bracket. When you or your spouse dies, and you are filing single, the Pension, SS and 401K may push you into a higher tax bracket than expected.
@@CSM-68 True...retirement may prove to be painful and hard for many people if current government practices continue. "Normally" retired people don't carry a mortgage, auto loan, or pay for college education. Their expenses are lower...but, with astronomically increasing property taxes, insurance and home maintenance costs, many won't be able to stay in their homes. The only solution is to move to another country. Swallow your patriotism and pride and go. America is broken on every level, and very unsafe.
@@samkitty5894 Imagine you & your spouse have a total of 700K in IRA at age 55 (normal scenario to me if you have work hard and save), let it grow at 7% for next 20 years before RMD at age 75, your account will have 3.3 Million. So, RMD will be an issue then.
I put money in an IRA to save money on taxes at the time, when I was working and my income was much higher. When I start withdrawing from it, I'll be retired and in a much lower income bracket. Possibly so low I won't pay taxes at all. I never saw the need to convert to a Roth. If you aren't in a lower income bracket at retirement why even save for retirement??
It's great to duck the brutal 22% tax bracket and keep the cap-gains rate at 0%. Some people also don't fully realize that the 15-20% that they contribute to their IRA, HSA or whatever every year is no longer a spend once retired.
I can not see how a Roth Conversions does not make sense most of the time. If one has a large IRA account they should start Roth conversions ASAP to avoid/minimize the RMDs that are going to hit them at 73. The RMDs are not eligible to be converted into a Roth IRA. A large IRA can be converted evenly over a given a time frame (20 years) in order to stay within the 24% tax bracket. A large IRA conversion to Roth (within a couple years) may put one in the 34% bracket which in the long run will reduce one's overall net balance/worth. I can not think of any disadvantages to having a large Roth account other than the unpredictability of government's tax rules.
My wife and I will have decent sized pensions, so we'll have quite a large taxable income even in retirement years BEFORE RMDs and SS hit. If I were starting in a low tax bracket, I can see the benefit. That said, my calculation should really be the DIFFERENCE between my tax brackets before and after RMD and SS hit.
I'm going to start taking withdrawals on the IRA, put into taxable brokerage acct in dividends, pay 15% tax on those. My life expectancy isn't a good time value for me. IF I was 50 I'd do a conversion.
I don't really understand no. 2, it seems like if it makes sense it would work either way paying taxes with after tax money or converting to pay, because money in an IRA is only worth the after tax amount now anyway, so $4 in an IRA is worth $3 outside etc. That seems like a small reason that would not push the answer significantly in one way or the other, but I'm open to a more direct proof.
Not sure on all the reasons, but one I can think of is the taxes you pay on a regular account. Say if you were collecting dividends in your brokerage account, compared to dividends you receive in an IRA.
If you pay the conversion taxes out of a reg acct then you have that much more in a Roth and that much less in the reg acct subject to tax, that still doesn't move the needle for me
Roth withdrawals will absolutely be taxed at some point, but indirectly. They'll do something like include it for purposes of calculating IRMAA, the same way that so-called tax-free income is included.
Parents should schedule a meeting with their financial advisor for their children when they graduate college. It is confusing how to navigate investment and retirement accounts. My Dad was very frugal but didn't know about investments so I didn't know what I didn't know. I have a financial advisor and, an accountant but I am still afraid of messing up something when preparing for retirement. I have tried studying but I feel much of the information doesn't apply to my situation.
Setting up appointments with CFPs and CPAs for this very reason. Most online calculators show it to be a wash at 15-20 yrs. My wife and I are in high tax brackets and will remain in these brackets for the first 10 yrs of retirement (spending a good portion when you can still enjoy it). If I were to guess the outcome I will most likely convert some over the next 3-4 yrs prior to RMDs and let that grow with aggressive large cap tech companies for money needed in 15 yrs.
I'm in the same type of situation. I have trust income that starts me out in the 22% tax bracket. So not much wiggle room in doing a big Roth conversion without pushing into the higher tax brackets. But yes, you have to live a long time to overcome the tax payment deficit of the conversion. Other benefits though are reduced RMD and heirs can deal with the inherited IRA/401K balances at their leisure and tax free instead of 10 year limit and taxable withdrawals.
60 years old and I didn't manage to save that much in my Roth so the plan is to only take minimal withdrawals that the Roth can support and do small Roth conversions each year 10k to 15k each year until 70. I'm relying on my traditional for the bulk of my expenses. Wasn't planning to retire until 62 but, well new management had other ideas. Will delay Social Security as long as I can. I have never been as happy/scared in my life.
The first SECURE Act torpedoed my plans to provide for my kids. Now I get to jump through all the new hoops to attempt to protect my kids from huge tax burdens in the future
I can’t find the notes you talk about. I am interested in knowing more about the strategy of drawing income from my deferred accounts along with my taxable accounts.
Question: I have the Traditional 401K and have not considered the Roth Conversation. The primary reason is that I plan to retire overseas and will qualify for the 2555 Foreign Income Exclusion which makes the first $120,000 USD not taxable in the USA. My retirement income is most likely under this threshold. As I see it, there is no benefit for the Roth Conversion or anything Roth-related. Or am I not considering something? In summation, with the traditional, I get the tax breaks now and I also get them in retirement.
So you are retiring overseas and will continue to work for a US based company? Is that really retiring if you are working but overseas? So the income (from employment) that will be excluded from taxes will be Salary, Wages, Bonuses, Commissions, or Self-employment income? The 401k withdrawals, if any, would not be excluded from taxes, am I understanding that correctly? I don't see how you would not pay taxes on your Traditional 401k withdrawals.
I fail to see the advantage in a Roth 401k over traditional. When I take the money out of a traditional 401k it’ll be taxed as income, but I’ll be in a much lower income bracket during retirement than when I’m working. So how is that calculated?
If you are going to be in lower tax bracket when you retire or move to a state with no income tax, it often times does not make sense. If you let 100k compound versus 65k compound 100k compounded taken at a lower tax rate is going to give you more in the end. Problem is everyone argues that tax rates are only going to go up. One thing I think people fail to realize is that if enough people do Roth conversions and tax revenues decline, there is nothing to say that Congress cannot change the rules on taxing Roth distributions in the future. It's the same idea as saying Congress is for sure going to increase tax rates on everyone in the future. That's why I say, do a little Roth conversion for money you believe you are leaving to heirs and keep rest in traditional. Everyone's situation is different. Flexibility of Roth money (contributions) is nice.
Thanks for all your good advice and work…….however! This system is sooooo messed up and confusing ON PURPOSE! We are forced and need financial advisors just to keep paying more and more for guidance when it should all be simplified for us seniors. Read and educate yourself on these matters and consult with your tax preparer…..NOT a CFP! This is a self-propagating system and you will spend soooooo much money just to feel comfy n warm! Educate yourself
Due to a lengthy work history, my wife and I have our retirement in4 main accounts 1) 58% a pre-tax IRA that started as part of a SAR-SEP from 24+ years ago 2) 29% in a pre-tax 457b thru my current office and then 3) 8% in a ROTH in my name and 4) 8% in a Spousal ROTH in my wife's name..... Going forward #1 will probably grow on it's own without more contributions #2 will continue being contributed to through payroll deductions, and #3 & #4 will be contributed to as we can scrape money together. We are not seeking to convert, but it may become beneficial to do so in part once I retire. As our tax bracket will most likely be the same or lower, I can't see too much benefit from converting all of it at this time. The ROTH accounts that we are building are only meant to give use more flexibility with RMDs.
Anyone considering conversions should beware compound taxes - i.e., causing more qualified dividend income and long term capital gains to be taxed. I'm in that boat, so any conversion I do involves an income tax on the conversion plus a 15% additional tax, due to causing dividends to be taxed.
@@barrybmw6101 Sure - income is stacked, so qualified income (like qualified dividends, long term capital gains) are stacked on top of regular income. Qualified income isn’t taxed, though, until your total income reaches $47K (single). Suppose you’re retired and you have $30K in non-qualified income (e.g., non-qualified dividends, consulting, social security, whatever), which is taxed at a marginal rate of 12%, plus $20K in qualified income, of which $3K is taxed at 15% since it’s above the total threshold. Now you do a Roth conversion of, say, $10K - you’ll pay 12% on that $10K, plus it will push $10K more of your qualified income into being taxed, at 15%. So really your tax is 27%, not 12%.
@@barrybmw6101 Beware that the same concept shows up in other areas too. How much your social security is taxed depends on your other income. How much you pay in IRMAA fees depends on your other income. So if your other income includes Roth conversions, then it could cause more social security to be taxed, or could cause you to owe IRMAA fees.
@@nunuvyurbiz123 Yes, I wrote a very involved/complex Excel spreadsheet showing me everything from taxes to when the 401K will be completely empty and the yearly spend rate. Trying to get lots out of the 401K before I hit the IRMAA age and before SS and RMDs will not be a significant factor for me. I did learn (or refreshed my memory) from this video that gifts to charity should come from your 401K so adjusting the conversions down some to allow for that. This helps the tax situation a bit.
