My husband and I were discussing our taxes this morning. Just sold our business and were just trying to decide on this very issue! Picked up my phone and this channel was up! Wow, how amazing are these gentlemen! Ok, now let's get them blown up on RUclips! If you watch hit the like button, share, subscribe them. We need them! No, not related to them😂 😂😂😂😂😂
You guys are so intelligent! I’m going to have to listen a couple of times to absorb everything. Appreciate you sharing so much information for us non-experts.
This isn’t true. Financial advisors know a ton and require multiple years of education and certification. Some of their businesses are set up to where they have to market their products. But don’t think they don’t know how it works.
I agree with you about taxes, inflation, and debt. And, being 80 years old, I have tried to quit worrying about it. I am hopeful that you will all figure out what is going on and take the correct steps to solve the problems.
Thank you for these excellent videos. The reason I'm converting my traditional IRAs to Roth IRAs is the Required Minimum Distributions (RMDs). These withdrawals, whether I needed the money or not, would increase my Medicare Part B premiums and potentially trigger the Income-Related Monthly Adjustment Amount (IRMAA). Also it would directly impact Social Security benefits. Then there's the "widow's trap" where the surviving spouse's tax filing status goes from married filing jointly to single. This change can cause the surviving spouse to have to pay nearly double the taxes compared to what they were paying. I think it really depends on how much someone has in their traditional IRA.
Thank you so much! You've got to check out this video and download the spreadsheet we use: ruclips.net/video/ZetbFdEqi2A/видео.html Goes into those conversions and how they relate to the Tax Torpedo :)
I love how everyone assumes they’re going to have an RMD problem. #1) Let’s not forget, no one is guaranteed to live that long. #2) You’re deductible is going to save you a good portion on taxes, and if you think about it, what portion of the population is going to have an $80k-$100k per year RMD problem? If you’re in a high tax state, like CA, it’s very tempting to stay traditional b/c you’re saving 22-24% federal + 9.3% state income tax right now! Plus, that extra money, plus 20+ years of growth, will likely cover the taxes everyone’s so worried about.
@@DialedN_07 If politicians still want to get elected in 2050, it’ll be higher than it is today. What was it in 1999 or 2000 ? Do the math for yourself. 😉
I'm glad you corrected yourself, it's the most spendiable wealth But the problem is we don't know how long we will work or market returns. In best case senerio I'm putting to much in traditional but in senerios were I don't reach my goal (stop working early or bad returns) a traditional makes more sense I'd rather pay more taxes in best case senerio than have less in worse case scenario
As a couple RMDs are dependent on who owns the IRAs. If both people own their own, the RMD is by person. So for us we each have our own and we have an age separation. Even if all SS is taxed, we are still talking about an effective rate of 10% or less. The way to get rid of a lot of government debt is to inflate it away
Please do a revisit number 2 and/or talk about impact on IRA/401k impact on inheritances and possible strategies to limit taxes further. It really comes down to multi-year tax planning including your heirs and their expected tax brackets. Always a moving target but we should boundary condition the possibilities. Thanks again for the awesome content.
I can see Congress lowering the thresholds and/or increasing the tax rate for NIIT and ACA wage surtax. The thresholds are already effectively falling every year since neither is indexed for inflation. I expect the OASDI threshold to formally cross over the ACA threshold in approximately 2030. There are so many non-indexed tax thresholds that stealth tax increases hit many who don’t realize it.
If roth earnings are ever taxed then they become just a restricted brokerage account. It SHOULD never happen, but the government never met a tax they didn't like.
IF it happens, I imagine it would be prospective. Meaning future contributors will have that info. They historically wouldn't start retroactively taxing Roth's just because they feel like it.
For the back door Roth, do you have to move the entire IRA to a 401k or could you just open a new IRA? That way you have a separate account that you can then do the back door conversions from.
Here you go... :) The IRS doesn't think about IRAs as separate accounts. They lump them all together. So if you have any traditional IRA money anywhere, they will make you do a proportionate conversion in the same percentages as the Pre-tax vs After-tax $ in your IRAs everywhere. Example: You have $95K in an IRA and you contribute $5K after tax, now you have $100K. Then you do a Roth conversion of $5K thinking it will all be tax free conversion. Doesn't work... You have to say that 95% of the $5K is pre-tax and 5% of the $5K is after tax and you are left with after tax money in the Traditional. So you need to move all your IRA money into your work retirement plan (usually 401k). Or if your IRAs aren't that big, convert them all. Then you no longer have any IRA money anywhere. Now you can do the after tax contribution & subsequent conversion. Does that help?
