I retired early at age 45. I have over 2.4 mill in pre-tax, 300k+ in Roth IRAs, 600k+ in after-tax. I plan on doing conversions every year. Here's some considerations that merit additional discussion: 1) Your tax bracket matters. Early on, while you have kids as dependents, you can pay almost no taxes for large AGIs. For example, a family of 5 would owe $0 in taxes at an AGI of 90K+. Once your 60+ and if you are no longer with your spouse, you tax brackets are way way way worse. 2) Roth IRA conversion ladder is a great way of being able to access your 401k money without penalty, if you are an early retiree. 3) Health Care. In the ACA, you can go from paying $0 to paying $20K+ for a year depending on your AGI. For example, at an AGI of 49K for a family of 5 it's free, at 90K it's 8K+. 4) The state you live in matters. Maybe consider moving, if it's an option, to a low tax state when doing a very very large conversion. Let's say you live in CT and you wanted to convert 1mill, this would cost you at least 55,000 in just state taxes. I would rather put that 55k into a property in a no tax state. 5) Why not have both Roth and pre-tax. Who knows what the tax policy landscape will be later on. By having both, I can control my taxable AGI very easily to fit the tax landscape. For example, let's say I needed 90k per year to live. I could pull 50k from my 401k and 40k from my Roth to survive, but I would only be taxed on my 50k 401k distribution.
All excellent points! And probably better points than the guy in the video above was making (he really should have rehearsed his script some more before hitting the record button).
@@HB-yq8gy My father just died from Covid. He was 66, and was going to retire, but he had auto-immune issues and Covid destroyed him. I feel so bad that he never got to see a penny of SS and he had no living spouse so it all stays with the government. I begged him to retire earlier to enjoy some life without work, but it never happened. So my response will be tainted by this. I'm not a SSI expert so I won't provide advice here for this, except that since your spouse does have an auto-immune issue you need to be realistic that her life-span might be drastically cut short and consider how that affects your survivor benefits, if any. As far as ROTH IRA conversions, the best time is when there is a market downturn. We are having a nice correction now which provides an interesting opportunity. I actually did some moves recently to my Roth.
@Neil Stewart Sorry, I just don't have it in my to communicate beyond here. It's was over a month of pain :( I'm just trying to recover now. As far as the ROTH Ladder, I'm also learning friend. Controlling your AGI is key. Use the H&R and Turbo Tax estimators to see what tax cliffs are out there for your situation. Play around the number on those sites. Here's an example that I ran into for the 2021 tax year: I was thinking of converting 10k to my Roth while my AGI was 150k. This would have brought my AGI to 160k, but it would have cost me an additional 10k in taxes, so basically I would have been loosing 10k. Crazy right? So you need to pay attention to these "CLIFFS" for different situations, like health care costs and child tax credits for example.
Troy, I've gone through 20+ videos and you're the first to be realistic in your expectations regarding market/account growth, which greatly helps to provide a realistic view. But either way, there's a great deal to digest and analyze here. Thanks for the work you put into this! Anthony
Great video! As someone who is just starting to do some big Roth conversions, I especially like the section from about 8-10 minutes in, showing green and blue lines for one’s net worth with Roth conversions (blue) or without them (green). ON PAPER (or the white board) the cross-over point in value is years down the line. It hurts to see one’s net worth go down, and as he points out, it hurts to write those big checks to the IRS. But in TRUE VALUE one’s wealth takes no dip at all, because as he points out, the green line represents “tax-infested dollars” which are actually worth less than tax-free dollars. Personally, I am doing big Roth conversions before turning 63, and paying taxes up up to a 24% marginal rate. Starting with the year I turn 63, I expect to keep converting but smaller amounts, to keep my Medicare premiums low (since they are based on one’s AGI 2 years prior).
My concern and the avoided issue is the Net Present Value (NPV) of your money. If you convert, you pay taxes today. If you wait and pay taxes down the road (like in 20years), you are paying taxes with future money, which is worth less. i.e., would you rather I give you $100 today than in 20 years
Is your IRA not going to grow? At some point it will have to be emptied and someone will have to pay the taxes. If not you and/or your spouse, some other beneficiary.
@@rogerstuart2592 Yep. To me a big IRA is an acorn that has grown into a giant oak tree right next to your house. Convert everything to Roth early on is like planting a tree 50 feet away from the house. You'll never have to call in a tree cutter.
Great analysis and explanation! I am a big fan of Roth Conversions and have seen nobody measure the tax savings in this much level of detail. I will reach out to entertain a conversation about retirement planning! Great job!!!
This was very helpful to me, thank you. I was just discussing this very subject with my Fidelity account manager this week. As usual, he couldnt tell me more than I already knew. These big houses want you to use their services that have access to trade for you and I need an independent planner to guide me and I make the changes.
Very interesting. I also have an account with Fidelity. How does your discussion with your Fidelity account manager go. I have tried talking to my Fidelity Account manger about the subject but was not fruitful. Do you pay your account manger extra fees? Will appreciate very much for your answer. I did an $100,000 conversion last year which I regret that I did not covert more. Thanks
@@wensunkeh2030 I just asked him about Roth conversion because I no longer qualify to put more money into my Roth. Fidelity offers full account management where they do your trading and rebalancing and advising for 1% yearly fee. I prefer to find independent advice that partners with me and advises me and I pay them for their time but I do my own trading.
@@Lianne459 I also asked my Fidelity account manager the same question, he did ask me what tax rate I was paying. So I did some search and find out that for 2020, I paid @ 22% and if I move an additional, say , $50,000 to ROTH from IRA then I will more likely in the 24% bracket. So I hesitate if do it this year. I also do my own trade. This year I already moved all 401K to IRA. So I still not decide if I should move more to ROTH.
is Fidelity motivated by your conversion to roth and using money from your accounts to pay taxes and then ending up with less AUM(assets under management), imo. Imagine if we all did that at fidelity.
we are considering a conversion,hubby 65,but not retiring and has high income putting us in 35% to 37% tax bracket,so doesn't make sense to convert now until he retires and doesn't have high income,would only have a few years to make conversions unless they bump RMD rule to 75 that would help a lot👍
Converting after he retires means transferring the funds from a traditional 401K to a Roth IRA. If he converts while employed he could target a Roth 401K. When he terminates employment, he can keep the money in the Roth 401K rather than transfer it to a Roth IRA. The concern is the difference between a 401K and an IRA with regard to asset protection from creditors. Also, there may be 401K vs IRA implications for the division of assets comes the day he divorces you to be with a younger woman.
@@Chris.Brisson not sure what u mean by "he could target Roth 401k if he converts while employed". We were considering converting his trad IRA,after paying tax,into his Roth IRA. We also have done rollovers from 401k roth to his IRA roth,we like to rollover from 401k to trad IRA d/t the many fees in 401k. Lastly,let's hope he's not leaving me for a younger woman,cuz we've got other Community property😄
I'm 66 have done one $75k Roth Conversion and stayed in the 12% tax bracket. My wife and I each have about $600,000 in tax deferred accounts, she is 4 years younger and if Secure act 2.0 passes, she won't have RMDs until 75 yrs old. I'm sure when we both get SS and RMDs we will be in a higher tax bracket. I'm wondering if I should bite the bullet and go up to the 22% tax bracket doing the Roth Conversions. The 'first world problem' we have now is the tax deferred accounts are growing faster than I am Roth converting them. Nice problem to have but still a problem.
The 12% bracket seems like a no-brainer. Still, when you go higher, it will depend on variables outside your control, such as longevity, tax law changes and market returns, depending on what asset allocation you are comfortable with...
I'm 62 and did it last year. The tax hit is enormous. If I die young it won't really matter either way except for my heirs. But if I manage to live a long time and my investments are reasonable, I figure that I am going to come out way ahead. Wish me luck.
@@Scott-xf5xb I had a lousy year in 22 and again in 23, but still managed to make more than I spend in retirement. I figure that's a big plus - and the name of the game, right? 6 figures of tax free gains is significant. But to be fair I also had a lot less IN the market after the tax I paid initially. Still too soon to really tell, but I am quite optimistic about my current holdings.
Finally someone that makes sense! My plan has been to burn the pre-tax stuff (either spend or convert to Roth, making up the needed spending with taxable) and delay SocSec until age 70. I haven't been able to figure out why keeping the pre-tax makes sense with medicare brackets and social security taxation.
You want to keep enough in the traditional IRA to account for your standard deduction being used, and with Social Security taxation not being increased with inflation, it is virtually assured that you are going to be in the 85% of Social Security being counted as income if you are concerned about the size of your IRA.
@@davidfolts5893 I wouldn't say I ”want” to keep that in the pre-tax IRA, but rather it is okay to keep that there and may save current taxes by leaving it in pre-tax. However having it in a Roth is psychologically advantageous because if something comes up you don't have any tax concerns in accessing the money. Converting more also may save money if tax rates increase.
Here's a great scenario, and possibly fodder for a video, with a situation common to many working-class people. Many of us are in, or mostly in, the 12% bracket while working. We're short of a million dollars in savings/investments, but let's say we've managed to put away somewhere in the range of $700 - 750K. At 65, does it make sense to do Roth conversions that would put more dollars into the 22% bracket during conversion, given that post-retirement taxes (with no conversion) would likely stay mostly in the 12% bracket as married filing jointly. And, to add a wrinkle, what about considering the period following the death of a spouse when the 22% bracket begins at around 40K? Many surviving spouses will have 20 years or even more of paying taxes filed as single.
Good thoughts, but it is hard as an advisor to not give all the implications, involved. Like time value of money, moving to a non-income tax state in retirement, etc. As a retired financial planner I would often recommend to my clients to take the 50/50 option. Meaning, if we are not sure which way to go in this case, do the Roth conversion with 1/2 of your qualified money. That way the worse you could do is make 1/2 of a mistake and not a 100% mistake, if in the end doing the Roth was not a good idea. Just a thought.
Very good video. I have been thinking of this since before I retired. However I did not consider it due to upfront costs. However we will be starting this year to convert a substantial amount into Roth despite the upfront costs the benefits can outweigh those . Thanks for posting.
Can you convert this year and if so needed Re-characterize some of the money early next year before the deadline. Would this allow you to see how you are taxed and set you up for a "do over" if you're unhappy with the taxes paid ?
@@jetboy770371 can't do to the horse racing technique anymore. Usually it's best to just optimize per the tax bracket. Usually taking out enough to max out the 10 or 12% is the sweet spot
For what it's worth -- my $.02. As a working stiff I fully funded my 403(b)/401(k) employer retirement plan -- even taking advantage of the over 50 catch-up provisions as I aged. I also have a ROTH IRA -- funded to the maximum allowed by law since they were created -- and numerous after-tax investments. I rolled my retirement plan over to an IRA when I retired (10 years ago) and am allowing it to grow untouched since (I'm 70). My living expenses are funded from after-tax investments. In hindsight... I would've contributed to the retirement plan ONLY enough to garner the employer's contribution. And focused my additional payments (after tax) into AFTER-TAX investments (individual stocks, municipal bonds, indexed stock funds). Investments with low or minimal tax exposure. Plus the ROTH of course. A bigger "bite" while working of course... but less to worry about in retirement.