Great video. One of the reasons you mentioned not to convert to Roth is if your heirs are in a lower tax bracket. What about the surviving spouse? The surviving spouse will have to file as Single and their tax bracket is essentially cut in half. Isn't that a reason to convert to Roth?
Yes, but they may be in a higher tax bracket because they’ll be a single filer. I’m more referring to if your heirs don’t earn much income. But yes, the surviving spouse is a big reason to convert.
Thanks for sharing. I feel that there is a lot of information missing in these Roth conversion stories. It would be great to have a flow chart as there are so many decisions that you need to be aware of. The first question is likely if you are likely to have excess money in your retirement account that will be inherited. The scenarios seem to be very different if that is likely to happen. If you plan to leave your retirement account to your heirs, then (as Kevin says) you have to take into account whether your heirs will be in a higher or lower tax bracket than you are. He drags the slider for the tax bracket like it is an optional setting. Wouldn't I end up in a higher tax bracket if I converted my full IRA over a few years? Kevin is the first person that I have heard share the secret that you should pay the taxes with money outside the retirement account. I had not understood that until now, and all the calculations that I had done showed that it was better to not do a Roth. However, I wonder if he is taking into account the fact that even your pre-tax non-retirement account will continue to grow. I am still skeptical. I need to try his tool to learn more. I clicked the link - the whole thing feels like a tool to collect your email address and personal information. This is not for me.
I have more money growing by not having a Roth. I would be surprised if anyone could really do the math on what is better. As the saying goes "six one...half dozen the other". I do find it funny though when people ask if I have one and I say no. They are appalled :)
I'm converting 100K a year, paying the tax outside of my IRA and 2 years in I'm already up 50K in the Roth account. I hope to convert most of it before I hit RMD's. You really have to work the numbers. Because I won't have any RMD's that money will exponentially grow much faster and it's all tax free.
My view on ROTH conversion is that in theory they are great. But in practice it depends if you need that money now or later. For example, if you decide to retire at 60 and have a 401k (in addition to a ROTH and a brokerage) , then delaying social security until 70 will allow you to take out the 401k (if it provides you the overhead for the decade) and avoid the ROTH conversion . This way your ROTH grows, the social security is delayed and taxes are minimal from 401k, IF and only IF you take our UNDER 42,000. Correct me if I am wrong {not sure if unemployment is also taken out of taxes from 401k }
This is a good plan. You need to run some spreadsheets, because it all depends on your specific situation. It is best to have some money in Roth and some in Traditional IRA. What most people do not understand is that once they start taking Social Security, their effective marginal tax rates are likely to be much higher than they are right now when they work. Your income will be lower, but the effective tax rate higher. This is counterintuitive, but you need to explore this more to understand. The effective marginal tax rate is the percent of the federal tax you will pay on the last $100 of the taxable income outside of Social Security. In many scenarios, this is going to be 185% of your theoretical tax bracket. Read more info by googling the-taxation-of-social-security-benefits-as-a-marginal-tax-rate-increase I cannot provide the link here.
@@pbtube58 true, but by my calculation CA does not tax social security AND if I dont take it until 72, then from 60 on, I can withdraw, say , $40K from my 401k and still not pay any taxes or very little.
@@BorselinoThadchack There is no benefit of delaying SS beyond 70. Also, if you pay little taxes at retirement, it might mean that you paid too much when you worked. The best strategy is to be at the same marginal EFFECTIVE tax brackets your whole life (may not always be possible).
@@pbtube58 true, my social security will be pretty average at 67. hence why I want to wait those 3 years to squeeze a bit more. I ve been self employed for most of my life so my 401k is in addition to an HSA and A ROTH. Also my wife is younger and still wants to work. Whereas me, at 60 (not yet there) , I am kinda sick and tired of that job. So that is why I figured that I can pay a bit more than half for our overhead from my 401k and wait for SS. Meanwhile, my wife can still work and save , while I drawdown the 401k. No debt whatsoever, so that is an advantage. It's just for me to get away from a job that I started to hate. And I will be too old to get hired in other industries. That's the thinking. Thank you for commenting. My hat's off to you !
@@BorselinoThadchack Looks like a good plan. I will also wait until 70 for SS. In the last 5 years, I did significant transfers to Roth in order to go all the way up to 24% tax brackets, which I consider a good deal. Now, I have about 60% of my retirement money in Roth and 40% not yet taxed. This should be a good mix. I will no longer do Roth transfer this year, because now I need to watch for the Medicare Plan B and D limits, beyond which they become pretty expensive (times 2, including my wife). The problem is that they look 2 years back. I want to retire in 2026, so I need to keep 2024 with not too much income. I will be 66 this year. So, after I retire at 67/68, I will also draw before-tax money, and maybe even move some to Roth, if this does not cross my thresholds. Not much time until 70, but I am already well positioned with 60% in Roth. I have been working so long because I have a flexible job that I like. Good luck.
I am with reason #1. I just don't feel like put out the tax money up front espcially in my 50s to do the roth conversion. My second reason is that if I leave my IRA in aggressive growth or sp 500, let it grow like at average of 7% over next 15 years at around age 65, it will grow large enough that I can take additional withdraw to pay for the roth conversion for the next 10 years before RMD. This way, it "feels" like that the grow can pay the tax by itself. Yes, the overall portforlio will dip some, but no one needs a large bank account to die with.
I'm pretty late on Roth. No fault of my own. When Roth IRAs started they were only for child secondary college expenses, no taxes on gains. WHEN did the rules change? After we all have giant 401Ks or IRAs, it doesn't make sense to convert for most of us.
Good video, I'm curious when I start taking required RMDs from my IRA, I think that's age 72, what is the RMD calc for that? Is it like 15 years? So divide my balance by 15? Just trying to get a rough idea. I'm 10 years away from it.
Your example about California income taxes is misleading because rates start at 1.0% and are graduated. For example, I earn about $200k and my taxable income is about $150k. My effective taxes are $6800, or ~4.5%, which isn’t much different than Utah’s flat rate of 4.65%, despite the fact that Utah is considered a “low tax state”.
what about taking some of your money - if the markets crash - getting out of the Tax bracket then investing / day trading it as the market rises and see all the increase outside of tax dollars
Move it in small increments per year. In retirement, then you can raise the level of the increments remembering you need to wait 5 years for each conversion. Sometimes you may be able to do it without paying taxes at all. Also your chain of dividends from previous conversions can cover any taxes you have on this year's conversion if you are 59 1/2 plus. If you put that money into a diversified portfolio of BDCs and covered call ETFs such as CION and SPYI, you can generate dividends greater than 10% and just spend them, remembering to reinvest 10% of your dividends back into your BDCs and SPYI to make up for inflation. You also should have qualified dividends in brokerage accounts to take advantage of qualified dividends' long term capital gains. I really should have been a financial planner.
Unless you have a time line of at least 10 years out, it just takes too long to make up that lost compounding factor of those tax dollars no longer growing!
My projected RMD's are massive. I'm converting 401K chunks until RMD's start. I can't get any of the convert or don't convert math clear in my head I just do it every year and pay the taxes on it from income. I cannot imagine ever being in a lower tax bracket given the pending RMD's plus pension, SS and other non-deferred investment income. I see the videos on UA-cam with numbers being put into calculators and they apparently show its rarely logical to do Roth Conversions.
Obviously there are a lot of things to consider when doing a rollover, which I'm working through now, but the big issue that comes up is Healthcare and ACA subsidies. If you are already on Medicare, then it won't matter. For me (I'm 55), I may just end up converting everything this year and paying the higher taxes, so I can save 7K or more a year (depends on how much I convert, 70k rollover will cost about an extra 7K in insurance premiums) on healthcare. It won't take many years to make up the difference in tax rates. There is also the added benefit of how much of your SS gets taxed, if you get to 62 and start collecting. Converting everything means my only source of income is SS (Roth's don't count), so I won't have to pay any taxes on those earnings. If I'm converting every year, then I'll be paying taxes on 85% of my social security, every year until those conversions are done. In my case, the wife started collecting SS this year, so every year going forward we'd be saving on taxes. This savings is definitely something to consider if your thinking of not doing the conversions at all, since taking regular distributions every year, means your SS is going to be taxed every year. If everyone is healthy, you can buy a simple private insurance policy while converting and hope no one gets real sick. Not an option for me.
Looking at a non taxed retirement account is fools gold. If you’re looking at what is in your account is not real until you take the taxes out of it. Non Roth accounts are so frustrating for that reason
I don't see how magically coming up with funds to pay for your Roth conversion taxes makes a Roth conversion financially workable. If you don't take into account, the funds that were used to pay the taxes can also grow in value and you don't have to pay taxes on them in many investments. For instances, if you buy municipal bonds or just a market ETF but never sell any. Another point, if one is high networth, paying max tax bracket today & due to expected sizable growth of investments going forward to stay in the max tax bracket. The Roth conversion breakeven will be loooong time. Might as well enjoy life now vs pay less taxes when 90 years old. 😊
I agree. I never jumped on the Roth conversion bandwagon. I saved a lot of money in taxes by investing in a reg IRA. When I start withdrawing late in life, I'll be in a much lower tax bracket thus much lower taxes, possibly no taxes. If you aren't in a much lower tax bracket when you retire why are you saving for it??