I don't think you can put money from an IRA into a 401(k), only the other direction when you are no longer working for company with which you had the 401(k), at which point you can roll the 401(k) over into an IRA.
I think Roth savings will eventually count as income toward IRMAA/medicare premiums and toward how much of SS gets taxed, so it will eventually be a backdoor way to tax those who saved in a Roth. I think it will also be eventually taxed (at least the growth or a portion) for heirs.
I believe we will see Roths above a certain level will be taxed in some manner. There were instances in the early 2000's where CEOs of companies with non publicly stocks placing those stocks into Roths. These non publicly traded stocks were valued (by the CEOs) at well below market before being placed into the Roth. This allowed the CEOs to have a Roth valued at several billion dollars (Peter Theil turned a $2000 Roth into a $5B Roth using this trick). I think we will see Roths above $20m or $30m being taxed as a way of clawing back some of this gain.
Thank you Cody! This is Erik here :) I do a lot of reading, but I don't have a large library of books I've read about retirement income/tax planning. I'm more the Medicare nerd, so Zacc and team likely have better info on that, but I'll share a couple. 1. I refer to it often in videos, but I love the Psychology of Money by Morgan Housel. His podcast is great, too. 2. Your Money or Your Life - I can't say that I could live by this 100%, and not necessarily tax advice, more around personal finance, but it has some interesting takes that made me think. 3. The Index Card is pretty okay, probably more along the lines of the retirement planning. In talking with Zacc about the 9 index card rules, the advice is probably best titled "what to do if you are a novice and don't plan on hiring any help." There are a lot of DIY-ers out there and, if that's you, this has some solid suggestions. I don't know if that helps, but there's a stab at 3 :) Thank you for spending time with us!
One more aspect I think you missed was estate planning. I believe with the traditional, heirs have to immediately take all the money out and pay income on the traditional (there may be some options like over x number of years?), and that will be at their marginal tax rate, I think. Meanwhile, the Roth will not be taxable. So, if you have successful children in reasonable tax brackets, and if it's a lot of money coming in, the withdrawals could bump them into significantly higher tax brackets for the year of the withdrawal and the gov't end up with a lot more money. Also, I think I remember something about the Roth not requiring them to take a distribution, not sure on that. Not everyone would have this as a big consideration, but if the rules would require my 1 heir to take a $500k distribution in one year, that will bump them up to a high marginal tax bracket no matter their income. Again the hybrid strategy helps here - if half is Roth and half is Traditional, then that impact will be significantly less and all the Roth comes tax free and doesn't push the bracket even higher, regardless of the actual tax bracket impact.
Roth does require distribution. That hypothetical $500k traditional distribution roughly means (10 year distribution * $500k =) $5 Million balance; heir would be happy to have that, the tax an afterthought.
Good points. If beneficiary designations are done right, the beneficiary has 10 years to withdraw the funds. So $1m IRA to 3 kids is about $33k/year if you are trying to spread it out as much as possible. (Not the end of the world, but still something to consider if your kids are making a lot of money). If your kids tax rate is high it goes right back to “which tax rate is higher?” If theirs I higher, conversions make a lot of sense. I guess the other consideration is how nice they have been to you recently because paying all those taxes is a major gift!!!!!!!
Very fascinating and thought-provoking discussion. Thank you! Is the tax rate before or after deductions? I hope you could please clarify for me since it's the determining factor for me.
Will depend on you current tax rate now and what you think your tax rate will be in retirement. Happy to take a look. Erik@theretirementnerds.com is my email and I can connect you to Zacc's team.