Roxie's Dad is smart about this. The taxed investment increases will be taxed primarily as capital gains (short-term at marginal tax rates, long-term at 0%, 15%, or 20% depending on income) with some dividends/interest (at marginal tax rates). I do disagree with the investments with minimal tax exposure though. I would suggest index funds and then be ready to pay the long-term capital gains, which will be less than your marginal tax rates.
@@AnthonyMiyazaki Yes, but they have to consider the opportunity costs of the 20% (max) being invested in the market also. So it's not just that they're paying the extra 20% now ahead of time but that in a traditional 401(k), that 20% also grows compounded.
Unless you have created a Trust for your Estate instead of a Will. ALL of your Investments Will be held by the Estate until Bills and Claims are settled! Only the Roth and IRA will Go Directly to their Beneficiaries, upon your passing. A Will for an Estate can be kept open for years.
Yes, that’s the thing for people to do. If your employer offers a match only invest in a 401(k) up to the match, and then invest fully in a Roth IRA, up to the limit. After that, you could invest any more money in the 401(k), if you want. if your employer does not offer a match, forget the 401(k) until you have invested fully in the Roth IRA. Then invest in the 401(k) and defer taxes.
I don't think that would have been a good idea. In my opinion, you should have been doing Roth conversions from your 401k all along, so that those conversions would have been growing tax free in your Roth all these years. Putting more money in a taxable account only would have increased your tax burden.
My RMD will be about the same amount as I need to live on, so no big deal. I will be taking that money out any way. Besides you can always reinvest the money you take out as long as its not in a tax deferred account. . Thats my understanding.
Please consider creating a video that compares how a given couple would have fared if they stretched out the Roth conversions over a longer period of time. Your video does a great job showing how if you bite the bullet for four years, it can be well worth paying the taxes. Depending on their marginal tax rates, they might have saved much more if they had started earlier.
Hi David, From our experience of sitting with families over the years very few start conversions earlier. The strategy reviewed in the video is very good for that particular scenario, in our view. For some people, stretching the conversions out over longer periods results in more taxes paid over time. A common reason for this is the more you leave in IRAs the higher your RMDs are in the future which can trigger large income taxes along with other areas of the tax code. This is especially true if you expect taxes to be higher in the future. I will get a video out comparing a scenario of stretching the conversions out versus doing them more quickly. The right action to take ultimately depends on your persona situation. Thanks for your comment!
@@OakHarvestFinancialGroup Thanks! I'm 58 and planning to do it over ten years before I retire at age 70, in part because my spouse is 15 years older than me and I want to convert as much as possible while we can still file jointly as a married couple.
To me this really only matters if your going to leave the money alone and let it grow. I'm not going to fly coach and let my kids fly first class and believe me they will
If you've done the projections including RMDs where the taxes can get horrendous, and you can make it to the end of life without running out, go for it!
Finally, somebody with sense!!! Kids will get ZERO! They have an education in school and in life, provided by me, and the winning lottery ticket of having been born in AMERICA. They can create THEIR own wealth. I am enjoying mine. And! I will die penny-less and with a smile on my face.
Agree, specially when the cross-over date is at 84 years old. We should all be lucky to make it to 84. Also once you get to your 80's, you won't be spending much cash and could probably care less that your Roth conversion is now just starting to work in your favor.
Hi Troy, First time listener and I appreciate the helpful video. I have started doing exactly what you have talked about, but I am little late in doing so! My problem, as well pointed out, is to swallow high taxes in the initial years! I have subscribed to your videos and hope to make a visit to your office sometime. Thanks, and Best Regards.
Also, once the couple goes from married filing joint to a widow filing single, the tax rates become higher sooner. Better to convert to Roth before income drops to 1 social security check and tax rate is higher. Odds of surviving spouse living into 90's is great.
When making Roth decisions, you need to know who you are planning for: You and your spouse together, the surviving spouse alone, or your children. Prioritize your decision-making first, then plan accordingly, keeping in mind that you won't have certainty because longevity is a wildcard that will change the end value of those conversions.
My thoughts exactly. My wife and I want to leave our kids with substantial funds - because the mid- to later-21st Century is shaping up to be an unpredictable hell-hole thanks to the changing weather. Funds may give them some options. And no, we are not promoting the idea of grandchildren.
@@rogerstuart2592 Thats the point-it is a great positive to have 10 more years heirs can defer and tax plan their withdrawals. Plus, it may be easier to find heirs in a lower bracket to will your deferred accts. too. You don't need to be so hasty drawing down your deferred accounts beyond the RMDs because of that benefit.
I stopped contributing to my IRA in 1998, because I switched to Roth. Now at 71yo, my RMD next year or the year after is very manageable. I do very well in the 12% bracket. About 2/3 of my money is in my brokerage account, all in mutual funds and etfs, and have 3 years cash. My spend rate is about 1% most years. My IRA is all GMNA bonds and a little cash for conversions. My brokerage and Roth do the heavy lifting, and the IRA is used to maintain my 70/30 asset allocation. I behave myself during downturns and stick with it. I don't have a whole lot of money, but enough so I don't have to fight with the dog for the last can of Alpo before the SS money hits my account. :) Late last year I made my first QCD. Nice channel you have here.
Scared to pay the taxes. Tax Money will have to be paid with 401k dollars which decreases its earning power. So if i have 1M now and i convert i am left with 750K for my retirement. How to pay the taxes could be your next video?
A lot of your video is explaining the output of your software model - fair enough (and I think it is credible). But it would have been interesting to identify the root causes of the tax savings identified. Are most of the savings the result of tax arbitrage between different current tax rates? Tax arbitrage between current rates (Trump rates) and future rates? Are most of the savings from avoiding the taxation of Social Security income? Were there savings driven by Medicare IRMAA? As I try to decide about Roth conversions, it would be helpful to understand where the savings are coming from.
I remember my parents complaining about the taxes they paid both lived to 87 yrs young. We are gonna all pay taxes this is the game we are in just like this gentleman said you choose which way to go, pay it now or pay it later. I don’t trust the tax man the sooner I get him off my plate the better. My parents were not wealthy people but they managed their money well and lived comfortably well. That’s the least I can do is to educate myself on options with the tax man and pay the least tax I can in the long run and yes pass that info and on to our offspring so they can choose which path to travel. The government spends money we hope taxes will be lower but plan on them being higher. Thank you for this information.
Would be awesome if you guys can do a video for an early retirement (50 years old) scenario. Everyone talks about 62, 65, 67, etc., but there are limited info for folks wanting to retire at 48-50 years old.
Another thing for couples to consider which makes earlier ROTH conversions even more attractive is the shift to the single tax bracket upon the death of one spouse. Once filing single the higher tax rates kick in at a much lower income level.
Yes! exactly. You don't know the future, but you do know taxes can only go up from here and at some point there will be only 1 so tax brackets will hurt.
The only approach that seems desirable is to wait until late December and get all of your dividend and distribution data and calculate your taxes. Then you can try entering various Roth conversions and immediately see what the tax effect will be for the year.
I would suggest that converting a portion, say 75% or so, early in the year and finish once you know what your tax position will be at year end. This works when the market is up and is less effective when the market declines for the year. As mentioned, there are other considerations such as IRMAA.
We have been retired 3 years, so far I have generated all my spending in the previous year and it sets in a cash account for spend down during the next year. In December I figure out the lowest tax consequences for withdrawing the next years spending. This has worked well, as I have maximized income in the 12% bracket. This makes it easy to maximize my Roth Conversion. I just need to figure out if the 12% bracket is best or the 22% bracket.
If you convert in early January, you get growth starting in January, but don't pay the taxes until mid-April of the following year. As long as you can estimate the taxes well, this is the route to go.
@@bartman5849 this is not correct. While contributions can be made until tax due date, conversion must be done in the calendar year, ie dec 31 deadline.
It’s just too bad that they didn’t create the Roth and even a Roth 401k at the beginning, instead of the traditional IRA, and the regular 401k. Then we wouldn’t have all these headaches. It’s nice that they’re considering increasing the age for the RMD. They should also increase the amount you can make during the year and not get penalized on your Social Security benefits. Due to inflation, I would suggest increasing it from $25,000 to $50,000.
I am someone who is in the 24% tax bracket and over 10 years away from retirement. I started contributing to an Traditional 401k and later to an Roth 401k. I have a large amount of money I want to convert to Roth. If I only convert the amount up to the max of my tax bracket, it will take until retirement before I am done so I am converting up to the max of the 32% tax bracket. I am paying a huge tax bill now but I am hoping with all my money in Roth when I retire, it will be worth it.
Perhaps look at the viability of early retirement to give yourself more runway to do the conversions? At a certain point in assets, time becomes your most valuable commodity.
@@davidfolts5893 definitely a good idea but I am someone who thinks a glass is always half empty. I never think what I have is enough even with proper planning. Early retirement is not something I plan for but something I might do unexpectedly. So I am hoping early conversion and big tax bill now will save me later.
@@kinglionheart50: That is true for many. When asked what amount of money people would feel wealthy at, their answer is double the amount that people currently have, no matter the wealth level. 😀
Convert smaller amounts at a time each year to remain within a lower tax bracket. Only convert the whole amount if you have the money to cover the taxes on the lump sum.
@@billytrujillo8661 You're welcome. I've been using a spreadsheet to play around with how much I can convert without bumping me into the next tax bracket. If you have a sizeable portfolio, it's definitely worth thinking about converting small amounts now (before retiring) vs having to make big rmds later, because that will guarantee that 85% of your social security benefits will be taxed.
The biggest mistake most people make is not even considering doing a conversion. Another mistake people make is doing the conversion focused only on what bracket it bumps you into this year without understanding the impact on your future balances, RMDs and taxes. Looking only at this year's tax bracket is like looking through the rear view mirror while ignoring what's coming down the road. Everyone's situation is different and the right actions depend on your particular situation, but hopefully this video helps you to see the potential benefits of tax planning while looking forward!
I wish that something was addressed in this video: What is the range of cash outlay one needs to do a Roth conversion in different scenarios. I wish someone would address this.
I’ve done 2 years of Roth conversions. I converted an amount that kept me in the 24% tax bracket (with the converted amount added to my regular taxable income. The 24% limit is about $326,000 for married filing jointly. So if you converted $100,000, you would need to have $24,000 in reserves (unless you took it from the 100k and paid a penalty) to pay the irs. My state (Illinois) doesn’t tax retirement income (yet, it’s coming), which was another incentive to convert now, while federal tax rates have been the lowest in over 100 years.
@@Liledgy100 it wouldn't necessarily be $24k in taxes right? If you did the $100k, some of that works be taxed at lower rates since this country's income tax is progressive, meaning taxes step up as income increases. Hope thus makes sense
@@FIRED13 all my income above $175k (I think that’s when 24% kicks in) is taxed at 24%, including the additional converted amount. If my income was lower and I only went over the 24% by say $10k, then yes, only the last $10k would be taxed at 24%
What if you don’t have the liquid funds to pay the tax due each year of a Roth conversion? If I pay the tax due from the IRA does it still make financial sense to convert over 10 years or so? I doubt it.
Troy, can you make the same sample planning for single which dollar amounts are small? Any additional considerations or options for single? Thank you for all the information.
I'm curious about the future cost of money (FCoM) and how it plays into your example & calculations... Let me elaborate - A 2021 $1 in taxes doesn't have the same value as in 2051 if you assume 2% inflation... A 2021 $1 in 2051 may only have a value (in todays dollars) or $0.50 +/- ... How could we figure the FCoM into your totals/example?