@@bob5365 Could be. My tax strategy has always been show low income with lots of write offs. I also don't have state income tax where I live. I'm 66 and it's working so far but I'm not rich so I don't have the worries of the rich. I have more than enough to do what I want and I'm satisfied.
A flaw in the premise of #2. Of course if you pay taxes from the IRA pretax account, then sure it can hurt you. But ... if you would be using the pretax IRA for most of your living expenses, then that is a different situation ... and I offer that most/many folks in the average situation invested in pretax 401k for most of their working life and find themselves in this situation, especially if retiring pre SS FRA and living from the pretax IRA funds until FRA (or to age 70). In this case, and if tax rates will be same as when working (say filling up 22% bucket) then doing incremental Roth conversions each year (early in year, btw) it will optimize taxes and portfolio value over time.
if you retire at 60 , and start taking distribution from 401k - the all income you will have is 401k and will be in lower tax bracket. Many states don’t even tax retirement distribution or have very high deductions. So In fact 401k makes more sense. When you start your Social security, you can reduce 401k distribution and control taxable income. Also saving tax on 401k in early life you can buy first home quickly and eventually rental as side income plus gains on those assets, which most people don’t talk about.
I'm converting money into a Roth every year. I'm able to pay the tax without taking it from the conversion. I would rather pay some tax now and NEVER have to pay any tax later, OR have any RMD's. The money will grow substantially over time.
Hi Kevin. I have a 401K balance from my previous job. Is that NOT considered an IRA? How can I put all that money into my first ROTH in my first brokerage account? Am I able to put the whole amount into a ROTH? I have a new job with a new 401K but there are better choices in my own brokerage account. Any thoughts? Thank you Kevin.
I have been wondering what to do. I just retired and have a 401(k) under 200,000. I am a single senior. I don’t know whether I should just leave it in there. It will not grow since I have stopped working for my company.
Move it over the next X years. Try to get it all done by the time you collect SS. It will grow in your 401K based on what it is invested in. What you mean is there will be no more contributions. Move say 30 or 40 thousand a year until it is all moved. You have your standard deduction to help minimize the taxes. Pay for the income taxes on it from your personal unprotected funds if you have enough of that. Then you can invest the Roth IRA money in whatever you like, JEPQ for growth and dividends, VOO and QQQ to follow the S&P500 and NASDAQ are some stable suggestions.
@@barrybmw6101 Your Assuming growth for JEPQ, VOO and QQQ versus a bear or sideways market with losses or no growth. If your wrong sequence of return risk will kill this portfolio.
I'm gonna convert $20k/year or so to qualify for Obamacare in Texas since I retired before I qualify for social security and have not enough MAGI otherwise
My thought on why NOT to do a Roth conversion is that you are guaranteeing that you'll pay the taxes to the IRS upfront and probably when you have a higher tax bracket and income pre-retirement. Meanwhile, if you are careful and strategic, you could optimize your traditional IRA/401k withdrawals in retirement when you most likely have a lower tax bracket.
When the Roth IRA first started, I thought of it as a Fed money grab. Get the money upfront. Seeing how the government wastes the tax dollars, I would rather delay taxes due upon withdrawals. I’ll Let the IRA/401-K grow tax deferred with taxes due down the road. To younger workers just starting their IRAs, it maybe good to pay taxes upfront.
Does this video change your decision on whether to do a Roth conversion?
Thanks for this and all your previous videos (and the rightcapital links). This did not change my mind, but based on your previous videos and my goals for charity, I had already been looking at this, including using rightcapital to model, but I wanted to +1 your comment about sometimes needing more detailed analysis, Playing with Right capital I did not find any models where Roth conversion helped my rather complex case. However, after realizing that AGI limits for charitable are different for donated assets (30% limit) vs cash (60% limit), I felt I could use Roth to both reduce RMDs and also to have cash for charitable donations, which further reduced the AGI . Could not figure this out in right capital but verified with detailed Excel modeling. ( I had previously used right capita to validate the Excel models that I've been using for years). It looks like doing Roths combined with charitable to give me more room to convert at low tax rates, we can increase our charitable giving by 25-50%, depending on market performance and lifetime, which is millions more for the charity vs taxes. So, to anyone watching this, don't give up on Roth just because you want to do or want to maximize charitable giving. It just might need a more detailed analysis.
Which states do not tax retirement income (traditional 401K)? Thank you!!
Conversions affect income guidelines for Obamacare assistance grant eligibility, as well. Also, overall income affects the cap gains rate, from zero to 15%. Are those things factored in?
I'm not changing my mind but there are a lot more moving parts to work around.
Since I don't have heirs, it makes sense to do lower dollar value conversions. The charitable donations are helping.
😮😮😮
I believe the retirement crisis will get even worse. Many struggle to save due to low wages, rising prices, and exorbitant rents. With homeownership becoming unattainable for middle-class Americans, they may not have a home to rely on for retirement.
You got it! Buying stocks during a recession when prices are down could be a good move. You might get them at a lower price and sell them later when they go up. Just do your homework and be aware of the risks before diving in!
@@CharliesMcCormicks The issue is people have the "I want to do it myself mentality" but are not equipped enough for a crash and, hence get burnt. Ideally, advisors are reps for investing jobs, and at the first-hand encounter, my portfolio has yielded over 300% since 2020 just after the pandemic to date.
@@JacobReynolds-t7v Your advisor must be really good. How I can get in touch? My retirement portfolio's decline is a concern, and I could use some guidance.
@@MarcoWanner-h8j The beauty of MARGARET MOLLI ALVEY approach is her dual focus: while aggressively pursuing profit opportunities, she's equally tenacious about shielding investors from potential pitfalls. It's a balance few can achieve.
@@JacobReynolds-t7v Thank you so much for your helpful tip! I was able to verify the person. She seems very proficient and I'm grateful for your guidance.
I wish they taught investing at school level. There is so much advantage to doing this!
My biggest regret is that I started so late.
My concern is whether I can continue to sustain my standard of living with $550k and avoid outliving my savings. Every withdrawal makes me a bit unsettled
@@ClemonSteve I'm approaching retirement and having a financial advisor has been helpful. I started investing later than most, so relying on compound interest from Etf's or bonds alone wasn’t enough for me. Despite that, I’ve managed to do well and am on track to retire with around $2 million
@@EbrahamAljalil I'm currently evaluating my portfolio and could use some guidance. How can I get in touch with your advisor?
@@ClemonSteve I usually avoid making specific recommendations because everyone's situation is unique. However, my experience with Julie Ann Lerch has been quite positive. You might find it worthwhile to see if her approach fits your needs
@@EbrahamAljalil I looked for the name online and found her page.I will get in touch with her,Thanks for the help
I emailed and made inquiries. Thanks for the help
The key is to convert little by little if you have time on your side. I am doing a few thousand at the time. I have no idea the tax rates by the time I retire. So, I have some in traditional 401k and some in a Roth account, and converting as I go.
Not all the companies let you do that you have to quit a some job to do that I would like my company let me do that will be awesome
My company has both traditional and Roth inside the 401. I select which I invest in. Roth baby! 😅
@@harryl7946 Excellent choice! Be aware though that any match is pre-tax. You actually have a Roth & a traditional. Shud you ever rollover you will need to roll each portion into a different rollover acct.
My company finally has offered Roth 401K. Frustratingly, they will not let us convert any of the traditional. 😔
@punknhead23 Every year ask them to change it, have your coworkers also ask. If they is enough demand they might change it, it won't cost them anything, or at least no major cost.
Even if you pay the taxes out of available taxable accounts…shouldn’t the time value of money matter here? In other words, should the tax payments with/without Roth conversions over lifetime be compared on a present value basis? If I pay taxes now, that PV $ is more expensive than PV $ paying later. The off setting factor is, of course, portfolio growth (tax free or not). So, maybe, the only thing that matters is effective net worth (ie. Netting out IRA rolling tax liability)…since that’s cash flow based…and shouldn’t there be PV overlay on that too in terms of spend power? E.g if I pay PV$1M in taxes in the relative now (ROTH conv period) vs PV$1M in relative taxes later (RMD period) then is, really is about when my net worth is better off…that might not be until my 80s…this becomes a life expectancy question. Anyway, the more I think about this the more complex the equation gets
Thank you, made things add clarity to my long standing overthinking of this Roth Conversion confisions for a long time!
I enjoy your channel. Always have managed my portfolio myself. I’ve made some stupid mistakes but also have persistently saved and worked hard so hopefully that makes up for it. I enjoy learning about money and retirement scenarios. I get a lot from channels like yours. You have an easy fun way of presentation.