For the person worried about taxes on the Roth... That seems so extremely unlikely. But anything is possible... I mean there use to be a 50%+ tax bracket back in the day, which is unthinkable today! But there are lots of things they could do to claw back some of the Roth promise to make it taxable: They could add a wealth tax, and include the Roth value. They could remove pre-retirement features like no penalty or tax to withdraw the initial investment, or spending on a first home purchase. They could raise penalties or add fees. They could stop increasing the contribution limit, or lower the contribution limit. They could tax growth, or tax at a low rate. Lots of things could happen... But still likely less than a traditional account
Many golden nuggets of wisdom are shared during this conversation about Roth conversions. Here's my two cents: When deciding to do conversions, who are you solving for: You and your spouse, the one remaining after the other spouse has passed away, or those who will inherit? Don't worry much about the two levels above the standard Medicare Part B premium for IRMAA. If your Modified Adjusted Gross Income is $97,000 or higher for Married Filing Jointly, your Social Security will be calculated at 85% of the Social Security benefit when you file your taxes. Regarding taxation of Roth money down the road, while stealth taxes could be employed, there is about one trillion in Roth money currently and 30 trillion in Traditional IRAs and/or 401k accounts, so it is a smaller target. Lots of ambiguity in the Roth decision, so the more conservative assumptions that you make, such as converting in the lower two brackets, the more you hedge your bets. It is a pleasure to hear this discussion made so keenly and pragmatically. Thank you very kindly, Zacc and Eric!
I think the most likely stealth tax on Roth distributions Congress might employ would be to treat them like municipal bond interest is treated. Thus they would count as income for triggering SS taxation, IRMAA, and ACA subsidy eligibility. There have also been proposals to limit Roth account balances, effectively forcing RMDs to distribute that excess. Presumably such RMDs would not themselves be taxable, but future earnings on them would be. In combination with making Roth distributions provisional income a rather negative feedback loop is created.
0% tax bracket for married couple allows us to collect social security and live off long term cap gains from taxable brokerage. Our goal is to use limited 401k contributions to support our lowered taxable income today, but maximize Roth and taxable accounts. 0% tax from taxable and Roth is much better than guaranteed tax rate at taking out 401k as “income”
QUESTION: AT 60, should you do ROTH Conversions, or just withdraw the money from your IRA? I'm looking at staying in the 0% tax bracket, both ways....as I would only convert or take out from the IRA up to the standard deduction. Any extra needed would come from long-term capital gains or cash (if stock market is in a big decline).
The answer is yes most of the time (not all of the time), but it might be converting the entire pretax amounts…or it could be only partial conversions each year. Depends on each year’s cash flow situation in comparison with other future years.
From what I've heard mostly on Dave Ramsey's channel, if you can't leave it alone for at least 10 years, you should not bother with the conversion to Roth. The real benefit is putting money in there and giving it time to compound. Plus, converting increases your reportable income. Depending on how much you convert, you could bump a good chunk of that conversion into one or more higher brackets.
On the Roth vs traditional and the argument on RMDs: I don't think people like myself are worried about the rmd itself. It is that it doesn't put it on fair footing when comparing the before and after tax comparison about growth. So when I turn age X and am forced to take RMDs when the market is down, then it sucks because I still have to take it. But if the market is down, then the Roth can just hang out for a better day. In my own planning, because the advantage of the Roth is not paying taxes on growth, it becomes the account of last resort. So when I retire I'll probably pull more than the rmd from my 401k, while leaving my Roth a bit more aggressively allocated for an additional 5-10 years. With the bulk of a decade of extra growth, it is much more savings in taxes on the back end. My other thought on the Roth is that it makes things simpler later in life. As I age, the less I need to account for things like taxes if my taxable assets are drained first. Or at the very least (like you mentioned in the first video) having assets in multiple asset types and multiple vehicles, it gives options and flexibility. It isn't a Roth vs traditional, because both are good and needed. It is getting picky about what percentage should be in each... And in that view, you can only put a relatively small amount in a Roth, so my thought is to max that out, and then do any additional in the traditional account.
If I have a pension that pays me 75% of my salary at the time of retirement. Would a Roth 401k be better than a traditional 401k? Would my pension keep me in a higher tax bracket and limit the amount of each withdrawal?
This will all vary on that dollar amount and any other income producing assets you may have. Happy to take a look into it for you if you'd like. My email is erik@90daysfromretirement.com
Existing SS tax rules are effectively a means test based on income rather than assets. That they are not indexed for inflation is a nasty stealth tax increase.
Revoking the ROTH untaxed status would be a third rail move for any pollution that would end their political career faster than them being hit by a train. Now making it reportable as income to determine ones tax rate I can see that happening but not being taxed its self. Whenever I see anyone talk about Traditional versus ROTH its "ALWAYS" about if someone should convert a Traditional into a ROTH and not what they should do with their current money to put into a retirement account. I would love to see someone actually talk about if someone should put their current retirement money into a Traditional or ROTH. Now for me I am 100% in the ROTH camp as I max out my ROTH 401K every year as that will give me more money when I retire as I am not having to give some of my retirement money as taxes I also make more money as I spend so paying the taxes now is in no way hurting me now.