The bigger concern is the percentage of account dollars, in todays value or future value, that you lose. Generally speaking, if you lose 22% of your account value today versus 35% of your account value in the future due to taxes, you're better off letting that 78% compound tax-free for the next 20 years. Make sense?
At 16:45 mark it shows a cumulative $330k savings over all the years. But wouldn’t it be a much more meaningful picture to take the difference (year to year) of both columns and discount those numbers back to a present value using a suitable investment rate (or a safe rate)? That would tell you what the value of any future tax savings is to you today and not a cumulative number of decades, which I believe exaggerates the savings.
Hi @joecimy07054, thanks for pointing that out - this is definitely an abbreviated version of the more comprehensive analysis that we do with each unique individual's situation - We try to paint the full picture of each option and projected outcome so that each client can decide for themselves which route they'd like to take based on their goals and personal risk willingness. Thank you for watching and take care!
How can you account for the time value of the projected tax liability over time for each scenario, in addition to the total over time as the presentation shows.
We converted a 457 and a 401 account to a Roth IRA after selling a real estate investment with significant passive activity losses. We still have money in traditional IRA accounts to move over the next several years, but the sooner you do it the better.
Thanks for commenting! I would recommend speaking with a CPA, or getting a second opinion, regarding that strategy. The rules surrounding deducting passive activity losses are very strict and typically can only be used to offset passive activity (other real estate gains).
@@OakHarvestFinancialGroup these were suspended losses carried over from prior years that were "freed up" when we sold the property. We would have preferred to have had profits to pay taxes on, but if you end up with lemons, make lemonade.
1:41 time mark: Timing the Market. This is voodoo financial advice. IT DOES NOT MATTER whether you take money after tax and invest it or let it sit pre-tax and tax it upon withdrawal. All other factors being equal, the final closing (after tax) dollar amount of each fund will be the same. So, the relevant discussion isn't about the strategy - both strategies have pros and cons - it's about "the other factors". Namely tax bracket now vs. tax bracket at time of withdrawal, that's the number one issue. The number two issue is the effect of RMDs on the individual's tax outlook. There are other issues, but those are the two main ones that most UA-cam videos focus upon.
Remember the 5 year rule for conversion from a Traditional IRA to a Roth. Not a problem if you spent a lifetime saving money and plan to give it away to your heirs instead of enjoying it yourself. You can't withdraw the money until 5 years have passed unless you want to pay a penalty. Best solution is to build a Roth to pass on to heirs and keep enough in the Traditional IRA to spend yourself.
You can’t spend the earnings on that money for 5 years. You can spend the principle. I think he said he was converting 65k over a 5 year period or something like that. He’d have access to the $65k, but not the interest on it. He’d have to wait 5 years to spend all of the first year earnings, 6 years for the 2nd year earnings, etc. So, it would take 10 years in this case to be able to spend $100% of the earnings of all that money. In the meantime, he still has access to the money that wasn’t converted as well.
@@DeniseW618 Right about the principle but I believe you are wrong about needing to wait more than 5 years for the earnings. 5 years after conversion, all earnings can be withdrawn tax free (and without penalties if over 59.5 years).
The presentation is very useful but doesn't talk about the impact of IRMAA on Medicare Part B which seems to have a significant increase in the monthly premium.
Can calculate higher irmaas, if full conversion, only Irma for 2 years after... but generally high net worth and high income earners will pay that w RMDs too over a longer time. Look at the math of a 100k conversion added to a MFJ couple at 170k agi currently....approximately 150/month increase. Or 1800/yr × 2= 3600 × 10 = 36000. Or take the approximately 6k yr penalty × 2 people for 2 yrs. = 24000. And Irmaa has gone up and will most likely continue to go up.
I'm on the fence. My wife and I are still working, but I plan to retire before the end of the year at 63. She says she may or may not work. I have been trying to determine if I should or not convert to Roths. With a break even point at 85, it doesn't benefit me as much as my kids. Lucky kids.
In 2010 if you did a conversion the government would spread The tax liability over two years. Such a deal and if the market goes up 15% a year you double your money every five years. And that’s all tax free. Socially you are buying your freedom. Thank you for your presentation
The SECURE Act has torpedoed my plans to leave the bulk of my traditional 401k and IRA's to my kids. Now I'm in a bit of a scramble to do some conversions. Still waiting on a dip in the market to begin. 60 years old, so I have a bit of time, but am ready to take the tax hit when the timing is right.
@Wes. I think you’re being overly nice to your kids. Why stress over it. You plan on leaving them something which is better than many. You never know in that one of your kids could temporarily be unemployed after you passed away and that’s a perfect time for them to pull out some money? You could also consider retiring early and just live off your 401k and IRA until you start to get social security. Put excess money aside and just give it to your kids in the form of cash. Are you worried they may get lazy or just spend it?
As far as I’m concerned put as much as you can in your Roth IRA. It will buy you freedom and you do not have to hassle with higher taxes later in your life and I could pass it on easily. Keep your life simple to
@D Sullivan You do not pay inheritance tax on the funds if the estate is under $11.7M. The funds are transferred as an "Inherited IRA" to the recipient. These must be handled through a broker so the recipient never directly has the funds. The recipient then must pay taxes when the funds are removed from the "Inherited IRA". Search rules for Inherited IRA distribution and tax. Before 2020 the recipient had RMD's based on age, after 2020 there was a maximum of 10 years to distribute the funds.
Very good presentation! I did 100% conversion to Roth when I was 68. Fortunately, of course the money is there if I need it but, I have a good chance of never needing a distribution so the legacy component was a big consideration. Add in the Trump tax cuts, and the certainty that taxes were going up from there turned the conversion into A No Brainer!
I selected this video because the example is pretty close to my own, and I wondered if conversion made sense doing it relatively late with a modest ira account. Pleased to see it did. Like the graphs. But did you say there was something different regarding Soc Security between the 2 examples? I didn't get what that was.
I caught that as well, he mentioned about coming back to that later in the video but didn't. It would have been nice to see an exact apples to apples comparison. I hate when something is different, it seems as though they're hiding something.
I’ve noticed that financial planners make the assumption that tax rates will continue to rise in the future. I find it less likely that a Congress of either party will move to tax middle income seniors’ deferred retirement account withdrawals at a rate much higher than 24 percent without major pushback.
I disagree! Income taxes have been the lowest in anyone’s lifetime! We’re running huge deficits, the cuts trump made caused another 1.5 trillion. On top of that, social security and Medicare are running down there reserves very quickly.
Tim M is right, and now we must factor in paying for the $Trillions that have been appropriated for Covid stimulus in addition to salvaging the SS fund. You can take it to the bank, taxes will rise across the board going forward.
Like the info! but I think he should of better explained what money should be used to pay take on roth conversions. If you have cash equivalent's ;c.d.'s, mutual funds, savings bonds; to pay take on theses conversions it won't affect your retirement balance.
HI, I notice that you compare the pretax amount of the 401k to the roth conversion, It would be a great if you also showed a line of the after tax value of the 401k assuming the RMD and current tax rates.
Hi Keith! I have done videos where I discuss the concept, but not an entire video dedicated to that. The simple answer is much sooner! Thanks for watching and Happy New Year!
I started my IRA conversions into Roth IRAs in 2008 over 3 years and started converting my work based 401ks in 2010 until all my 401ks became Roth 401ks. Also in 2010 all my 401k contributions were Roth 401k contributions until I stopped working. Upon retirement in 2020 I shifted the Roth 401ks over to my Roth IRA. My accounts have had years to recover from the tax bite of the conversions and really zoom ahead thanks to a good stock market. What this gentleman is suggesting strikes me as the way to go. I know I did something similar and it worked out well for me. Takes time and you definately want to implement this strategy at least 6 years in advance of your retirement to avoid the Roth IRA 5 year rule.
Thank u. Very interesting. Question. I want to convert my IRA standard to another investment but want to avoid the taxes on my IRAs when I disburse/convert the IRAs. What investment type will reduce the tax on the IRAs ? Is the ROTH the best option?
Excellent video - no 20 minute discussion can address everybody's scenario but the Roth conversion concept is clear - lifetime tax savings + simplifying and reducing pain for your heirs. Every time I review my mother's financial situation, I am reminded of the smart way my now departed father set her (and us kids) up. He had already done the Roth conversion. Now that future tax free money is there for my mother for peace of mind, even though she does not need it... and it is heir friendly. Compliant with her wishes to pass it on after her death.
some numbers questions: on bar graph at approximately 13:12 how is the ~67k in taxes calculated during that 4 year period? at 6:03 in comparison of conversion v. traditional where do the two total values come from - $5.1M v. $4.3M? are those at the end of the longevity period - 29? also, same time frame "ending value" of what?
When the kids inherit a tax deferred account like an 401k they get 10 years to liquidate that account. You also forgot to mention that the cheques that you write out to the irs, in this case about $250.000 does not generate “compound interest” if it would have stayed in the conventional account. So that is a loss when you convert to a Roth IRA.
You might want to re-watch the video. He explicitly addressed all your points and did clearly say heirs have 10 years to withdraw down to zero. What do you think your heirs will do with your traditional IRA/401K if you do not convert them?
@@hermanparisius2828 never make a major financial decision based solely on what anybody on the Internet advises. Everyone’s situation is different and requires expert advice.
Agree, everyone (planners) forget the concept on the time value of money on the taxes paid up front. Also, the idea that someone with 1.4 million in IRA is without other passive income is a bit to simple.
To your second point, if you actually run the calculations (e.g. in a spreadsheet) you can see that it doesn't matter if you pay the tax now (before your investments grow) or in the future (after your investments have grown). The final amount you have, after taxes is identical - ASSUMING the tax RATE is the same now as it will be in the future. At least 2 considerations though are: 1) Tax rates are likely to be higher in the future - so you will pay more then 2) Required Minimum Distributions from a Traditional IRA could drive you into a higher tax bracket A third consideration that other commenters have mentioned is that you may be married now (and thus pay less tax) but single/widowed in the future (and thus paying more tax).
This is a very good analysis. I believe the Roth conversions are even more beneficial if you have a few low-income years, maybe before taking social security and perhaps living off of taxable savings and maybe a pension.
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Thanks for the insights. You mentioned inheritance tax and forced distribution. I thought there was no inheritance tax for the first $12M that you pass on to your heirs after you pass away...
Excellent video and one can soften the conversion tax by starting at age 60 or so and spreading it out up to 72. As I learned in the video, one can maybe go out to 75 if secure act 2 passes!
What's the Present Value of the 2 tax streams? I'm guessing it will likely still favor the conversion given the large discrepancy, but I'm curious about the comparison. Thanks!
I have 2.3 million in a 401K, 67 and no longer working. I will have several years with no income so I am planning on doing a partial roth conversion. I will take out 60K a year, put it in my roth and pay the taxes with the cash I have. I have about $330K cash so enough to support myself until I hit age 70 and start my social security which should be about 50K. Then at 72 1/2 I will start my RMD's which should be about $100K. I won't have a lot in my roth, maybe $250K that I don't plan to take out unless there is an emergency.
If you want to pay all your taxes at one time go ahead. Or you could just draw out your MRD plus what you wanted and pay your taxes each year just like you have been doing.