If there are a few things I have learned it is don’t try to swing for the fences. It’s ok if you want to do this in small ways but it can crush your overall returns if you try to pick the next Amazon too often and with too large amount of your portfolio. And even IF you DO pick the next Amazon remember you gonna have to hold it for a substantial period of time through fearful pullbacks which rarely anybody can stomach. I have picked several stocks that started out in the sub dollar and went parabolic. People don’t realize it’s extremely difficult to know how much to invest and when to add and when to sell. You can loose loads of money if you get any one of these wrong.
Also don’t look at your portfolio too often. Maybe once a month. Have a good plan and ride it out.
Also beyond a certain point money doesn’t provide any more level of happiness. Money can give choices.
You need a video specifically for high income earners (32% and above brackets) and roth conversions (pros and cons)
Use both types. I’m 35% but an employee so I need the up front tax savings but I also do back door Roth and invest on my own outside of retirement accounts. On paper, I plan to be at a lower tax bracket bc I will only pull out of my 401 k each year up to the lowest tax bracket, I will pull out of my general investing account up to the max amount at 0% capital gains and if I need more money the rest will come from Roth tax free. In the years I sell property I will only pull from Roth and non retirement account up to 0% capital gains tax level. Rinse and repeat every year in retirement.
I converted a few years back and paid a hefty tax bill. Now my ROTH is growing tax free! I think it depends on each person's situation. I'm glad I did it!
A trad IRA also "grows" tax free. The only difference is when u pay the tax. The growing part is the same. You only need to worry about the tax situation before or after, or if you need or want more money now compared to later.
I know this and my logic in paying upfront is that taxes will continue to rise, so therefore, I'm paying less tax on my conversion now rather then later. Even, if you could convert small portions and pay taxes now, it outweighs kicking the can down the road!
@TT-00000 But the facts still remain that we don't know for sure if taxes will be more or less, we assume gov will raise rates but historically they can rise or fall, and we have guessed wrong before. I just know many people believe that paying the taxes now gives a greater overall yield down the road even if the tax rate will be the same, and that is of course not true. There are still advantages to both, but are tied to each individual whether those matter.
@@alanpedrick1562True. But all signs suggest taxes have to rise to cover national debt and obligations. More importantly, unless my spouse and I die at the same time (e.g., in a car crash), one of us will be paying taxes at the single rate for the rest of our lives. And that is a _big_ tax bite. Better to pay at MGJ rates today.
Agree, depends on your tax bracket and overall financial circumstances. We did our Roth conversions in some accounts in our late 40s at the advice of our CPA. We have traditional accounts too from pension lump sum rollover’s. We retired in our 50s and our financial advisers confirm it was a smart move. My wife just hit 59 and half and I’m almost there. Life is good. Cheers!
7. You'll be getting a sizable pension, your spouse will still be a high earner, and the conversion puts you in a higher bracket. My solution is to draw on the pre-tax and delay SS until my spouse retires.
Delaying SS is idiotic. It is free money...why burn your IRA/401K?
@@samkitty5894 IRMAA my friend...IRMAA. It looks at joint income. SS isn't free...I paid into it. Also, I may plan on working p/t doing something I enjoy after I retire from f/t work. That would mean delaying SS and delaying draws on my pre-tax. I have to keep income below the IRMAA threshold while she's still working f/t - I'm not giving the gov't any more money than I need to.
@@vernshird711 Some of my friends thought the same as you. They wanted to delay SS until the age of 70, for maximum benefit. Until then they wanted to live off of 401K RMDs and their bank account savings. Well, some died...something they didn't plan on. I started my SS at 66 and will be drawing RMD at 73 (if I live that long). Why not take SS? If I don't, I lose it...Why let the government keep it while I wait for RMDs. Passing up SS and living off of other sources of income doesn't sound good. But, to each his own... Good luck and may you live to be 122, for maximum RMD draw.
@@samkitty5894 I should have clarified that the SS wouldn't be delayed until 70, but only until my wife retires so I can avoid the IRMAA surcharge. I'd be in my mid-60s. Waiting a few years to collect isn't a big deal in the grand scheme of things.
@@samkitty5894 For me the main reason not to take SS early is if you're married to a younger spouse that also has a lower SS benefit. An inflation protected guaranteed income is a nice safety net for the surviving spouse.
Glad that you mentioned ACA subsidies. We receive an excellent subsidy but need to keep a close eye on our taxable income to qualify for it. Our annual Roth conversion is closely tied to that number.
The government should run a completely free, first rate financial advisement for all citizens especially since they deliberately omitted these “tricks” from our high school curriculum. Thanks for your sound advice. It’s very appreciated
Why would they want to? The ridiculously complex tax code is the cause of many mistakes that end up benefiting the IRS.
No. The government can't be trusted with the simple things.
It took you perhaps 35+ years to get to this size of a nest egg. Can anyone guarantee I will get outsize returns after I convert? No. I will leave it be and let the person after me worry about taxes. I worried my whole life. Now is the time to enjoy
Totally agree!
I agree 100%. My dad passed away and I inherited his IRAs. He was a private person so I had no idea he had this money and I was pleasantly surprised at the amount. Never for a second did I think “I wish he would have paid the tax so I won’t have to”. It is found money and I am happy to pay my tax.
@@keithmachado-pp6fv Yeah, but now you have 10 years to use it up, AND pay the taxes on it. And if it's a sizable amount, your tax bracket will go up resulting in even higher taxes. But it's found money.
Yes, but I retired this year so it will be at lower rates. I did not take anything out during the first 4 years so will have 6 more years to deplete the account which will be what I live on and aligns with when I expect to start SS.
@@jschaff not all dollars are taxed at the highest rates. Additionally, I can make a QCD if need be.
I'm only moving an amount to stay in the 12% bracket. Avoiding my child and even possibly me to go into the 22% plus brackets.
Perhaps my retirement spreadsheet should include a column for the estimated taxes for each year.
Definitely. I have a pre- and post tax column and reduce all income by 24% to be conservative. Reality is, if rates stay high I'll put some 401k money into tax free bonds
Charitable contributions....totally agree. Very good reason. Reasons 3/4 very good.❤ Need to look at where you live now and where you are going to live.
I think you missed a big reason. If you have no children to leave the money to or choose not to leave money to kids for whatever reason. RMD's are only in issue if you are trying to preserve big wealth for the next generation. All of these calculators are using the mean path, what if you are on the unlucky path RMD's won't be an issue as the amounts will be small. If you are on the lucky path and have so much money you are in a 34%+ bracket, Awesome!! Pay the tax and count yourself lucky. I think burning all of that money to pay taxes early for something that may be an "issue" later might cause an issue by lowering your balance compounding the sequence of return risk.
IRA's were set up initially to help people save for retirement. If you pay more taxes when you are retired than when you are working, you didn't need to save IMO.
You are correct converting examples seldom show the compounding effect of not converting and exaggerate the time frames beyond logic. Lots of different tax policies over the next 20-30yrs will come and go, plus remember you may pay your taxes as you convert but what if your portfolio goes down-you cant write off your losses
I’m going to have to watch this about ten times and stop to look things up, because it seems like there is some very useful information here that is worth digging into.
I’m
I’m 38 and have done Roth conversion a few times. My thought is to pay taxes while working so I do not have to when I’m retired. The goal is to have your taxable income in retirement under the married tax deduction.
It comes out of your overall life portfolio one way or the other.
On Reason #2, whether you pay the tax from other funds or the IRA funds makes no difference if you are over 59 1/2. In both cases, you are using funds you could otherwise invest for growth.
This article below explains the math behind why he’s correct on reason #2.
The Arithmetic of Roth Conversions
By EDWARD F. MCQUARRIE AND JAMES A. DILELLIO May 2023
from the Journal of Financial Planning: May 2023
Nope. If you withdraw $100k and pay 20% tax, you have $80k after tax. It does not matter how you pay the $20k, that is $20k you cannot invest in anything, whether it’s a Roth or otherwise. If the funds are coming from a brokerage account, your heirs get a step up in basis, so you will never need to pay tax during your lifetime if you don’t sell and they won’t need to withdraw funds in 10 years like they would with an inherited Roth. . You can also harvest losses during your lifetime which you can’t do from a Roth.
I read the article and get the point, but it is too simplistic on multiple fronts. 1. It assumes the money is invested in stock and tax will be paid. I have invested in stocks for 40 years and never paid $1 of capital gain. I do take my $3k of cap losses every year against ordinary income however. 2. You can invest in other assets that will not be taxed such as municipal bonds, universal life insurance or real estate (primary home). 3. It assumes you will have gains, which investing in stock is not guaranteed. The biggest issue with all the Roth conversion analysis is that they assume you will eventually pay tax someday on ALL of your traditional IRA money. Given that RMDs start at about 4% and it takes into the 90’s to get over 20% of total, it is conceivable you will pay tax on less than half the total in your lifetime. Yes eventually your heirs will be paying the tax but that is the only way I get the math to work to make conversion worthwhile
You are correct. Your net worth is the same regardless of how you pay taxes.