Great video, however, you referred to the "Bush era tax cuts expiring", did you mean :the Trump era tax cuts of 2017 are expiring"? The tax cuts in that bill for corporations were permanent, but for ordinary tax payers, the bill sunsets in 2025.
I've been maxing Roth 401k, Roth IRA and HSA because I can but maybe I need more Trad contributions plus taxable? I hate how complicated taxes are. Almost just want to do Roth always and be done with it.
When it comes to IRAs, does it even matter if I invest in growth stocks versus dividend payers? Essentially, after retirement, whether I sell 3.5% per year for expenses, versus harvesting the dividends landing in the IRA for expenses, does it really matter? In fact, even holding the ever confusing master limited partnerships (MLPs) of an oil company where one downside is dealing with the K-1s for taxes, an IRA effectively makes that moot. So where am I going wrong? Anyone?
If you live off dividends, your balance never goes down, obviously, so that is one benefit of dividend investing versus selling off your stock. MLPs can sometimes pass out payments that are classified differently from dividends. It's a rare occurrence, but it can happen. I can't remember the exact explanation. That is the explanation I got from (I think) GenExDividendInvestor. I have two energy company MLPs in my Roth IRA and I'm holding my breath to see if I run into that situation. And yeah, K-1s are a pain in the ass. Maybe pay a one-time fee to talk to a retirement advisor. (maybe your 401k offers advisor counseling?)
My spouse makes 45k from difficulty of care payment excluded from tax irs 14-7 payment, she has no w2 or offered any retirement plan.I make 35k earned income . Can I contribute to spousal IRA for her?
So for someone like myself who makes 350K per year, 52 years old, have 1.3 million in 403B/IRA accounts (contribute the max amount every year), high risk return strategy, plan on working at least another 10 yrs, have 170K in a brokerage account also in high risk return strategy (adding approximately 36K per year), 100k in a money market account, expecting $4500 in social security per month at 65 for both of us, and will have a pension that pays $3000 per month, should I start contributing my annual 403B money to the Roth 403B plan at my work and build that account for the next ten years? When my financial advisor (Raymond James) did future projections, at some point because of my RMDs, it had me projected to pay upwards of $140,000 in TAXES some years! I'm concerned that I don't have more assets in the "tax free bucket".
Great questions. For sure this type of question is best answered through an analysis & projection of your situation which is something we do for clients…But here are some thoughts… 1. I don’t fully agree with the $140k future estimated tax bill. To pay $140k in taxes you probably would need to have more like 700k-800k of income. You already have 90K in future SS & Pension (not inflation adjusted). That means you would need to have another ~$600k+ of RMDs. That is an IRA of about $17M at 75 years old. Maybe, but hard to imagine based on current situation. Obviously you have other income so the RMD might be less and the IRA balance may be less, but you get the idea. 2. However, Assuming that projection was right, I’d do Roth contributions now. Your current tax rate is lower than your future one. You’ll have more spendable with the Roth route. 3. I think there are some issues with the projections, but just from a diversification standpoint for marginal tax bracket management, I would likely do at least some Roth…maybe 4-5%. Optionality in retirement is super helpful. 4. But if the projections are truly off (the calculations actually show lower pretax balances at RMD age) you might be better off doing all TRAD for now and then converting chunks to ROTH later when income is lower. 5. Sounds like you are the guy we normally have to tell to spend more in retirement. Congrats!
Thanks so much for your reply. For someone who came from very meager means it has been difficult not having an immediate family member or someone like that who is able to give sound financial advice. Especially when I was first starting, it felt like flying blind. The information y’all present on RUclips has been super educational so thank you for dedicating your time for those of us who are in need of that insight. I’m hoping to be that for my kids/grandkids if I live that long. Just trying not to make a mistake that sinks the ship at any point in the journey 🙂
I believe that the point most people overlook is the fact that (correct me if I am wrong) the tax rate you pay is a blended rate. There are no straight 10, 12, 22 tax rates in 2024. When you are retired unless you work somewhere the income you get is from investments and SS for most people. Depending on what types of investments you have will determine how your income is taxed. When you talk about the tax rates that we currently have I believe that a lot of people assume that they will automatically pay a straight 22 percent on all their income (from 1 dollar to $100,524 dollars) If they make over $47,150 dollars in 2024. Taxes you pay are also dependent on where the income comes from and the state you live in. I am not worried very much about the taxes I pay now or in the future because I am lucky enough to have a large IRA and pension income plus SS. From my perspective I can use the SS income to pay taxes on my large IRA RMD withdrawals if I need too. I suppose it's just a matter of perspective. 😀
You are exactly right. The assumption from many is a flat tax rate, not marginal tax rate. Also, as you stated, it is much easier to control income in retirement to where yes, marginal tax rates may increase, but you can manage your income to have you in lower tax brackets than working years. You nailed it. Thank you!