In 2008-10 I did a Roth conversion And the IRS had a special rule where you could spread the tax liability of the conversion over two years. What a deal, 100% in the market and all tax free. Whoever inherits this has to take out the money over 10 years according to a new rule. Same with the regular IRA. That wasn’t the terms of the initial proposal it’s not fair to change the rules midstream? Obviously it was such a really good deal they want to cut of it.
I'm almost convinced, I wonder can you pay the conversion tax out of pocket or does it have to reduce the funds transfer amount? There has to be a big correction in the next 2 years, so I need to get a plan together.
You can pay out of the transferred funds, but it is messier and if under 59.5 a penalty (early distribution vs conversion) on the amount used to pay the taxes. So you would need to take out additional funds... Recommended to pay out of other sources.
Oh and converting at a down market is optimal, but usually only w hindsight. A bigger driver I feel is the known laws and tax rates vs new legislation, etc. I.e don't wait for down market vs the repeal of TJA tax cuts. Look at how the brackets used to be vs now and where they will likely go again in the future.
@@Lawdog1523 Though converting in a down market makes sense if we have to split up the conversion over 3 or 4 years to keep the tax bracket low enough the down market may not be the solution for several years.
You would not want to reduce the funds transferred. You would want to take full advantage of the tax growth in that newly converted Roth IRA. I would say if you can't comfortably pay out of pocket, then one should not convert---or at least convert smaller amounts at a time after 59.5 yrs. I could be wrong about this, as I'm trying to rapidly educate myself on this topic of conversions.
Another complication is ACA credits. Doing a Roth conversion shows up as income and could eliminate your ACA credit if you qualified before the conversion. How much that impacts your results will vary by each case.
@Nick Kemp Yep that is a big deal. I hope to be an expat for a number of years and part of the reason is so that I won't have to deal with the interplay of ACA Credits and Roth conversion...but you are right...it is a major consideration.
@@bartman5849 Yes, as a married person you and your wife could convert a pile of money every year into a Roth at very beneficial rates if you are not trying to balance it with ACA credit issues. And then as I understand it (please do your own research because I am just learning about this stuff myself) the added bonus of getting it into a Roth is that when you withdraw it it does not count toward the "income" level that is used to determine how much of your SS is taxable...so depending on your entire situation you may save tax on SS as well.
Simply another input to the calculation over your lifetime. In the video example, there were $330,000 in lifetime tax savings. Even if you had to give up $20,000 in ACA credits temporarily during each of the Roth conversion years, the conversion might still make sense. Every situation is different.
At the end of the video, a very important point is missed: the step-up in tax basis for the heir. (update: I was incorrect, there is no step-up for retirement accounts).
Retirement accounts do not receive a step up in basis. Only non-qualified assets do. Retirement accounts are required to be fully distributed within 10 years, creating a massive tax burden, or otherwise incur a 50% penalty of the full amount not distributed (plus taxes).
If I do a Roth conversion and pay the taxes out of my savings do I need to send the money to the irs right away to avoid underpayment penalties? How do I do that?
What value of a couples portfolio do you think there begins to be advantages to doing Roth conversions? There was a video you posted recently that you said you weren’t to worried about taxes because the portfolio value wasn’t high enough. We are just debating whether or not we should be planning on doing a Roth conversion since my wife was laid off and is no longer contributing to her 401K.
I have been doing ROTH conversions since retirement during the Trump tax cuts. I stay within my 24% bracket and convert about $110k a year and I pay the taxes on it out of my Taxable money. Most of my money was Traditional, so when 2025 ends and taxes possibly go back up (if a Republican doesn't get in to extend them) I still have a lot of unconverted funds. I plan to still convert but staying within the tax bracket at that time only allows me to convert $10k or so. How do you know if going above the current tax bracket is beneficial?
I cannot watch these. Why can't we have a savings account only? What is the reason for all of these different savings accounts? More money for tax planners and accountants and attorneys. The same reason a sole proprietor is no good we need LLC and S corp etc. Don't people feel scammed?
I can't Blame you, you cannot take it with you. I am spending mine too and enjoy my money. I have a will already, if I die, my wife and kids will get all I have. Simple.
yeah I was thinking that I raised my kids, made them self sufficient and paid for their education and all their living expenses. My responsibility now is to me and my wife. I will not 'suffer' by reducing spending so I "leave some for my kids". My sacrifices and hard work over the years will now allow me and my wife to (hopefully) have a good retirement. The kids can get what's left once we're done. Most likely there will be some left but I will not dictate the terms of my retirement so that I can "leave money for my kids". Selfish you might say? Well no; I lived frugally so that I can get to where I am. I don't want to be a burden on my kids when I'm old (financially) which would be more selfish.
@@oceancon along with that same thinking can gift to your children while you’re alive while you still can to keep them self sufficient instead of waiting to leave them something. Is that a thing to consider as well?
@@Hyper_Driven well yes, and along that vein, I've paid their student loans off and with my daughters will help them as they marry. However this is not the same as retiring with an eye on 'leaving something for the kids'. Like I said before, I am not selfish at all but I at this point my main concern is me and my wife and that takes precedence.
@@oceancon as I see it from what you’ve stated, you’ve gotten your kids out of the nest with no debt burden from student loans, and arranged things to not be a financial burden on them to guilt them with, while teaching them (I presume) about financial literacy. As a parent, before they live on their own, you’re responsible for their upbringing and those resources, and you’ve done that. You’ve taught them what they need to survive and continue the family lineage to the next generation, and their futures aren’t affected one way or another for finances if you suddenly died now or at 100: enjoy your retirement!
Are you considering the time-value of money and the impact of inflation? Considering the time value of those huge taxes up front for the conversion, Is it possible the tax payout is really the same? (Although i realize the opportunity provided by Trump tax cuts up through 2025) And the estate planning
I feel that the time value of money is implicitly included in this. If you don't do the conversion, the taxes you would have paid stay in the account and grow in the traditional IRA account. So the time-value of those funds is already reflected in the growth of that account. If you pay the taxes from some other account, you have to include the expected growth on that account with your total estate plan.
I don't know if this was considered in the $300K difference but there's also the opportunity cost of the $67K x 4 that could've been invested in an after-tax account - would that have made up the $300K "lifetime" benefit? That's one thing. The other thing is inflation - maybe it is better to pay taxes when the value of money has gone down far out in the future. So purchasing power needs to be considered as well. I agree it's a complex question but there's more than just the value of the accounts to consider and some things of course have to be based on assumptions. I wonder about the right age to do the conversions too - it seems doing it early isn't as advantageous as doing it closer to 72 or 75. If you're planning on doing a lot of charitable gifts, then conversion won't help you.
I agree. These advisors seem to not give all the implications. As a retired financial planner I would recommend to my client to take the 50/50 option. Meaning, if we are not sure which way to go in this case, do the Roth conversion with 1/2 of your qualified money. That way the worse you could do is make 1/2 of a mistake and not a 100% mistake, if in the end doing the Roth was not a good idea. Just a thought.
In this example, was the full $1.4 mil converted? What about the option to convert a portion - just enough to reduce the tax rate into around 10% to12% in order to avoid the massive tax bill?
Can you say more about how to factor this in, or point me to any videos that outline it? I think there is a 2 year lookback period at income for determining Medicare premium so this would have to be planned and completed prior to 2 years before commencing Medicare to avoid the biggest hit, as I understand it.
@@andreamiller6200 you can google for the medicare premium limit. For example, couple file for join, the limit is $176,000. If you exceed that amount, your premium will be increased.
Good video, though I'm not sure converting is best for the average person. For one, I think most Americans will have a substantially lower income in retirement. Few have pensions, rentals, or other investments outside of a 401(k) or Traditional IRA, so their future tax bracket will likely be lower and waiting could work out best in the long run. Also, even if doing a conversion still works out to better numbers, most won't live the 29 years your projection assumes. The life expectancy for the average American man at age 65 is only about 17 years. Again, good analysis, but people should realize this isn't a typical answer and the main takeaway is you really need careful analysis to decide what is right for your particular situation.
Thanks for the comment Golden, and you bring up some good points. I’m going to do a video looking at the analysis of some of your thoughts and provide some context to other aspects that should be considered with respect to an individuals situation, beyond just the numbers. Thanks again for watching and providing good content ideas. Be on the lookout for that video in a couple weeks!
I retired early at age 45. I have over 2.4 mill in pre-tax, 300k+ in Roth IRAs, 600k+ in after-tax. I plan on doing conversions every year. Here's some considerations that merit additional discussion:
1) Your tax bracket matters. Early on, while you have kids as dependents, you can pay almost no taxes for large AGIs. For example, a family of 5 would owe $0 in taxes at an AGI of 90K+. Once your 60+ and if you are no longer with your spouse, you tax brackets are way way way worse.
2) Roth IRA conversion ladder is a great way of being able to access your 401k money without penalty, if you are an early retiree.
3) Health Care. In the ACA, you can go from paying $0 to paying $20K+ for a year depending on your AGI. For example, at an AGI of 49K for a family of 5 it's free, at 90K it's 8K+.
4) The state you live in matters. Maybe consider moving, if it's an option, to a low tax state when doing a very very large conversion. Let's say you live in CT and you wanted to convert 1mill, this would cost you at least 55,000 in just state taxes. I would rather put that 55k into a property in a no tax state.
5) Why not have both Roth and pre-tax. Who knows what the tax policy landscape will be later on. By having both, I can control my taxable AGI very easily to fit the tax landscape. For example, let's say I needed 90k per year to live. I could pull 50k from my 401k and 40k from my Roth to survive, but I would only be taxed on my 50k 401k distribution.
All excellent points! And probably better points than the guy in the video above was making (he really should have rehearsed his script some more before hitting the record button).
Wow....how did you get so much money to grow in your Roth IRA so fast?!!!
@@narika7383 Just keep putting money away each year and keep it invested. It's amazing how it grows over time.
@@HB-yq8gy My father just died from Covid. He was 66, and was going to retire, but he had auto-immune issues and Covid destroyed him. I feel so bad that he never got to see a penny of SS and he had no living spouse so it all stays with the government. I begged him to retire earlier to enjoy some life without work, but it never happened. So my response will be tainted by this. I'm not a SSI expert so I won't provide advice here for this, except that since your spouse does have an auto-immune issue you need to be realistic that her life-span might be drastically cut short and consider how that affects your survivor benefits, if any.
As far as ROTH IRA conversions, the best time is when there is a market downturn. We are having a nice correction now which provides an interesting opportunity. I actually did some moves recently to my Roth.
@Neil Stewart Sorry, I just don't have it in my to communicate beyond here. It's was over a month of pain :( I'm just trying to recover now.
As far as the ROTH Ladder, I'm also learning friend. Controlling your AGI is key. Use the H&R and Turbo Tax estimators to see what tax cliffs are out there for your situation. Play around the number on those sites.
Here's an example that I ran into for the 2021 tax year: I was thinking of converting 10k to my Roth while my AGI was 150k. This would have brought my AGI to 160k, but it would have cost me an additional 10k in taxes, so basically I would have been loosing 10k. Crazy right?
So you need to pay attention to these "CLIFFS" for different situations, like health care costs and child tax credits for example.