@@Toomanydaysbut the assets don’t have the same tax status anymore… that will impact the after tax rate of return and therefore the future value of your assets. Paying taxes from the conversion will reduce the amount of tax advantaged funds in your portfolio. While paying from a taxable account improves the quality of your tax-deferred assets to tax-free without decreasing them!
Now I remember one reason I passed on Roth a while ago Heirs making less pay less tax than I would doing a conversion. Thanks; I will tell the kids to kick it in gear while I spend the RMD.
With Secure 2.0, little reason to do conversion. I will not have to take RMDs until age 75. I live in a blue state with high taxes. I will live in a tax free or low tax state when I retire and start taking RMDs. Depends on where you live NOW. Do the math. I have converted a portion only...also had to consider how long money will be there and purpose for the money. Money converted will be left to family. Agree 100%...it's a personal decision. Great video.
I was hoping to prolong taking social security and convert small portions for 4 or 5 years… like 60k a year to grow the Roth portion and then stop when I start drawing social security. Am hoping to convert at a much lower rate - like 10 - 12 percent. I wouldn’t do large portions… just trying to reduce amount of RMD’s later in retirement. If I can get even a small portion moved over in 5 years, think it’ll be worth it in the long run.
If you are in the 10-12% tax bracket then do as much as you can convert as long as you have enough cash on hand to cover the taxes on it and not deplete your cash too much.
Working through some of this now. The big issue that comes up is Healthcare and ACA subsidies. If you are already on Medicare, then it won't matter. For me (I'm 55), I may just end up converting everything this year and paying the higher taxes, so I can save 7K or more a year (depends on how much I convert, 70k rollover will cost about an extra 7K in insurance premiums) on healthcare. It won't take many years to make up the difference in tax rates.
There is also the added benefit of how much of your SS gets taxed, if you get to 62 and start collecting. Converting everything means my only source of income is SS (Roth's don't count), so I won't have to pay any taxes on those earnings. If I'm converting every year, then I'll be paying taxes on 85% of my social security, every year until those conversions are done.
If everyone is healthy, you can buy a simple private insurance policy while converting and hope no one gets real sick. Not an option for me.
@@jamesleonard4713 my wife will have a good pension starting at 60… along with that, they allow her to buy into her medical plan at same rate as state employees I believe. Was going to hold off collecting SS so I can get a good portion converted and don’t have to deal with IRMA issue later. Right now we’re in the 24% bracket, so not really wanting to convert much right now. So, I have roughly 5 years to get a good chunk converted.
Edit: If the market dips quite a bit, may be tempted to convert some as converting when markets down is ideal.
@@jamesleonard4713Run some numbers. Leaving some funds in pretax could also yoeld tax free income since you'll have the standard deduction giving you some tax free income. If half your SS plus some pretax income stays below the current $25K limit, none of your SS will be taxed either.
No mention of the real probability that taxes will he higher for everyone in the future due to the out of control national debt. So Roth conversions make more sense than ever before.
Increasing tax rates are the reason I rolled over my 401k to a Roth. I don’t want to be 59 paying taxes on current income on withdrawals made from my retirement account.
Pre-tax contributions may help reduce income taxes in your pre-retirement years while after-tax contributions may help reduce your income tax burden during retirement.
Both have their perks but you can also save for retirement outside of a retirement plan, such as in an individual investment account or employing the services of a retirement planner/investment advisor.
@@SlParkerlee Really? Have you looked around? Made use of any advisor or investor tool.
Reason 6. The ACA adds an effective 8.5% marginal rate to the taxes due. 22% becomes 30.5%. Ouch. It wrecks the effectiveness of a conversion really well.
Depending on your health and how many you are buying for, you can find private insurance that's not as expensive. Which is what I'm doing for a few years.
who passed the ACA again?????
@@peartfaldoWho has the concepts of a plan?
I am surprised that all my friends that have retired early with large 401k balances are not converting because they don't trust that the government will not somehow undo the rules and tax the accounts. I don't think that will happen, but my concern is the risk that my tax rates will be low enough in retirement as I draw down the accounts that I will not have needed to convert, but I think that is in general pessimistic, so I think converting at the 22% rate might be worth it for me.
Thx to point out those reasons not to convert. I never think about that. Thx again for the advise.
We are 5 years off from huge RMD starting at the age of 73. Using recent inheritance to pay taxes on each Roth Conversion from 401k every year until RMD. Another advantage is heirs get tax free inheritance when we die. Considerations include IRMAA, social security taxes, minimizing federal and state income tax liability.
Super helpful. I'm surprised that there's so much more to consider than I already thought of. Thank you
Did a rollover for a client...have converted a small amount so as not to cross any tax threshold past few years. We won't convert it all but he was in position to. Plus, the 5 year rule on conversions wouldn't impact him.
Reason #1 baby. Not paying a nickel until I have to. There are no longevity or growth guarantees and who knows what could change in the future for rules. I will take my chances.
No avoiding death and taxes and you can be sure taxes are going up!
I don't completely disagree, but I have kids and I'm doing the work upfront to make sure they don't get hammered with taxes.
@@davesubers3415this will happen in 2025 when the Trump tax cuts expire.
That is a good plan for you. I’ll continue to put my retirement funds into the safe n my back yard. No growth but no risk and no tax
@@hoytoy100inflation is not a risk, it’s a certainty.
Thank you, I never fully understood the benefit of converting, so I hesitated in converting. I now understand to Pros/Cons much better.
Never considered about why someone wouldn't want to convert to a Roth, but these are all very valid and important reasons
It works best for those who do it gradually, have increasing retirement income, and live in states with no income tax.
Why is it never considered to wait as long as possible to pay your taxes with inflated dollars?
Well, you're also paying on inflated assets. It's not like a static amount -- or at least I hope it isn't.
Roth conversions are a great option for many people. I've been converting Roth for several years. Peace of mind knowing my Roth grows tax free and keeps Uncle Sam's hands off of it. Remember what Ed Slott says, "Your IRA is an IOU to the IRS. You don't own it...only partly.
Both Traditional and Roth accounts grow tax-free. The difference is Traditional accounts get a tax break on the front end when contributions are made, and Roth is not subject to income tax on the back end, when withdrawals are made, but no tax break when contributions were made.
It can come down to tax rates when making contributions vs. expected rates when making withdrawals, life expectancy, and whether or not you are concerned about potential tax impacts to heir(s).
@@g0989 But would you rather pay taxes on the Seeds or the Harvest.
@@CSM-68 Roth IRAs weren't available to many of us who are in or nearing retirement until we were maybe mid-career,. Then Roth 401Ks came along later (none of my employers offered a Roth). So we went with the only option up until that point, which was Traditional. Now the question becomes would we still come out ahead tax-wise if we convert at this point, which is what this video is about.
Same situation for me, so 12 years before retirement I did the back door and vey happy I made this move. Peace of mind too.
@@CSM-68 Well, you are assuming that when Social Security is bankrupt and the Democrats are running things that they won't change the rules and then make you pay taxes on your Roth withdrawals because it's not fair that rich people aren't paying taxes.
The video didn't mention another important reason - if your current year income is already high enough already to hit the high tax brackets, then there is no saving on tax doing the conversion now and pay the conversion tax at the high tax brackets. Roth conversion only makes sense if your regular income is in low tax brackets allowing you do "some" conversion to fill up the low tax brackets (tricky to calculate).
If you already in high income tax brackets and watch this video and say "Oh, none of these reasons apply to me, let me convert all my IRA to Roth" then you are mislead.
Becoming a millionaire through a Roth IRA or a 401(k) involves different strategies for maximizing profits. A Roth IRA offers tax-free withdrawals in retirement, which can be advantageous if you expect to be in a higher tax bracket later in life. On the other hand, a 401(k) provides tax-deferred growth and potential employer contributions, boosting your savings. The optimal choice depends on factors like your current and future tax situation, employer match, and investment options. Consulting a financial advisor can help tailor a strategy that aligns with your financial goals and circumstances.
Prioritizing effective personal finance management holds greater significance than the sheer amount saved, irrespective of income source. Consulting a certified financial advisor can offer tailored strategies to optimize financial results by reducing expenses and enhancing income, regardless of whether it's earned through employment or investments.
At 65 I'm converting $50k per year till 75 when RMD's kick in. By then the roth base will be yielding tax free dividends...😊
tax free dividend is not wise. The money in roth does not have RMD and can also pass it to your beneficiary. So, you can put the roth money to more aggressive investment if you don't plan to use the principle of the roth. You will gain much much more than earning dividends.
@@datbio7302 Dividends are better put to use in a taxable brokerage acct paying 15% tax
wait until you are retired and are in low tax bracket then convert over a few years - you should be in the 10% bracket for the taxes --- don't forget - most of these conversions are from funds that came from 401k so think of the much higher rate you would have paid when working
That's what I'm doing. I deferred the pretax savings at the tax rate of 22- 25%, and am Roth converting at mostly 12%. Got to use Uncle Sam's money to grow my portfolio for a couple decades.