Yes, it's progressive. Drives me crazy to hear people talk about fearing being bumped into a higher tax bracket, when it's only a portion of the earnings
Referring to backdoor Roth IRA: you want a $0.00 balance traditional IRA [by moving t-IRA to t-401(k)] so that backdoor Roth IRA is painless tax free non pro rate tax event.
@@bmiller7017Let's say you've never contributed to traditional IRA (so $0.00 t-IRA balance) and this year you want to contribute $7,000 to Roth IRA but your income is too high so you can't. Solution: contribute $7,000 to traditional IRA and then convert that $7,000 t-IRA to $7,000 Roth IRA and owe $0.00 tax for that conversion. Now let's say your t-IRA balance is $7,000 (you never paid taxes on) and this year you want to contribute $7,000 to Roth IRA but your income is too high. You contribute $7,000 to t-IRA so now have $14k t-IRA balance and when you convert $7k to Roth IRA IRS taxes you proportionally $7k/14k so half of the $7k is taxable. If you had $93k t-IRA and contributed $7k, 93% would be taxable - this is tax nightmare. Q1 Moving t-IRA to t-401(k) is first step to backdoor Roth IRA and removes nightmare of pro rata tax. Q2 If your 401(k) allows transfers from t-IRA, your backdoor Roth IRA will be nightmare free.
Your example of the man with$2M in IRA and he and wife have~$70k in SS income making it"go away" is not exactly true. The taxable SS comes in with~$32k .... that$70k isn't going away totally
Win win scenario: 1. max Traditional 401k 2. then max Roth IRA annually 3. Remove step 1, Then max Roth 401k 4. Max other investments 5. Retirement Plans 👍🏻
This is what I tell the "kids" at work. Two additional points. Step 0 is get your company match at least. If they have the discipline to do so, prioritize the Roth IRA contribution first before maxing the 401k. I find they don't like the IRA because they "see" the money, whereas just increasing the 401k withholdings 1% at a time isn't noticed. Psychology basically.
@@chrisjackson9102 Either way works but maxing Traditional 401k has more benefits. 1. Less income to pay for taxes. 2. Employer matching of your 401(k) contributions means that your employer contributes a certain amount to your retirement savings plan ((based on the amount of your annual contribution.)) I find the less you contribute, the less the employer will give you since it goes by a percentage of your contribution.
@@Ydoit "1. max Traditional 401(k)" is not ideal especially for those in relatively low tax bracket and those with horrible 401(k) and poor investment choices. As chris recommends, contribute enough to receive company 401(k) match takes precedence over maxing out 401(k). 1. contribute enough to receive company 401(k) match 2. max out Roth IRA 3. max out 401(k) If in relatively low (12% federal) tax bracket favor contributing to Roth 401(k), if in relatively high tax bracket favor contributing to traditional 401(k).
If you have the money to make backdoor Roth contributions over and above maxing out 401(k) contributions, chances are good that you're making enough money to be able to afford to retire early (when IRA withdrawals would have early withdrawal penalties). In that case, you probably want to have enough in ordinary taxable accounts to live off until you hit at least 59 1/2. So maybe just make your life easy and put that money into a taxable account and ignore the backdoor hassles. Sure, you're going to pay long-term capital gains rates (which seem pretty decent to me) instead of 0%, but that gives you more flexibility to enjoy your wealth earlier.
This is SOOOOOOO true. Everyone undervalues the benefits of having a normal non-retirement brokerage account…flexibility, tax loss harvesting, donating appreciated investments, borrowing against it, earlier withdrawals, long term cap gain rates, and more!!! Great point!!
@@johngill2853 how would I know what the tax brackets are going to be in the future. Theres no point i already invested in roth so i have no taxes i have to pay in the future. and im in a low tax bracket rn because I dont make enough for the traditional to make sense
Yep, having some Social security income, pension income, or pre-tax money is good since you get the first part of your income back tax free or only 10%!