Troy, I've gone through 20+ videos and you're the first to be realistic in your expectations regarding market/account growth, which greatly helps to provide a realistic view. But either way, there's a great deal to digest and analyze here. Thanks for the work you put into this! Anthony
This works IF you think you are going to live beyond age 85 and have heirs you want to leave proceeds to
Great video! As someone who is just starting to do some big Roth conversions, I especially like the section from about 8-10 minutes in, showing green and blue lines for one’s net worth with Roth conversions (blue) or without them (green). ON PAPER (or the white board) the cross-over point in value is years down the line. It hurts to see one’s net worth go down, and as he points out, it hurts to write those big checks to the IRS. But in TRUE VALUE one’s wealth takes no dip at all, because as he points out, the green line represents “tax-infested dollars” which are actually worth less than tax-free dollars.
Personally, I am doing big Roth conversions before turning 63, and paying taxes up up to a 24% marginal rate. Starting with the year I turn 63, I expect to keep converting but smaller amounts, to keep my Medicare premiums low (since they are based on one’s AGI 2 years prior).
I am in the same boat as you my friend. 😂
My concern and the avoided issue is the Net Present Value (NPV) of your money. If you convert, you pay taxes today. If you wait and pay taxes down the road (like in 20years), you are paying taxes with future money, which is worth less. i.e., would you rather I give you $100 today than in 20 years
Is your IRA not going to grow? At some point it will have to be emptied and someone will have to pay the taxes. If not you and/or your spouse, some other beneficiary.
@@rogerstuart2592 Yep. To me a big IRA is an acorn that has grown into a giant oak tree right next to your house. Convert everything to Roth early on is like planting a tree 50 feet away from the house. You'll never have to call in a tree cutter.
Great analysis and explanation! I am a big fan of Roth Conversions and have seen nobody measure the tax savings in this much level of detail. I will reach out to entertain a conversation about retirement planning! Great job!!!
This was very helpful to me, thank you. I was just discussing this very subject with my Fidelity account manager this week. As usual, he couldnt tell me more than I already knew. These big houses want you to use their services that have access to trade for you and I need an independent planner to guide me and I make the changes.
Very interesting. I also have an account with Fidelity. How does your discussion with your Fidelity account manager go. I have tried talking to my Fidelity Account manger about the subject but was not fruitful. Do you pay your account manger extra fees? Will appreciate very much for your answer. I did an $100,000 conversion last year which I regret that I did not covert more. Thanks
@@wensunkeh2030 I just asked him about Roth conversion because I no longer qualify to put more money into my Roth. Fidelity offers full account management where they do your trading and rebalancing and advising for 1% yearly fee.
I prefer to find independent advice that partners with me and advises me and I pay them for their time but I do my own trading.
@@Lianne459 I also asked my Fidelity account manager the same question, he did ask me what tax rate I was paying. So I did some search and find out that for 2020, I paid @ 22% and if I move an additional, say , $50,000 to ROTH from IRA then I will more likely in the 24% bracket. So I hesitate if do it this year. I also do my own trade. This year I already moved all 401K to IRA. So I still not decide if I should move more to ROTH.
is Fidelity motivated by your conversion to roth and using money from your accounts to pay taxes and then ending up with less AUM(assets under management), imo. Imagine if we all did that at fidelity.
we are considering a conversion,hubby 65,but not retiring and has high income putting us in 35% to 37% tax bracket,so doesn't make sense to convert now until he retires and doesn't have high income,would only have a few years to make conversions unless they bump RMD rule to 75 that would help a lot👍
Converting after he retires means transferring the funds from a traditional 401K to a Roth IRA. If he converts while employed he could target a Roth 401K. When he terminates employment, he can keep the money in the Roth 401K rather than transfer it to a Roth IRA. The concern is the difference between a 401K and an IRA with regard to asset protection from creditors. Also, there may be 401K vs IRA implications for the division of assets comes the day he divorces you to be with a younger woman.
@@Chris.Brisson not sure what u mean by "he could target Roth 401k if he converts while employed". We were considering converting his trad IRA,after paying tax,into his Roth IRA. We also have done rollovers from 401k roth to his IRA roth,we like to rollover from 401k to trad IRA d/t the many fees in 401k. Lastly,let's hope he's not leaving me for a younger woman,cuz we've got other Community property😄
I'm 66 have done one $75k Roth Conversion and stayed in the 12% tax bracket. My wife and I each have about $600,000 in tax deferred accounts, she is 4 years younger and if Secure act 2.0 passes, she won't have RMDs until 75 yrs old. I'm sure when we both get SS and RMDs we will be in a higher tax bracket. I'm wondering if I should bite the bullet and go up to the 22% tax bracket doing the Roth Conversions. The 'first world problem' we have now is the tax deferred accounts are growing faster than I am Roth converting them. Nice problem to have but still a problem.
The 12% bracket seems like a no-brainer. Still, when you go higher, it will depend on variables outside your control, such as longevity, tax law changes and market returns, depending on what asset allocation you are comfortable with...
I'm 62 and did it last year. The tax hit is enormous. If I die young it won't really matter either way except for my heirs. But if I manage to live a long time and my investments are reasonable, I figure that I am going to come out way ahead.
Wish me luck.
Good luck! live long and prosper
If you don't mind sharing, could you give us your numbers. Your heirs will appreciate it. I wish you a long and happy life too.
How is it working out 2 years later?
@@Scott-xf5xb I had a lousy year in 22 and again in 23, but still managed to make more than I spend in retirement. I figure that's a big plus - and the name of the game, right? 6 figures of tax free gains is significant. But to be fair I also had a lot less IN the market after the tax I paid initially. Still too soon to really tell, but I am quite optimistic about my current holdings.
Did some conversions years ago… glad we did in retrospect… still some not converted
The biggest weakness in this strategy is accounting for an extended bear market and high inflation like the late 1960's through the early 1980's
Best channel to strategize. Keep them coming!!
8 minutes into video I haven't learned anything yet except how good these guys are 0
Finally someone that makes sense! My plan has been to burn the pre-tax stuff (either spend or convert to Roth, making up the needed spending with taxable) and delay SocSec until age 70. I haven't been able to figure out why keeping the pre-tax makes sense with medicare brackets and social security taxation.
You want to keep enough in the traditional IRA to account for your standard deduction being used, and with Social Security taxation not being increased with inflation, it is virtually assured that you are going to be in the 85% of Social Security being counted as income if you are concerned about the size of your IRA.
@@davidfolts5893 I wouldn't say I ”want” to keep that in the pre-tax IRA, but rather it is okay to keep that there and may save current taxes by leaving it in pre-tax. However having it in a Roth is psychologically advantageous because if something comes up you don't have any tax concerns in accessing the money. Converting more also may save money if tax rates increase.
@@Sylvan_dB It's all about tax diversification to increase available options no matter what changes occur.
Here's a great scenario, and possibly fodder for a video, with a situation common to many working-class people. Many of us are in, or mostly in, the 12% bracket while working. We're short of a million dollars in savings/investments, but let's say we've managed to put away somewhere in the range of $700 - 750K. At 65, does it make sense to do Roth conversions that would put more dollars into the 22% bracket during conversion, given that post-retirement taxes (with no conversion) would likely stay mostly in the 12% bracket as married filing jointly. And, to add a wrinkle, what about considering the period following the death of a spouse when the 22% bracket begins at around 40K? Many surviving spouses will have 20 years or even more of paying taxes filed as single.
Good thoughts, but it is hard as an advisor to not give all the implications, involved. Like time value of money, moving to a non-income tax state in retirement, etc. As a retired financial planner I would often recommend to my clients to take the 50/50 option. Meaning, if we are not sure which way to go in this case, do the Roth conversion with 1/2 of your qualified money. That way the worse you could do is make 1/2 of a mistake and not a 100% mistake, if in the end doing the Roth was not a good idea. Just a thought.
Very good video. I have been thinking of this since before I retired. However I did not consider it due to upfront costs. However we will be starting this year to convert a substantial amount into Roth despite the upfront costs the benefits can outweigh those .
Thanks for posting.
Thank you for this analysis.
I've been a CPA for almost 40 years, and can verify everything he's said is on the money.
Thank you!
Can you convert this year and if so needed Re-characterize some of the money early next year before the deadline. Would this allow you to see how you are taxed and set you up for a "do over" if you're unhappy with the taxes paid ?
@@jetboy770371 can't do to the horse racing technique anymore. Usually it's best to just optimize per the tax bracket. Usually taking out enough to max out the 10 or 12% is the sweet spot
Is it not true that we can pass on $12.5 million to our family members tax free at least within a trust?
@@DrDave-zk6nf you can do it normally outside a trust too.
For what it's worth -- my $.02. As a working stiff I fully funded my 403(b)/401(k) employer retirement plan -- even taking advantage of the over 50 catch-up provisions as I aged. I also have a ROTH IRA -- funded to the maximum allowed by law since they were created -- and numerous after-tax investments. I rolled my retirement plan over to an IRA when I retired (10 years ago) and am allowing it to grow untouched since (I'm 70). My living expenses are funded from after-tax investments. In hindsight... I would've contributed to the retirement plan ONLY enough to garner the employer's contribution. And focused my additional payments (after tax) into AFTER-TAX investments (individual stocks, municipal bonds, indexed stock funds). Investments with low or minimal tax exposure. Plus the ROTH of course. A bigger "bite" while working of course... but less to worry about in retirement.
Roxie's Dad is smart about this. The taxed investment increases will be taxed primarily as capital gains (short-term at marginal tax rates, long-term at 0%, 15%, or 20% depending on income) with some dividends/interest (at marginal tax rates). I do disagree with the investments with minimal tax exposure though. I would suggest index funds and then be ready to pay the long-term capital gains, which will be less than your marginal tax rates.
@@AnthonyMiyazaki Yes, but they have to consider the opportunity costs of the 20% (max) being invested in the market also. So it's not just that they're paying the extra 20% now ahead of time but that in a traditional 401(k), that 20% also grows compounded.
Unless you have created a Trust for your Estate instead of a Will. ALL of your Investments Will be held by the Estate until Bills and Claims are settled! Only the Roth and IRA will Go Directly to their Beneficiaries, upon your passing. A Will for an Estate can be kept open for years.
Yes, that’s the thing for people to do. If your employer offers a match only invest in a 401(k) up to the match, and then invest fully in a Roth IRA, up to the limit. After that, you could invest any more money in the 401(k), if you want.
if your employer does not offer a match, forget the 401(k) until you have invested fully in the Roth IRA. Then invest in the 401(k) and defer taxes.
I don't think that would have been a good idea. In my opinion, you should have been doing Roth conversions from your 401k all along, so that those conversions would have been growing tax free in your Roth all these years. Putting more money in a taxable account only would have increased your tax burden.
One advantage of converting an IRA to Roth IRA is it will eventually reduce RMD's (Required Mandatory Distribution) in the near future,
My RMD will be about the same amount as I need to live on, so no big deal. I will be taking that money out any way. Besides you can always reinvest the money you take out as long as its not in a tax deferred account. . Thats my understanding.
Please consider creating a video that compares how a given couple would have fared if they stretched out the Roth conversions over a longer period of time. Your video does a great job showing how if you bite the bullet for four years, it can be well worth paying the taxes. Depending on their marginal tax rates, they might have saved much more if they had started earlier.