Nice educational video. Far too many people want to use IRA funds to pay the taxes, scary!
I have both - conversions can get tricky and technical. Time value of money also needs to considered.
I am in the 12% US federal tax bracket so my retirement contributions are 100% Roth IRA/Roth 401k.
And any traditional IRA/401k balances that you have should be Roth converted now while you are low tax rate. Assuming you have the cash to pay that tax bill. Not worth it to used converted funds to pay the taxes. Reduces the Roth amount working for you over time.
Always good to be cognizant of your tax bracket!
I don't understand something. If I don't have outside post-tax accounts and thus must pay taxes from my IRA when I do the conversion, why is this a reason to not convert? After all, I must pay the taxes sometime. I know I will have less to invest now, but it seems to me that by converting now before my tax rates go up, then I'd still be ahead in the long run. Right?
Is it still possible to get access to the tool? BTW - great videos!
If you are below 59 and 1/2 you'll get hit with an additional 10% penalty if you use some of that pre-tax retirement money to pay the taxes.
If you believe tax rates will go down in 2026, then go ahead and stick with your taxable retirement accounts.
If the state and federal government begin to take 50% of your distributions, you may regret not converting.
One impact of doing the conversion is higher medicare costs due to the "extra" taxable income in doing the conversion.
If you convert over a certain level, then yes.
convert roth before you hit 63, like starting at 52
@@datbio7302 yep, because after that it just doesn't make a lot of sense in my case... at 63 far too late.
Thank you awesome video! I retired with a state pension affected by WEP & GPO. We are both 60 y/o no debt my wife will retire at 62 y/o and we both will claim SS at 62 y/o due her early stage breast cancer diagnosis 5 years ago. My SS monthly benefit at 62 y/o is $124 due to the WEP. My wife’s SS approx $2300 at 62. We need the income from the IRAs for our monthly expenses. Roth conversion in our case doesn’t make sense. My spousal/survival benefit for SS goes to ZERO because of my state pension (Gov Pension Offset) So claiming SS ASAP life expectancy is shortage for my wife before spousal/survival goes to zero😩
If you have a high income AND are a trader it's a no-brainer. We converted and paid the taxes. Our financial advisor has a huge problem with people refusing to sell because of taxes. After conversion we began with Amazon, Apple, MSFT, etc Two buddies, also techies, convinced me their companies were going to change the world - Google (2015) and Nvidia (2019). They may not have changed the world but they changed my life! LOL Yes to a Roth.
We have a 1st lean HELOC “no mortgage” we could pay Roth conversions with. we are taking S.S. @62 and with 1 pension is more than enough to cover all expenses with about 3k leftover each month. I worry about huge RMD’s 20 years from now. With about 900k in 401k and IRA we like to convert in chunks and stay in the 12% bracket. I welcome any all comments TIA😊
Some "experts" push IRA/401K saying when we retire we will be in a lower tax bracket. Other "experts" say IRA/401K are a bad idea because taxes later could go up dramatically and paying high taxes would eat away any benefits or profits. I learned not to listen to the "experts".
I agree. Do what is best for you bc nobody knows what is gonna to happen in the future. Even if tax will be raised in 2026 and if you won't convert a large size, the amount of taxes will be paid still marginal and likely irrelevant.
At the current government spending, if you think taxes are going down you are fooling yourself. You may be in a lower tax bracket because you are not making as much money, however Pensions, Social Security and 401K RMD's are all taxed as ordninary income. If you are married filing joint, you may be in one tax bracket. When you or your spouse dies, and you are filing single, the Pension, SS and 401K may push you into a higher tax bracket than expected.
@@CSM-68 True...retirement may prove to be painful and hard for many people if current government practices continue. "Normally" retired people don't carry a mortgage, auto loan, or pay for college education. Their expenses are lower...but,
with astronomically increasing property taxes, insurance and home maintenance costs, many won't be able to stay in their homes. The only solution is to move to another country. Swallow your patriotism and pride and go. America is broken on every level, and very unsafe.
@@samkitty5894 so beat it samkitty!
@@samkitty5894 Imagine you & your spouse have a total of 700K in IRA at age 55 (normal scenario to me if you have work hard and save), let it grow at 7% for next 20 years before RMD at age 75, your account will have 3.3 Million. So, RMD will be an issue then.
I put money in an IRA to save money on taxes at the time, when I was working and my income was much higher. When I start withdrawing from it, I'll be retired and in a much lower income bracket. Possibly so low I won't pay taxes at all. I never saw the need to convert to a Roth. If you aren't in a lower income bracket at retirement why even save for retirement??
It's great to duck the brutal 22% tax bracket and keep the cap-gains rate at 0%. Some people also don't fully realize that the 15-20% that they contribute to their IRA, HSA or whatever every year is no longer a spend once retired.
@@antilogism $48k? Who wants to live like that in retirement? I want to be in the 24% tax bracket enjoying life.
I can not see how a Roth Conversions does not make sense most of the time. If one has a large IRA account they should start Roth conversions ASAP to avoid/minimize the RMDs that are going to hit them at 73. The RMDs are not eligible to be converted into a Roth IRA. A large IRA can be converted evenly over a given a time frame (20 years) in order to stay within the 24% tax bracket. A large IRA conversion to Roth (within a couple years) may put one in the 34% bracket which in the long run will reduce one's overall net balance/worth. I can not think of any disadvantages to having a large Roth account other than the unpredictability of government's tax rules.
Was not aware RMD not eligible for Roth as that was my plan, now, no longer a plan
My wife and I will have decent sized pensions, so we'll have quite a large taxable income even in retirement years BEFORE RMDs and SS hit. If I were starting in a low tax bracket, I can see the benefit. That said, my calculation should really be the DIFFERENCE between my tax brackets before and after RMD and SS hit.
I'm going to start taking withdrawals on the IRA, put into taxable brokerage acct in dividends, pay 15% tax on those. My life expectancy isn't a good time value for me. IF I was 50 I'd do a conversion.
Thank you for what you do and sharing all these valuable info.
and one reason to convert for sure. Tax free income once your investment has grown. Do it if you can and the numbers work out.
I don't really understand no. 2, it seems like if it makes sense it would work either way paying taxes with after tax money or converting to pay, because money in an IRA is only worth the after tax amount now anyway, so $4 in an IRA is worth $3 outside etc. That seems like a small reason that would not push the answer significantly in one way or the other, but I'm open to a more direct proof.
Not sure on all the reasons, but one I can think of is the taxes you pay on a regular account. Say if you were collecting dividends in your brokerage account, compared to dividends you receive in an IRA.
If you pay the conversion taxes out of a reg acct then you have that much more in a Roth and that much less in the reg acct subject to tax, that still doesn't move the needle for me
@@jamesleonard4713 in that case, take out of IRA, put in taxable brokerage acct with a dividend ETF and pay 15% tax
Roth withdrawals will absolutely be taxed at some point, but indirectly. They'll do something like include it for purposes of calculating IRMAA, the same way that so-called tax-free income is included.
Being hit by IRMAA from Roth is still better than being hit by IRMAA in addition to being taxed.
@@JasonBuckman That was just an example to illustrate the point.
@@nunuvyurbiz123
Being taxed indirectly is better than being taxed indirectly in addition to directly.
So that would not be any different than the situation today. There are more advantages to doing it than not.
Parents should schedule a meeting with their financial advisor for their children when they graduate college. It is confusing how to navigate investment and retirement accounts. My Dad was very frugal but didn't know about investments so I didn't know what I didn't know. I have a financial advisor and, an accountant but I am still afraid of messing up something when preparing for retirement. I have tried studying but I feel much of the information doesn't apply to my situation.
Never addressed is the effect of inflation. Would you rather pay your taxes now OR pay them in inflated dollars years from now?
Setting up appointments with CFPs and CPAs for this very reason. Most online calculators show it to be a wash at 15-20 yrs. My wife and I are in high tax brackets and will remain in these brackets for the first 10 yrs of retirement (spending a good portion when you can still enjoy it).
If I were to guess the outcome I will most likely convert some over the next 3-4 yrs prior to RMDs and let that grow with aggressive large cap tech companies for money needed in 15 yrs.
I'm in the same type of situation. I have trust income that starts me out in the 22% tax bracket. So not much wiggle room in doing a big Roth conversion without pushing into the higher tax brackets. But yes, you have to live a long time to overcome the tax payment deficit of the conversion. Other benefits though are reduced RMD and heirs can deal with the inherited IRA/401K balances at their leisure and tax free instead of 10 year limit and taxable withdrawals.
60 years old and I didn't manage to save that much in my Roth so the plan is to only take minimal withdrawals that the Roth can support and do small Roth conversions each year 10k to 15k each year until 70. I'm relying on my traditional for the bulk of my expenses. Wasn't planning to retire until 62 but, well new management had other ideas. Will delay Social Security as long as I can. I have never been as happy/scared in my life.