My husband and I were discussing our taxes this morning. Just sold our business and were just trying to decide on this very issue!
Picked up my phone and this channel was up! Wow, how amazing are these gentlemen!
Ok, now let's get them blown up on RUclips! If you watch hit the like button, share, subscribe them. We need them! No, not related to them😂 😂😂😂😂😂
This made us smile so much! Thank you for watching and sharing such kind words!
You guys are so intelligent! I’m going to have to listen a couple of times to absorb everything. Appreciate you sharing so much information for us non-experts.
Thank you so much for watching! We are releasing a new video over the weekend :) Stay tuned for that one!
If you watched the original episode and this follow up and understand the concepts presented, you know more than 90% of financial advisors.
You are too kind! Thank you for spending so much time with us!
This isn’t true. Financial advisors know a ton and require multiple years of education and certification. Some of their businesses are set up to where they have to market their products. But don’t think they don’t know how it works.
The fact that people will watch meaningless videos and not ever watch videos about their future. You guys are awesome and have helped me so much
Thank you for spending time to help future-Adam 🙂
I agree with you about taxes, inflation, and debt. And, being 80 years old, I have tried to quit worrying about it. I am hopeful that you will all figure out what is going on and take the correct steps to solve the problems.
This is the first time I've enjoyed a financial discussion other than The Money Guy show! Really appreciate the deep dive specifically on taxes!
Thank you Josh! Make sure you check out the precursor to this video here:
ruclips.net/video/VHHNYdpVwrU/видео.html
Thank you for these excellent videos. The reason I'm converting my traditional IRAs to Roth IRAs is the Required Minimum Distributions (RMDs). These withdrawals, whether I needed the money or not, would increase my Medicare Part B premiums and potentially trigger the Income-Related Monthly Adjustment Amount (IRMAA). Also it would directly impact Social Security benefits. Then there's the "widow's trap" where the surviving spouse's tax filing status goes from married filing jointly to single. This change can cause the surviving spouse to have to pay nearly double the taxes compared to what they were paying. I think it really depends on how much someone has in their traditional IRA.
Thank you so much! You've got to check out this video and download the spreadsheet we use:
ruclips.net/video/ZetbFdEqi2A/видео.html
Goes into those conversions and how they relate to the Tax Torpedo :)
I will. Thank you.@@Theretirementnerds
I love how everyone assumes they’re going to have an RMD problem. #1) Let’s not forget, no one is guaranteed to live that long. #2) You’re deductible is going to save you a good portion on taxes, and if you think about it, what portion of the population is going to have an $80k-$100k per year RMD problem?
If you’re in a high tax state, like CA, it’s very tempting to stay traditional b/c you’re saving 22-24% federal + 9.3% state income tax right now! Plus, that extra money, plus 20+ years of growth, will likely cover the taxes everyone’s so worried about.
All excellent points!
@CrabbyE8 what is the standard deduction going to be in 2050?
@@DialedN_07 If politicians still want to get elected in 2050, it’ll be higher than it is today.
What was it in 1999 or 2000 ? Do the math for yourself. 😉
Great educational video. Learnt so much about Roth and traditional. Misunderstood them so far.
Thank you so much!
You guys are awesome
Appreciate you so much!
I like this guy…watched the original episode as well..very informative and has a soothing, meditating voice lol..he should do audiobooks 😂
Trying to convince him 😀
Ha ha! Love it. Honestly, it wouldn’t be good. The author would be like, “Wait, why are you winging it?”
I'm glad you corrected yourself, it's the most spendiable wealth
But the problem is we don't know how long we will work or market returns. In best case senerio I'm putting to much in traditional but in senerios were I don't reach my goal (stop working early or bad returns) a traditional makes more sense
I'd rather pay more taxes in best case senerio than have less in worse case scenario
Thanks for the follow up video! I found the original really informative and was surprised by the blow back in the comments.
RUclips is an interesting place :) Thank you for spending time with us!
Well said!
Thank you!
As a couple RMDs are dependent on who owns the IRAs. If both people own their own, the RMD is by person. So for us we each have our own and we have an age separation.
Even if all SS is taxed, we are still talking about an effective rate of 10% or less.
The way to get rid of a lot of government debt is to inflate it away
Please do a revisit number 2 and/or talk about impact on IRA/401k impact on inheritances and possible strategies to limit taxes further. It really comes down to multi-year tax planning including your heirs and their expected tax brackets. Always a moving target but we should boundary condition the possibilities. Thanks again for the awesome content.