Hi David, From our experience of sitting with families over the years very few start conversions earlier. The strategy reviewed in the video is very good for that particular scenario, in our view. For some people, stretching the conversions out over longer periods results in more taxes paid over time. A common reason for this is the more you leave in IRAs the higher your RMDs are in the future which can trigger large income taxes along with other areas of the tax code. This is especially true if you expect taxes to be higher in the future. I will get a video out comparing a scenario of stretching the conversions out versus doing them more quickly. The right action to take ultimately depends on your persona situation. Thanks for your comment!
@@OakHarvestFinancialGroup Thanks! I'm 58 and planning to do it over ten years before I retire at age 70, in part because my spouse is 15 years older than me and I want to convert as much as possible while we can still file jointly as a married couple.
@@OakHarvestFinancialGroup Yes please do a video of smaller conversions. What you wrote does not make sense to me!
Exactly what I was looking for, I will contact your firm.
To me this really only matters if your going to leave the money alone and let it grow. I'm not going to fly coach and let my kids fly first class and believe me they will
If you've done the projections including RMDs where the taxes can get horrendous, and you can make it to the end of life without running out, go for it!
Finally, somebody with sense!!! Kids will get ZERO! They have an education in school and in life, provided by me, and the winning lottery ticket of having been born in AMERICA. They can create THEIR own wealth. I am enjoying mine. And! I will die penny-less and with a smile on my face.
Agree, specially when the cross-over date is at 84 years old. We should all be lucky to make it to 84. Also once you get to your 80's, you won't be spending much cash and could probably care less that your Roth conversion is now just starting to work in your favor.
I wouldn't be allowed in first class.
Hi Troy,
First time listener and I appreciate the helpful video. I have started doing exactly what you have talked about, but I am little late in doing so! My problem, as well pointed out, is to swallow high taxes in the initial years! I have subscribed to your videos and hope to make a visit to your office sometime.
Thanks, and Best Regards.
Thanks for sharing!
Also, once the couple goes from married filing joint to a widow filing single, the tax rates become higher sooner. Better to convert to Roth before income drops to 1 social security check and tax rate is higher. Odds of surviving spouse living into 90's is great.
When making Roth decisions, you need to know who you are planning for: You and your spouse together, the surviving spouse alone, or your children. Prioritize your decision-making first, then plan accordingly, keeping in mind that you won't have certainty because longevity is a wildcard that will change the end value of those conversions.
My thoughts exactly. My wife and I want to leave our kids with substantial funds - because the mid- to later-21st Century is shaping up to be an unpredictable hell-hole thanks to the changing weather. Funds may give them some options. And no, we are not promoting the idea of grandchildren.
@@edbouhl3100 but think if you had grandkids as heirs for your deferred accounts and assume a much lower tax bracket
@@GuySkellenger Remember that if your Roth passes on to anyone but your spouse, they have to empty it within 10 years.
@@rogerstuart2592 Thats the point-it is a great positive to have 10 more years heirs can defer and tax plan their withdrawals. Plus, it may be easier to find heirs in a lower bracket to will your deferred accts. too. You don't need to be so hasty drawing down your deferred accounts beyond the RMDs because of that benefit.
I stopped contributing to my IRA in 1998, because I switched to Roth. Now at 71yo, my RMD next year or the year after is very manageable. I do very well in the 12% bracket. About 2/3 of my money is in my brokerage account, all in mutual funds and etfs, and have 3 years cash. My spend rate is about 1% most years. My IRA is all GMNA bonds and a little cash for conversions. My brokerage and Roth do the heavy lifting, and the IRA is used to maintain my 70/30 asset allocation. I behave myself during downturns and stick with it. I don't have a whole lot of money, but enough so I don't have to fight with the dog for the last can of Alpo before the SS money hits my account. :) Late last year I made my first QCD. Nice channel you have here.
Hopefully its a small dog so you can win. Good job.
@@chessdad182 I think I'll do ok. I know how to operate the can opener. :) Thank you for your concern.
Scared to pay the taxes. Tax Money will have to be paid with 401k dollars which decreases its earning power. So if i have 1M now and i convert i am left with 750K for my retirement. How to pay the taxes could be your next video?
A lot of your video is explaining the output of your software model - fair enough (and I think it is credible). But it would have been interesting to identify the root causes of the tax savings identified. Are most of the savings the result of tax arbitrage between different current tax rates? Tax arbitrage between current rates (Trump rates) and future rates? Are most of the savings from avoiding the taxation of Social Security income? Were there savings driven by Medicare IRMAA? As I try to decide about Roth conversions, it would be helpful to understand where the savings are coming from.
Great point
I remember my parents complaining about the taxes they paid both lived to 87 yrs young. We are gonna all pay taxes this is the game we are in just like this gentleman said you choose which way to go, pay it now or pay it later. I don’t trust the tax man the sooner I get him off my plate the better. My parents were not wealthy people but they managed their money well and lived comfortably well. That’s the least I can do is to educate myself on options with the tax man and pay the least tax I can in the long run and yes pass that info and on to our offspring so they can choose which path to travel. The government spends money we hope taxes will be lower but plan on them being higher. Thank you for this information.
Would be awesome if you guys can do a video for an early retirement (50 years old) scenario. Everyone talks about 62, 65, 67, etc., but there are limited info for folks wanting to retire at 48-50 years old.
Another thing for couples to consider which makes earlier ROTH conversions even more attractive is the shift to the single tax bracket upon the death of one spouse. Once filing single the higher tax rates kick in at a much lower income level.
Yes! exactly. You don't know the future, but you do know taxes can only go up from here and at some point there will be only 1 so tax brackets will hurt.
Very good point, that I suspect many people either overlook, or just don't want to think about.
Thank you.....I had not thought of that.
The only approach that seems desirable is to wait until late December and get all of your dividend and distribution data and calculate your taxes. Then you can try entering various Roth conversions and immediately see what the tax effect will be for the year.
I would suggest that converting a portion, say 75% or so, early in the year and finish once you know what your tax position will be at year end. This works when the market is up and is less effective when the market declines for the year. As mentioned, there are other considerations such as IRMAA.
We have been retired 3 years, so far I have generated all my spending in the previous year and it sets in a cash account for spend down during the next year. In December I figure out the lowest tax consequences for withdrawing the next years spending. This has worked well, as I have maximized income in the 12% bracket. This makes it easy to maximize my Roth Conversion. I just need to figure out if the 12% bracket is best or the 22% bracket.
You can do the prior year conversion up until the tax deadline for the year. Makes it easier for sure.
If you convert in early January, you get growth starting in January, but don't pay the taxes until mid-April of the following year. As long as you can estimate the taxes well, this is the route to go.
@@bartman5849 this is not correct. While contributions can be made until tax due date, conversion must be done in the calendar year, ie dec 31 deadline.
It’s just too bad that they didn’t create the Roth and even a Roth 401k at the beginning, instead of the traditional IRA, and the regular 401k. Then we wouldn’t have all these headaches.
It’s nice that they’re considering increasing the age for the RMD. They should also increase the amount you can make during the year and not get penalized on your Social Security benefits. Due to inflation, I would suggest increasing it from $25,000 to $50,000.
Awesome presentation thank you
I am someone who is in the 24% tax bracket and over 10 years away from retirement. I started contributing to an Traditional 401k and later to an Roth 401k. I have a large amount of money I want to convert to Roth. If I only convert the amount up to the max of my tax bracket, it will take until retirement before I am done so I am converting up to the max of the 32% tax bracket. I am paying a huge tax bill now but I am hoping with all my money in Roth when I retire, it will be worth it.
Perhaps look at the viability of early retirement to give yourself more runway to do the conversions? At a certain point in assets, time becomes your most valuable commodity.
@@davidfolts5893 definitely a good idea but I am someone who thinks a glass is always half empty. I never think what I have is enough even with proper planning. Early retirement is not something I plan for but something I might do unexpectedly. So I am hoping early conversion and big tax bill now will save me later.
@@kinglionheart50: That is true for many. When asked what amount of money people would feel wealthy at, their answer is double the amount that people currently have, no matter the wealth level. 😀
Thanks for an excellent presentation which confirms what we have been doing!
Great info... Appreciate your videos... Very insightful!
The fear for me is having to pay the lump sum during conversion
Convert smaller amounts at a time each year to remain within a lower tax bracket. Only convert the whole amount if you have the money to cover the taxes on the lump sum.
@@PM-oe5mk thank you that makes sense
@@billytrujillo8661 You're welcome. I've been using a spreadsheet to play around with how much I can convert without bumping me into the next tax bracket. If you have a sizeable portfolio, it's definitely worth thinking about converting small amounts now (before retiring) vs having to make big rmds later, because that will guarantee that 85% of your social security benefits will be taxed.
@@PM-oe5mk yes that's why I started my research on this subject... I have 9 years before retirement starts
The biggest mistake most people make is not even considering doing a conversion. Another mistake people make is doing the conversion focused only on what bracket it bumps you into this year without understanding the impact on your future balances, RMDs and taxes. Looking only at this year's tax bracket is like looking through the rear view mirror while ignoring what's coming down the road. Everyone's situation is different and the right actions depend on your particular situation, but hopefully this video helps you to see the potential benefits of tax planning while looking forward!
I wish that something was addressed in this video: What is the range of cash outlay one needs to do a Roth conversion in different scenarios. I wish someone would address this.
I’ve done 2 years of Roth conversions. I converted an amount that kept me in the 24% tax bracket (with the converted amount added to my regular taxable income. The 24% limit is about $326,000 for married filing jointly. So if you converted $100,000, you would need to have $24,000 in reserves (unless you took it from the 100k and paid a penalty) to pay the irs. My state (Illinois) doesn’t tax retirement income (yet, it’s coming), which was another incentive to convert now, while federal tax rates have been the lowest in over 100 years.
@@Liledgy100 Appreciate it. Thank you.
@@Liledgy100 it wouldn't necessarily be $24k in taxes right? If you did the $100k, some of that works be taxed at lower rates since this country's income tax is progressive, meaning taxes step up as income increases. Hope thus makes sense
@@FIRED13 all my income above $175k (I think that’s when 24% kicks in) is taxed at 24%, including the additional converted amount. If my income was lower and I only went over the 24% by say $10k, then yes, only the last $10k would be taxed at 24%
What if you don’t have the liquid funds to pay the tax due each year of a Roth conversion?
If I pay the tax due from the IRA does it still make financial sense to convert over 10 years or so?
I doubt it.
Troy, can you make the same sample planning for single which dollar amounts are small? Any additional considerations or options for single? Thank you for all the information.
I'm curious about the future cost of money (FCoM) and how it plays into your example & calculations... Let me elaborate - A 2021 $1 in taxes doesn't have the same value as in 2051 if you assume 2% inflation... A 2021 $1 in 2051 may only have a value (in todays dollars) or $0.50 +/- ... How could we figure the FCoM into your totals/example?
The bigger concern is the percentage of account dollars, in todays value or future value, that you lose. Generally speaking, if you lose 22% of your account value today versus 35% of your account value in the future due to taxes, you're better off letting that 78% compound tax-free for the next 20 years. Make sense?