The first SECURE Act torpedoed my plans to provide for my kids. Now I get to jump through all the new hoops to attempt to protect my kids from huge tax burdens in the future
I can’t find the notes you talk about. I am interested in knowing more about the strategy of drawing income from my deferred accounts along with my taxable accounts.
Question: I have the Traditional 401K and have not considered the Roth Conversation. The primary reason is that I plan to retire overseas and will qualify for the 2555 Foreign Income Exclusion which makes the first $120,000 USD not taxable in the USA. My retirement income is most likely under this threshold. As I see it, there is no benefit for the Roth Conversion or anything Roth-related. Or am I not considering something?
In summation, with the traditional, I get the tax breaks now and I also get them in retirement.
So you are retiring overseas and will continue to work for a US based company? Is that really retiring if you are working but overseas? So the income (from employment) that will be excluded from taxes will be Salary, Wages, Bonuses, Commissions, or Self-employment income? The 401k withdrawals, if any, would not be excluded from taxes, am I understanding that correctly? I don't see how you would not pay taxes on your Traditional 401k withdrawals.
I fail to see the advantage in a Roth 401k over traditional. When I take the money out of a traditional 401k it’ll be taxed as income, but I’ll be in a much lower income bracket during retirement than when I’m working. So how is that calculated?
If you are going to be in lower tax bracket when you retire or move to a state with no income tax, it often times does not make sense. If you let 100k compound versus 65k compound 100k compounded taken at a lower tax rate is going to give you more in the end. Problem is everyone argues that tax rates are only going to go up. One thing I think people fail to realize is that if enough people do Roth conversions and tax revenues decline, there is nothing to say that Congress cannot change the rules on taxing Roth distributions in the future. It's the same idea as saying Congress is for sure going to increase tax rates on everyone in the future. That's why I say, do a little Roth conversion for money you believe you are leaving to heirs and keep rest in traditional. Everyone's situation is different. Flexibility of Roth money (contributions) is nice.
Thanks for all your good advice and work…….however! This system is sooooo messed up and confusing ON PURPOSE! We are forced and need financial advisors just to keep paying more and more for guidance when it should all be simplified for us seniors. Read and educate yourself on these matters and consult with your tax preparer…..NOT a CFP! This is a self-propagating system and you will spend soooooo much money just to feel comfy n warm! Educate yourself
If you’re retiring (in a year or two) I think it’s better to wait since your income will be less hence lower tax bracket.
Due to a lengthy work history, my wife and I have our retirement in4 main accounts 1) 58% a pre-tax IRA that started as part of a SAR-SEP from 24+ years ago 2) 29% in a pre-tax 457b thru my current office and then 3) 8% in a ROTH in my name and 4) 8% in a Spousal ROTH in my wife's name..... Going forward #1 will probably grow on it's own without more contributions #2 will continue being contributed to through payroll deductions, and #3 & #4 will be contributed to as we can scrape money together. We are not seeking to convert, but it may become beneficial to do so in part once I retire. As our tax bracket will most likely be the same or lower, I can't see too much benefit from converting all of it at this time. The ROTH accounts that we are building are only meant to give use more flexibility with RMDs.
You mention a link to play around with running some numbers on conversions. Where is that?
Anyone considering conversions should beware compound taxes - i.e., causing more qualified dividend income and long term capital gains to be taxed. I'm in that boat, so any conversion I do involves an income tax on the conversion plus a 15% additional tax, due to causing dividends to be taxed.
Not sure what you mean. Can you explain this a bit more?
@@barrybmw6101 Sure - income is stacked, so qualified income (like qualified dividends, long term capital gains) are stacked on top of regular income. Qualified income isn’t taxed, though, until your total income reaches $47K (single). Suppose you’re retired and you have $30K in non-qualified income (e.g., non-qualified dividends, consulting, social security, whatever), which is taxed at a marginal rate of 12%, plus $20K in qualified income, of which $3K is taxed at 15% since it’s above the total threshold. Now you do a Roth conversion of, say, $10K - you’ll pay 12% on that $10K, plus it will push $10K more of your qualified income into being taxed, at 15%. So really your tax is 27%, not 12%.
@@nunuvyurbiz123 got it, thank you.
@@barrybmw6101 Beware that the same concept shows up in other areas too. How much your social security is taxed depends on your other income. How much you pay in IRMAA fees depends on your other income. So if your other income includes Roth conversions, then it could cause more social security to be taxed, or could cause you to owe IRMAA fees.
@@nunuvyurbiz123 Yes, I wrote a very involved/complex Excel spreadsheet showing me everything from taxes to when the 401K will be completely empty and the yearly spend rate. Trying to get lots out of the 401K before I hit the IRMAA age and before SS and RMDs will not be a significant factor for me. I did learn (or refreshed my memory) from this video that gifts to charity should come from your 401K so adjusting the conversions down some to allow for that. This helps the tax situation a bit.
Great video. One of the reasons you mentioned not to convert to Roth is if your heirs are in a lower tax bracket. What about the surviving spouse? The surviving spouse will have to file as Single and their tax bracket is essentially cut in half. Isn't that a reason to convert to Roth?
Yes, but they may be in a higher tax bracket because they’ll be a single filer. I’m more referring to if your heirs don’t earn much income. But yes, the surviving spouse is a big reason to convert.
Thanks for sharing.
I feel that there is a lot of information missing in these Roth conversion stories. It would be great to have a flow chart as there are so many decisions that you need to be aware of.
The first question is likely if you are likely to have excess money in your retirement account that will be inherited. The scenarios seem to be very different if that is likely to happen. If you plan to leave your retirement account to your heirs, then (as Kevin says) you have to take into account whether your heirs will be in a higher or lower tax bracket than you are.
He drags the slider for the tax bracket like it is an optional setting. Wouldn't I end up in a higher tax bracket if I converted my full IRA over a few years?
Kevin is the first person that I have heard share the secret that you should pay the taxes with money outside the retirement account. I had not understood that until now, and all the calculations that I had done showed that it was better to not do a Roth. However, I wonder if he is taking into account the fact that even your pre-tax non-retirement account will continue to grow.
I am still skeptical. I need to try his tool to learn more.
I clicked the link - the whole thing feels like a tool to collect your email address and personal information. This is not for me.
I have more money growing by not having a Roth. I would be surprised if anyone could really do the math on what is better. As the saying goes "six one...half dozen the other". I do find it funny though when people ask if I have one and I say no. They are appalled :)
I'm converting 100K a year, paying the tax outside of my IRA and 2 years in I'm already up 50K in the Roth account. I hope to convert most of it before I hit RMD's. You really have to work the numbers. Because I won't have any RMD's that money will exponentially grow much faster and it's all tax free.
@@bob5365 With the same investments it will not grow any faster and your tax haircut % will be the same
My view on ROTH conversion is that in theory they are great. But in practice it depends if you need that money now or later. For example, if you decide to retire at 60 and have a 401k (in addition to a ROTH and a brokerage) , then delaying social security until 70 will allow you to take out the 401k (if it provides you the overhead for the decade) and avoid the ROTH conversion . This way your ROTH grows, the social security is delayed and taxes are minimal from 401k, IF and only IF you take our UNDER 42,000. Correct me if I am wrong {not sure if unemployment is also taken out of taxes from 401k }
This is a good plan. You need to run some spreadsheets, because it all depends on your specific situation. It is best to have some money in Roth and some in Traditional IRA. What most people do not understand is that once they start taking Social Security, their effective marginal tax rates are likely to be much higher than they are right now when they work. Your income will be lower, but the effective tax rate higher. This is counterintuitive, but you need to explore this more to understand. The effective marginal tax rate is the percent of the federal tax you will pay on the last $100 of the taxable income outside of Social Security. In many scenarios, this is going to be 185% of your theoretical tax bracket. Read more info by googling the-taxation-of-social-security-benefits-as-a-marginal-tax-rate-increase
I cannot provide the link here.
@@pbtube58 true, but by my calculation CA does not tax social security AND if I dont take it until 72, then from 60 on, I can withdraw, say , $40K from my 401k and still not pay any taxes or very little.
@@BorselinoThadchack There is no benefit of delaying SS beyond 70. Also, if you pay little taxes at retirement, it might mean that you paid too much when you worked. The best strategy is to be at the same marginal EFFECTIVE tax brackets your whole life (may not always be possible).
@@pbtube58 true, my social security will be pretty average at 67. hence why I want to wait those 3 years to squeeze a bit more. I ve been self employed for most of my life so my 401k is in addition to an HSA and A ROTH. Also my wife is younger and still wants to work. Whereas me, at 60 (not yet there) , I am kinda sick and tired of that job. So that is why I figured that I can pay a bit more than half for our overhead from my 401k and wait for SS. Meanwhile, my wife can still work and save , while I drawdown the 401k. No debt whatsoever, so that is an advantage. It's just for me to get away from a job that I started to hate. And I will be too old to get hired in other industries. That's the thinking. Thank you for commenting. My hat's off to you !