I can see Congress lowering the thresholds and/or increasing the tax rate for NIIT and ACA wage surtax. The thresholds are already effectively falling every year since neither is indexed for inflation.
I expect the OASDI threshold to formally cross over the ACA threshold in approximately 2030.
There are so many non-indexed tax thresholds that stealth tax increases hit many who don’t realize it.
If roth earnings are ever taxed then they become just a restricted brokerage account. It SHOULD never happen, but the government never met a tax they didn't like.
IF it happens, I imagine it would be prospective. Meaning future contributors will have that info. They historically wouldn't start retroactively taxing Roth's just because they feel like it.
For the back door Roth, do you have to move the entire IRA to a 401k or could you just open a new IRA? That way you have a separate account that you can then do the back door conversions from.
Here you go... :)
The IRS doesn't think about IRAs as separate accounts. They lump them all together. So if you have any traditional IRA money anywhere, they will make you do a proportionate conversion in the same percentages as the Pre-tax vs After-tax $ in your IRAs everywhere.
Example: You have $95K in an IRA and you contribute $5K after tax, now you have $100K. Then you do a Roth conversion of $5K thinking it will all be tax free conversion. Doesn't work... You have to say that 95% of the $5K is pre-tax and 5% of the $5K is after tax and you are left with after tax money in the Traditional.
So you need to move all your IRA money into your work retirement plan (usually 401k). Or if your IRAs aren't that big, convert them all. Then you no longer have any IRA money anywhere. Now you can do the after tax contribution & subsequent conversion.
Does that help?
I don't think you can put money from an IRA into a 401(k), only the other direction when you are no longer working for company with which you had the 401(k), at which point you can roll the 401(k) over into an IRA.
He mentioned it around the 21 min portion of the video. Thinking he meant Roth.
I wonder what the median RMD is in 2024. 🤔 I would think it would be small.
Hello 👋 thank you for the topic information, about age
Thank you Eddie! Hope you have a Merry Christmas!
@90DaysFromRetirement thank you merry Christmas 🎅
I think Roth savings will eventually count as income toward IRMAA/medicare premiums and toward how much of SS gets taxed, so it will eventually be a backdoor way to tax those who saved in a Roth. I think it will also be eventually taxed (at least the growth or a portion) for heirs.
They will try to screw us no matter what.
I believe we will see Roths above a certain level will be taxed in some manner. There were instances in the early 2000's where CEOs of companies with non publicly stocks placing those stocks into Roths. These non publicly traded stocks were valued (by the CEOs) at well below market before being placed into the Roth. This allowed the CEOs to have a Roth valued at several billion dollars (Peter Theil turned a $2000 Roth into a $5B Roth using this trick). I think we will see Roths above $20m or $30m being taxed as a way of clawing back some of this gain.
Loving the show! Do you both have any book recommendations for retirement income/tax planning?
Thank you Cody!
This is Erik here :)
I do a lot of reading, but I don't have a large library of books I've read about retirement income/tax planning. I'm more the Medicare nerd, so Zacc and team likely have better info on that, but I'll share a couple.
1. I refer to it often in videos, but I love the Psychology of Money by Morgan Housel. His podcast is great, too.
2. Your Money or Your Life - I can't say that I could live by this 100%, and not necessarily tax advice, more around personal finance, but it has some interesting takes that made me think.
3. The Index Card is pretty okay, probably more along the lines of the retirement planning. In talking with Zacc about the 9 index card rules, the advice is probably best titled "what to do if you are a novice and don't plan on hiring any help." There are a lot of DIY-ers out there and, if that's you, this has some solid suggestions.
I don't know if that helps, but there's a stab at 3 :)
Thank you for spending time with us!
@@TheretirementnerdsThank you Eric! Love the Medicare videos as well. You guys are putting out incredible content.
@@codyemerson3525 appreciate you saying this!
One more aspect I think you missed was estate planning. I believe with the traditional, heirs have to immediately take all the money out and pay income on the traditional (there may be some options like over x number of years?), and that will be at their marginal tax rate, I think. Meanwhile, the Roth will not be taxable. So, if you have successful children in reasonable tax brackets, and if it's a lot of money coming in, the withdrawals could bump them into significantly higher tax brackets for the year of the withdrawal and the gov't end up with a lot more money. Also, I think I remember something about the Roth not requiring them to take a distribution, not sure on that.