At 16:45 mark it shows a cumulative $330k savings over all the years. But wouldn’t it be a much more meaningful picture to take the difference (year to year) of both columns and discount those numbers back to a present value using a suitable investment rate (or a safe rate)? That would tell you what the value of any future tax savings is to you today and not a cumulative number of decades, which I believe exaggerates the savings.
Hi @joecimy07054, thanks for pointing that out - this is definitely an abbreviated version of the more comprehensive analysis that we do with each unique individual's situation - We try to paint the full picture of each option and projected outcome so that each client can decide for themselves which route they'd like to take based on their goals and personal risk willingness. Thank you for watching and take care!
Can a retiree already drawing RMD get into Roth through back door process?
Is there any particular time of year to perform the conversions? Early in the year, pay the estimated tax, and let the Roth funds grow all year?
How can you account for the time value of the projected tax liability over time for each scenario, in addition to the total over time as the presentation shows.
We converted a 457 and a 401 account to a Roth IRA after selling a real estate investment with significant passive activity losses. We still have money in traditional IRA accounts to move over the next several years, but the sooner you do it the better.
Thanks for commenting! I would recommend speaking with a CPA, or getting a second opinion, regarding that strategy. The rules surrounding deducting passive activity losses are very strict and typically can only be used to offset passive activity (other real estate gains).
@@OakHarvestFinancialGroup these were suspended losses carried over from prior years that were "freed up" when we sold the property. We would have preferred to have had profits to pay taxes on, but if you end up with lemons, make lemonade.
1:41 time mark: Timing the Market. This is voodoo financial advice. IT DOES NOT MATTER whether you take money after tax and invest it or let it sit pre-tax and tax it upon withdrawal. All other factors being equal, the final closing (after tax) dollar amount of each fund will be the same.
So, the relevant discussion isn't about the strategy - both strategies have pros and cons - it's about "the other factors". Namely tax bracket now vs. tax bracket at time of withdrawal, that's the number one issue. The number two issue is the effect of RMDs on the individual's tax outlook. There are other issues, but those are the two main ones that most UA-cam videos focus upon.
Remember the 5 year rule for conversion from a Traditional IRA to a Roth. Not a problem if you spent a lifetime saving money and plan to give it away to your heirs instead of enjoying it yourself. You can't withdraw the money until 5 years have passed unless you want to pay a penalty. Best solution is to build a Roth to pass on to heirs and keep enough in the Traditional IRA to spend yourself.
You can’t spend the earnings on that money for 5 years. You can spend the principle. I think he said he was converting 65k over a 5 year period or something like that. He’d have access to the $65k, but not the interest on it. He’d have to wait 5 years to spend all of the first year earnings, 6 years for the 2nd year earnings, etc. So, it would take 10 years in this case to be able to spend $100% of the earnings of all that money. In the meantime, he still has access to the money that wasn’t converted as well.
@@DeniseW618 Thanks for the clarification. I did not realize that the principle was available at any time without penalty (age 59.5+)
@@rickj6048 I didn’t know that either until about 2 years ago. That makes a big difference in making your decision to convert or not. Happy New Year!
@@DeniseW618 Right about the principle but I believe you are wrong about needing to wait more than 5 years for the earnings. 5 years after conversion, all earnings can be withdrawn tax free (and without penalties if over 59.5 years).
The presentation is very useful but doesn't talk about the impact of IRMAA on Medicare Part B which seems to have a significant increase in the monthly premium.
Can calculate higher irmaas, if full conversion, only Irma for 2 years after... but generally high net worth and high income earners will pay that w RMDs too over a longer time. Look at the math of a 100k conversion added to a MFJ couple at 170k agi currently....approximately 150/month increase. Or 1800/yr × 2= 3600 × 10 = 36000. Or take the approximately 6k yr penalty × 2 people for 2 yrs. = 24000. And Irmaa has gone up and will most likely continue to go up.
I'm on the fence. My wife and I are still working, but I plan to retire before the end of the year at 63. She says she may or may not work. I have been trying to determine if I should or not convert to Roths. With a break even point at 85, it doesn't benefit me as much as my kids. Lucky kids.
In 2010 if you did a conversion the government would spread The tax liability over two years. Such a deal and if the market goes up 15% a year you double your money every five years. And that’s all tax free. Socially you are buying your freedom. Thank you for your presentation
Market won't go up 15% annually. You are dreaming. S&P500 actually went down a few percentage from 2001-2011.
Thanks, informative.
The SECURE Act has torpedoed my plans to leave the bulk of my traditional 401k and IRA's to my kids. Now I'm in a bit of a scramble to do some conversions. Still waiting on a dip in the market to begin. 60 years old, so I have a bit of time, but am ready to take the tax hit when the timing is right.
@wes. I think the dips have arrived!
@Wes. I think you’re being overly nice to your kids. Why stress over it. You plan on leaving them something which is better than many.
You never know in that one of your kids could temporarily be unemployed after you passed away and that’s a perfect time for them to pull out some money?
You could also consider retiring early and just live off your 401k and IRA until you start to get social security. Put excess money aside and just give it to your kids in the form of cash. Are you worried they may get lazy or just spend it?
@@f430ferrari5 , the best way to help your kids is to give each $6k yearly as a gift for their Roth,
As far as I’m concerned put as much as you can in your Roth IRA. It will buy you freedom and you do not have to hassle with higher taxes later in your life and I could pass it on easily. Keep your life simple to
@D Sullivan Incorrect
@D Sullivan You do not pay inheritance tax on the funds if the estate is under $11.7M. The funds are transferred as an "Inherited IRA" to the recipient. These must be handled through a broker so the recipient never directly has the funds. The recipient then must pay taxes when the funds are removed from the "Inherited IRA". Search rules for Inherited IRA distribution and tax. Before 2020 the recipient had RMD's based on age, after 2020 there was a maximum of 10 years to distribute the funds.
Very good presentation! I did 100% conversion to Roth when I was 68. Fortunately, of course the money is there if I need it but, I have a good chance of never needing a distribution so the legacy component was a big consideration. Add in the Trump tax cuts, and the certainty that taxes were going up from there turned the conversion into A No Brainer!
how did you calculate that 100% needed to be done, all in one shot?
I selected this video because the example is pretty close to my own, and I wondered if conversion made sense doing it relatively late with a modest ira account. Pleased to see it did. Like the graphs. But did you say there was something different regarding Soc Security between the 2 examples? I didn't get what that was.
I caught that as well, he mentioned about coming back to that later in the video but didn't. It would have been nice to see an exact apples to apples comparison. I hate when something is different, it seems as though they're hiding something.
It only make sence to convert if you have years to grow your Roth account to make up the differnce in money taken out for taxes.
I’ve noticed that financial planners make the assumption that tax rates will continue to rise in the future. I find it less likely that a Congress of either party will move to tax middle income seniors’ deferred retirement account withdrawals at a rate much higher than 24 percent without major pushback.
Plan for the worst case
I disagree! Income taxes have been the lowest in anyone’s lifetime! We’re running huge deficits, the cuts trump made caused another 1.5 trillion. On top of that, social security and Medicare are running down there reserves very quickly.
Tim M is right, and now we must factor in paying for the $Trillions that have been appropriated for Covid stimulus in addition to salvaging the SS fund. You can take it to the bank, taxes will rise across the board going forward.
Current tax rates are only temporary. In 2026 they will revert to pre 2017 levels. Congress does not have to move to do anything.
@@Liledgy100 I guess you missed the 3.5 and 1.5 trillion dollars bidens cabel is trying to push. Hard. Real hard.
What state and local tax rates did you use for your Roth conversion calculations?
Like the info! but I think he should of better explained what money should be used to pay take on roth conversions. If you have cash equivalent's ;c.d.'s, mutual funds, savings bonds; to pay take on theses conversions it won't affect your retirement balance.
This was terrific. I will definitely discuss this with our financial advisor.
Great info. Thks
Thanks so much, Charles!
HI, I notice that you compare the pretax amount of the 401k to the roth conversion, It would be a great if you also showed a line of the after tax value of the 401k assuming the RMD and current tax rates.
Hi Keith! I have done videos where I discuss the concept, but not an entire video dedicated to that. The simple answer is much sooner! Thanks for watching and Happy New Year!
Very good analysis! Thank you.
I started my IRA conversions into Roth IRAs in 2008 over 3 years and started converting my work based 401ks in 2010 until all my 401ks became Roth 401ks. Also in 2010 all my 401k contributions were Roth 401k contributions until I stopped working.
Upon retirement in 2020 I shifted the Roth 401ks over to my Roth IRA. My accounts have had years to recover from the tax bite of the conversions and really zoom ahead thanks to a good stock market. What this gentleman is suggesting strikes me as the way to go. I know I did something similar and it worked out well for me. Takes time and you definately want to implement this strategy at least 6 years in advance of your retirement to avoid the Roth IRA 5 year rule.
I converted some money to a Roth to take advantage of a tax credit for a solar power installation.
So, you’re splitting up the $1M roll over into 4 separate rollovers? Why? Can I pay the taxes on the roll over out the $1M account?
Thank u. Very interesting. Question. I want to convert my IRA standard to another investment but want to avoid the taxes on my IRAs when I disburse/convert the IRAs. What investment type will reduce the tax on the IRAs ? Is the ROTH the best option?
Excellent video - no 20 minute discussion can address everybody's scenario but the Roth conversion concept is clear - lifetime tax savings + simplifying and reducing pain for your heirs.
Every time I review my mother's financial situation, I am reminded of the smart way my now departed father set her (and us kids) up. He had already done the Roth conversion. Now that future tax free money is there for my mother for peace of mind, even though she does not need it... and it is heir friendly. Compliant with her wishes to pass it on after her death.
some numbers questions: on bar graph at approximately 13:12 how is the ~67k in taxes calculated during that 4 year period? at 6:03 in comparison of conversion v. traditional where do the two total values come from - $5.1M v. $4.3M? are those at the end of the longevity period - 29? also, same time frame "ending value" of what?
The $5.1M and $4.3M are the amounts each strategy would generate at +29 years if no distributions were taken.
When the kids inherit a tax deferred account like an 401k they get 10 years to liquidate that account.
You also forgot to mention that the cheques that you write out to the irs, in this case about $250.000 does not generate “compound interest” if it would have stayed in the conventional account. So that is a loss when you convert to a Roth IRA.
You might want to re-watch the video. He explicitly addressed all your points and did clearly say heirs have 10 years to withdraw down to zero. What do you think your heirs will do with your traditional IRA/401K if you do not convert them?
@@M22Research so you say I should convert them.
@@hermanparisius2828 never make a major financial decision based solely on what anybody on the Internet advises. Everyone’s situation is different and requires expert advice.
Agree, everyone (planners) forget the concept on the time value of money on the taxes paid up front. Also, the idea that someone with 1.4 million in IRA is without other passive income is a bit to simple.
To your second point, if you actually run the calculations (e.g. in a spreadsheet) you can see that it doesn't matter if you pay the tax now (before your investments grow) or in the future (after your investments have grown). The final amount you have, after taxes is identical - ASSUMING the tax RATE is the same now as it will be in the future. At least 2 considerations though are:
1) Tax rates are likely to be higher in the future - so you will pay more then
2) Required Minimum Distributions from a Traditional IRA could drive you into a higher tax bracket
A third consideration that other commenters have mentioned is that you may be married now (and thus pay less tax) but single/widowed in the future (and thus paying more tax).