@@BorselinoThadchack Looks like a good plan. I will also wait until 70 for SS. In the last 5 years, I did significant transfers to Roth in order to go all the way up to 24% tax brackets, which I consider a good deal. Now, I have about 60% of my retirement money in Roth and 40% not yet taxed. This should be a good mix. I will no longer do Roth transfer this year, because now I need to watch for the Medicare Plan B and D limits, beyond which they become pretty expensive (times 2, including my wife). The problem is that they look 2 years back. I want to retire in 2026, so I need to keep 2024 with not too much income. I will be 66 this year. So, after I retire at 67/68, I will also draw before-tax money, and maybe even move some to Roth, if this does not cross my thresholds. Not much time until 70, but I am already well positioned with 60% in Roth. I have been working so long because I have a flexible job that I like. Good luck.
I am with reason #1. I just don't feel like put out the tax money up front espcially in my 50s to do the roth conversion. My second reason is that if I leave my IRA in aggressive growth or sp 500, let it grow like at average of 7% over next 15 years at around age 65, it will grow large enough that I can take additional withdraw to pay for the roth conversion for the next 10 years before RMD. This way, it "feels" like that the grow can pay the tax by itself. Yes, the overall portforlio will dip some, but no one needs a large bank account to die with.
Your last Roth conversion won't be tax free until you're 80.
I'm pretty late on Roth. No fault of my own. When Roth IRAs started they were only for child secondary college expenses, no taxes on gains. WHEN did the rules change? After we all have giant 401Ks or IRAs, it doesn't make sense to convert for most of us.
Good video, I'm curious when I start taking required RMDs from my IRA, I think that's age 72, what is the RMD calc for that? Is it like 15 years? So divide my balance by 15? Just trying to get a rough idea. I'm 10 years away from it.
Your example about California income taxes is misleading because rates start at 1.0% and are graduated. For example, I earn about $200k and my taxable income is about $150k. My effective taxes are $6800, or ~4.5%, which isn’t much different than Utah’s flat rate of 4.65%, despite the fact that Utah is considered a “low tax state”.
what about taking some of your money - if the markets crash - getting out of the Tax bracket then investing / day trading it as the market rises and see all the increase outside of tax dollars
Move it in small increments per year.
In retirement, then you can raise the level of the increments remembering you need to wait 5 years for each conversion. Sometimes you may be able to do it without paying taxes at all. Also your chain of dividends from previous conversions can cover any taxes you have on this year's conversion if you are 59 1/2 plus. If you put that money into a diversified portfolio of BDCs and covered call ETFs such as CION and SPYI, you can generate dividends greater than 10% and just spend them, remembering to reinvest 10% of your dividends back into your BDCs and SPYI to make up for inflation. You also should have qualified dividends in brokerage accounts to take advantage of qualified dividends' long term capital gains. I really should have been a financial planner.
Unless you have a time line of at least 10 years out, it just takes too long to make up that lost compounding factor of those tax dollars no longer growing!
My projected RMD's are massive. I'm converting 401K chunks until RMD's start. I can't get any of the convert or don't convert math clear in my head I just do it every year and pay the taxes on it from income. I cannot imagine ever being in a lower tax bracket given the pending RMD's plus pension, SS and other non-deferred investment income. I see the videos on UA-cam with numbers being put into calculators and they apparently show its rarely logical to do Roth Conversions.
At 81 still converting as I believe Roth conversions are good at any age if you can afford the tax payment.
Obviously there are a lot of things to consider when doing a rollover, which I'm working through now, but the big issue that comes up is Healthcare and ACA subsidies. If you are already on Medicare, then it won't matter. For me (I'm 55), I may just end up converting everything this year and paying the higher taxes, so I can save 7K or more a year (depends on how much I convert, 70k rollover will cost about an extra 7K in insurance premiums) on healthcare. It won't take many years to make up the difference in tax rates.
There is also the added benefit of how much of your SS gets taxed, if you get to 62 and start collecting. Converting everything means my only source of income is SS (Roth's don't count), so I won't have to pay any taxes on those earnings. If I'm converting every year, then I'll be paying taxes on 85% of my social security, every year until those conversions are done. In my case, the wife started collecting SS this year, so every year going forward we'd be saving on taxes. This savings is definitely something to consider if your thinking of not doing the conversions at all, since taking regular distributions every year, means your SS is going to be taxed every year.
If everyone is healthy, you can buy a simple private insurance policy while converting and hope no one gets real sick. Not an option for me.
Looking at a non taxed retirement account is fools gold. If you’re looking at what is in your account is not real until you take the taxes out of it. Non Roth accounts are so frustrating for that reason
I don't see how magically coming up with funds to pay for your Roth conversion taxes makes a Roth conversion financially workable. If you don't take into account, the funds that were used to pay the taxes can also grow in value and you don't have to pay taxes on them in many investments. For instances, if you buy municipal bonds or just a market ETF but never sell any. Another point, if one is high networth, paying max tax bracket today & due to expected sizable growth of investments going forward to stay in the max tax bracket. The Roth conversion breakeven will be loooong time. Might as well enjoy life now vs pay less taxes when 90 years old. 😊
RMDs can never go in a Roth. I pay 24% fed tax on conversions. I will not be in a lower tax bracket ever. For me conversion is logical.
I agree. I never jumped on the Roth conversion bandwagon. I saved a lot of money in taxes by investing in a reg IRA. When I start withdrawing late in life, I'll be in a much lower tax bracket thus much lower taxes, possibly no taxes. If you aren't in a much lower tax bracket when you retire why are you saving for it??
@@grannygoes7882 When uncle Sam starts telling you how much to take out each year in order to pay the taxes, you'll get it.
@@bob5365 Could be. My tax strategy has always been show low income with lots of write offs. I also don't have state income tax where I live. I'm 66 and it's working so far but I'm not rich so I don't have the worries of the rich. I have more than enough to do what I want and I'm satisfied.
A flaw in the premise of #2. Of course if you pay taxes from the IRA pretax account, then sure it can hurt you. But ... if you would be using the pretax IRA for most of your living expenses, then that is a different situation ... and I offer that most/many folks in the average situation invested in pretax 401k for most of their working life and find themselves in this situation, especially if retiring pre SS FRA and living from the pretax IRA funds until FRA (or to age 70). In this case, and if tax rates will be same as when working (say filling up 22% bucket) then doing incremental Roth conversions each year (early in year, btw) it will optimize taxes and portfolio value over time.
If your home is paid for and the mortgage rates are low you could take out a mortgage to pay the taxes
if you retire at 60 , and start taking distribution from 401k - the all income you will have is 401k and will be in lower tax bracket. Many states don’t even tax retirement distribution or have very high deductions. So In fact 401k makes more sense. When you start your Social security, you can reduce 401k distribution and control taxable income.
Also saving tax on 401k in early life you can buy first home quickly and eventually rental as side income plus gains on those assets, which most people don’t talk about.
I'm converting money into a Roth every year. I'm able to pay the tax without taking it from the conversion. I would rather pay some tax now and NEVER have to pay any tax later, OR have any RMD's. The money will grow substantially over time.
Hi Kevin. I have a 401K balance from my previous job. Is that NOT considered an IRA? How can I put all that money into my first ROTH in my first brokerage account? Am I able to put the whole amount into a ROTH? I have a new job with a new 401K but there are better choices in my own brokerage account. Any thoughts? Thank you Kevin.
What’s the guarantee that a Roth IRA will not become taxable in the future?
I have been wondering what to do. I just retired and have a 401(k) under 200,000. I am a single senior. I don’t know whether I should just leave it in there. It will not grow since I have stopped working for my company.
Move it over the next X years. Try to get it all done by the time you collect SS. It will grow in your 401K based on what it is invested in. What you mean is there will be no more contributions. Move say 30 or 40 thousand a year until it is all moved. You have your standard deduction to help minimize the taxes. Pay for the income taxes on it from your personal unprotected funds if you have enough of that. Then you can invest the Roth IRA money in whatever you like, JEPQ for growth and dividends, VOO and QQQ to follow the S&P500 and NASDAQ are some stable suggestions.
@@barrybmw6101 Your Assuming growth for JEPQ, VOO and QQQ versus a bear or sideways market with losses or no growth. If your wrong sequence of return risk will kill this portfolio.
Very nice video! Thanks...
I'm gonna convert $20k/year or so to qualify for Obamacare in Texas since I retired before I qualify for social security and have not enough MAGI otherwise
Yep.
Excellent. Thank you.
How to I access your Right Capital application?
My thought on why NOT to do a Roth conversion is that you are guaranteeing that you'll pay the taxes to the IRS upfront and probably when you have a higher tax bracket and income pre-retirement. Meanwhile, if you are careful and strategic, you could optimize your traditional IRA/401k withdrawals in retirement when you most likely have a lower tax bracket.
When the Roth IRA first started, I thought of it as a Fed money grab. Get the money upfront.
Seeing how the government wastes the tax dollars, I would rather delay taxes due upon withdrawals.
I’ll Let the IRA/401-K grow tax deferred with taxes due down the road.
To younger workers just starting their IRAs, it maybe good to pay taxes upfront.