This is a very good analysis. I believe the Roth conversions are even more beneficial if you have a few low-income years, maybe before taking social security and perhaps living off of taxable savings and maybe a pension.
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Every time you spend the pile gets smaller until you start to hate spending.
Thanks for the insights. You mentioned inheritance tax and forced distribution. I thought there was no inheritance tax for the first $12M that you pass on to your heirs after you pass away...
Excellent video and one can soften the conversion tax by starting at age 60 or so and spreading it out up to 72. As I learned in the video, one can maybe go out to 75 if secure act 2 passes!
You can still do it even after RMDs. I.e rmd of x and convert the y...
Yes, but you may be spreading the conversion into a higher tax rate.
What's the Present Value of the 2 tax streams? I'm guessing it will likely still favor the conversion given the large discrepancy, but I'm curious about the comparison. Thanks!
I have 2.3 million in a 401K, 67 and no longer working. I will have several years with no income so I am planning on doing a partial roth conversion. I will take out 60K a year, put it in my roth and pay the taxes with the cash I have. I have about $330K cash so enough to support myself until I hit age 70 and start my social security which should be about 50K. Then at 72 1/2 I will start my RMD's which should be about $100K. I won't have a lot in my roth, maybe $250K that I don't plan to take out unless there is an emergency.
Be careful. RMD's start at 72 and not 72 1/2.
How did things work out 2 years later?
I don't think the tax savings won't be as high as he indicated due to the Irmaa medicare increase for both which is significant!
True, I'm surprised he omitted that.
If you want to pay all your taxes at one time go ahead. Or you could just draw out your MRD plus what you wanted and pay your taxes each year just like you have been doing.
In 2008-10 I did a Roth conversion And the IRS had a special rule where you could spread the tax liability of the conversion over two years. What a deal, 100% in the market and all tax free. Whoever inherits this has to take out the money over 10 years according to a new rule. Same with the regular IRA. That wasn’t the terms of the initial proposal it’s not fair to change the rules midstream? Obviously it was such a really good deal they want to cut of it.
Keep voting Democrat,
They can only print so much money then someone has to pay for the Illegals in the 5 Star Hotels!
I'm almost convinced, I wonder can you pay the conversion tax out of pocket or does it have to reduce the funds transfer amount? There has to be a big correction in the next 2 years, so I need to get a plan together.
You can pay out of the transferred funds, but it is messier and if under 59.5 a penalty (early distribution vs conversion) on the amount used to pay the taxes. So you would need to take out additional funds... Recommended to pay out of other sources.
Oh and converting at a down market is optimal, but usually only w hindsight. A bigger driver I feel is the known laws and tax rates vs new legislation, etc. I.e don't wait for down market vs the repeal of TJA tax cuts. Look at how the brackets used to be vs now and where they will likely go again in the future.
@@Lawdog1523 Though converting in a down market makes sense if we have to split up the conversion over 3 or 4 years to keep the tax bracket low enough the down market may not be the solution for several years.
You would not want to reduce the funds transferred. You would want to take full advantage of the tax growth in that newly converted Roth IRA. I would say if you can't comfortably pay out of pocket, then one should not convert---or at least convert smaller amounts at a time after 59.5 yrs. I could be wrong about this, as I'm trying to rapidly educate myself on this topic of conversions.
Another complication is ACA credits. Doing a Roth conversion shows up as income and could eliminate your ACA credit if you qualified before the conversion. How much that impacts your results will vary by each case.
So true. Skipped conversion last year for that exact reason.
@Nick Kemp Yep that is a big deal. I hope to be an expat for a number of years and part of the reason is so that I won't have to deal with the interplay of ACA Credits and Roth conversion...but you are right...it is a major consideration.
@@boat6868 Expat is a good idea. Wife and I were considering it anyway but this would be even more reason to do so.
@@bartman5849 Yes, as a married person you and your wife could convert a pile of money every year into a Roth at very beneficial rates if you are not trying to balance it with ACA credit issues. And then as I understand it (please do your own research because I am just learning about this stuff myself) the added bonus of getting it into a Roth is that when you withdraw it it does not count toward the "income" level that is used to determine how much of your SS is taxable...so depending on your entire situation you may save tax on SS as well.
Simply another input to the calculation over your lifetime. In the video example, there were $330,000 in lifetime tax savings. Even if you had to give up $20,000 in ACA credits temporarily during each of the Roth conversion years, the conversion might still make sense. Every situation is different.
At the end of the video, a very important point is missed: the step-up in tax basis for the heir. (update: I was incorrect, there is no step-up for retirement accounts).
Retirement accounts do not receive a step up in basis. Only non-qualified assets do. Retirement accounts are required to be fully distributed within 10 years, creating a massive tax burden, or otherwise incur a 50% penalty of the full amount not distributed (plus taxes).
@@OakHarvestFinancialGroup thank you for the quick reply. I was under the impression that they did receive a step-up. Thanks for correcting me.
@@OakHarvestFinancialGroup but many heirs will/may probably be in lower brackets
If I do a Roth conversion and pay the taxes out of my savings do I need to send the money to the irs right away to avoid underpayment penalties? How do I do that?
Make an estimated tax payment for the quarter you do the conversion and do not have the taxes taken from the conversion amount.
What value of a couples portfolio do you think there begins to be advantages to doing Roth conversions? There was a video you posted recently that you said you weren’t to worried about taxes because the portfolio value wasn’t high enough. We are just debating whether or not we should be planning on doing a Roth conversion since my wife was laid off and is no longer contributing to her 401K.
Thank you!
Thank you, very good information I didn’t know before.
I have been doing ROTH conversions since retirement during the Trump tax cuts. I stay within my 24% bracket and convert about $110k a year and I pay the taxes on it out of my Taxable money. Most of my money was Traditional, so when 2025 ends and taxes possibly go back up (if a Republican doesn't get in to extend them) I still have a lot of unconverted funds. I plan to still convert but staying within the tax bracket at that time only allows me to convert $10k or so. How do you know if going above the current tax bracket is beneficial?
I cannot watch these. Why can't we have a savings account only? What is the reason for all of these different savings accounts? More money for tax planners and accountants and attorneys. The same reason a sole proprietor is no good we need LLC and S corp etc. Don't people feel scammed?
I'm going to SPEND IT ALL. That solves that problem.
I can't Blame you, you cannot take it with you. I am spending mine too and enjoy my money. I have a will already, if I die, my wife and kids will get all I have. Simple.
yeah I was thinking that I raised my kids, made them self sufficient and paid for their education and all their living expenses. My responsibility now is to me and my wife. I will not 'suffer' by reducing spending so I "leave some for my kids". My sacrifices and hard work over the years will now allow me and my wife to (hopefully) have a good retirement. The kids can get what's left once we're done. Most likely there will be some left but I will not dictate the terms of my retirement so that I can "leave money for my kids". Selfish you might say? Well no; I lived frugally so that I can get to where I am. I don't want to be a burden on my kids when I'm old (financially) which would be more selfish.
@@oceancon along with that same thinking can gift to your children while you’re alive while you still can to keep them self sufficient instead of waiting to leave them something. Is that a thing to consider as well?
@@Hyper_Driven well yes, and along that vein, I've paid their student loans off and with my daughters will help them as they marry. However this is not the same as retiring with an eye on 'leaving something for the kids'. Like I said before, I am not selfish at all but I at this point my main concern is me and my wife and that takes precedence.
@@oceancon as I see it from what you’ve stated, you’ve gotten your kids out of the nest with no debt burden from student loans, and arranged things to not be a financial burden on them to guilt them with, while teaching them (I presume) about financial literacy.
As a parent, before they live on their own, you’re responsible for their upbringing and those resources, and you’ve done that. You’ve taught them what they need to survive and continue the family lineage to the next generation, and their futures aren’t affected one way or another for finances if you suddenly died now or at 100: enjoy your retirement!
Are you considering the time-value of money and the impact of inflation?
Considering the time value of those huge taxes up front for the conversion, Is it possible the tax payout is really the same? (Although i realize the opportunity provided by Trump tax cuts up through 2025)
And the estate planning
I feel that the time value of money is implicitly included in this. If you don't do the conversion, the taxes you would have paid stay in the account and grow in the traditional IRA account. So the time-value of those funds is already reflected in the growth of that account. If you pay the taxes from some other account, you have to include the expected growth on that account with your total estate plan.
I don't know if this was considered in the $300K difference but there's also the opportunity cost of the $67K x 4 that could've been invested in an after-tax account - would that have made up the $300K "lifetime" benefit? That's one thing. The other thing is inflation - maybe it is better to pay taxes when the value of money has gone down far out in the future. So purchasing power needs to be considered as well. I agree it's a complex question but there's more than just the value of the accounts to consider and some things of course have to be based on assumptions.
I wonder about the right age to do the conversions too - it seems doing it early isn't as advantageous as doing it closer to 72 or 75. If you're planning on doing a lot of charitable gifts, then conversion won't help you.
I agree. These advisors seem to not give all the implications. As a retired financial planner I would recommend to my client to take the 50/50 option. Meaning, if we are not sure which way to go in this case, do the Roth conversion with 1/2 of your qualified money. That way the worse you could do is make 1/2 of a mistake and not a 100% mistake, if in the end doing the Roth was not a good idea. Just a thought.
@@dkgrace6743 That's very reasonable advice. I like it!
Well The best years to do the conversions are when your income is at the lowest point. typically that’s between retiring and receiving Social Security
what software is used to generate tables? is this internal software or available to anyone? anyone know of any similar software available publicly?
The investment return rate plays a huge part. If you think you will get 2% vs 20% would change your plans.
In this example, was the full $1.4 mil converted? What about the option to convert a portion - just enough to reduce the tax rate into around 10% to12% in order to avoid the massive tax bill?
That's usually best for most cases
I'm single, so I get into the 22 percent bracket pretty fast. Like at 40 K. I make close to 70 K. If I convert I;m at 28 percent by 86 K.
Need to consider Medicare premium when you do Roth conversion.
Can you say more about how to factor this in, or point me to any videos that outline it? I think there is a 2 year lookback period at income for determining Medicare premium so this would have to be planned and completed prior to 2 years before commencing Medicare to avoid the biggest hit, as I understand it.
@@andreamiller6200 you can google for the medicare premium limit. For example, couple file for join, the limit is $176,000. If you exceed that amount, your premium will be increased.
Great presentation and a great educational video. Thank you.
Good video, though I'm not sure converting is best for the average person. For one, I think most Americans will have a substantially lower income in retirement. Few have pensions, rentals, or other investments outside of a 401(k) or Traditional IRA, so their future tax bracket will likely be lower and waiting could work out best in the long run. Also, even if doing a conversion still works out to better numbers, most won't live the 29 years your projection assumes. The life expectancy for the average American man at age 65 is only about 17 years. Again, good analysis, but people should realize this isn't a typical answer and the main takeaway is you really need careful analysis to decide what is right for your particular situation.
Thanks for the comment Golden, and you bring up some good points. I’m going to do a video looking at the analysis of some of your thoughts and provide some context to other aspects that should be considered with respect to an individuals situation, beyond just the numbers. Thanks again for watching and providing good content ideas. Be on the lookout for that video in a couple weeks!
Additionally, the concern I have is what if this couple doesn't have $200k to pay the three years of $67k conversion taxes?