Not everyone would have this as a big consideration, but if the rules would require my 1 heir to take a $500k distribution in one year, that will bump them up to a high marginal tax bracket no matter their income. Again the hybrid strategy helps here - if half is Roth and half is Traditional, then that impact will be significantly less and all the Roth comes tax free and doesn't push the bracket even higher, regardless of the actual tax bracket impact.
Roth does require distribution. That hypothetical $500k traditional distribution roughly means (10 year distribution * $500k =) $5 Million balance; heir would be happy to have that, the tax an afterthought.
Good points. If beneficiary designations are done right, the beneficiary has 10 years to withdraw the funds. So $1m IRA to 3 kids is about $33k/year if you are trying to spread it out as much as possible. (Not the end of the world, but still something to consider if your kids are making a lot of money).
If your kids tax rate is high it goes right back to “which tax rate is higher?” If theirs I higher, conversions make a lot of sense. I guess the other consideration is how nice they have been to you recently because paying all those taxes is a major gift!!!!!!!
Very fascinating and thought-provoking discussion. Thank you! Is the tax rate before or after deductions? I hope you could please clarify for me since it's the determining factor for me.
After deductions 🙂 hope that helps. Thank you for watching!
A 37 yr old with two pension plans totaling 60k. Left current job. Should I roll it in to fidelity as a Roth IRA or traditional IRA?
Will depend on you current tax rate now and what you think your tax rate will be in retirement. Happy to take a look. Erik@theretirementnerds.com is my email and I can connect you to Zacc's team.
Roth versus traditional
For the person worried about taxes on the Roth... That seems so extremely unlikely. But anything is possible... I mean there use to be a 50%+ tax bracket back in the day, which is unthinkable today!
But there are lots of things they could do to claw back some of the Roth promise to make it taxable:
They could add a wealth tax, and include the Roth value.
They could remove pre-retirement features like no penalty or tax to withdraw the initial investment, or spending on a first home purchase.
They could raise penalties or add fees.
They could stop increasing the contribution limit, or lower the contribution limit.
They could tax growth, or tax at a low rate.
Lots of things could happen... But still likely less than a traditional account
If they could get away with having us work until we die... they absolutely will figure out a way to do it. (Gov)
Many golden nuggets of wisdom are shared during this conversation about Roth conversions. Here's my two cents: When deciding to do conversions, who are you solving for: You and your spouse, the one remaining after the other spouse has passed away, or those who will inherit? Don't worry much about the two levels above the standard Medicare Part B premium for IRMAA. If your Modified Adjusted Gross Income is $97,000 or higher for Married Filing Jointly, your Social Security will be calculated at 85% of the Social Security benefit when you file your taxes. Regarding taxation of Roth money down the road, while stealth taxes could be employed, there is about one trillion in Roth money currently and 30 trillion in Traditional IRAs and/or 401k accounts, so it is a smaller target. Lots of ambiguity in the Roth decision, so the more conservative assumptions that you make, such as converting in the lower two brackets, the more you hedge your bets. It is a pleasure to hear this discussion made so keenly and pragmatically. Thank you very kindly, Zacc and Eric!
Your thoughts are always so thoughtful and well-articulated. Thank you David!!
@@Theretirementnerds My pleasure. Zacc is a sharp one.
@@davidfolts5893 I'm very lucky to get to spend time with him and learn from him
I think the most likely stealth tax on Roth distributions Congress might employ would be to treat them like municipal bond interest is treated. Thus they would count as income for triggering SS taxation, IRMAA, and ACA subsidy eligibility.
There have also been proposals to limit Roth account balances, effectively forcing RMDs to distribute that excess. Presumably such RMDs would not themselves be taxable, but future earnings on them would be. In combination with making Roth distributions provisional income a rather negative feedback loop is created.
@@headlibrarian1996 Agree.
0% tax bracket for married couple allows us to collect social security and live off long term cap gains from taxable brokerage.
Our goal is to use limited 401k contributions to support our lowered taxable income today, but maximize Roth and taxable accounts. 0% tax from taxable and Roth is much better than guaranteed tax rate at taking out 401k as “income”
Sounds like a plan! Thank you for sharing!
QUESTION: AT 60, should you do ROTH Conversions, or just withdraw the money from your IRA? I'm looking at staying in the 0% tax bracket, both ways....as I would only convert or take out from the IRA up to the standard deduction. Any extra needed would come from long-term capital gains or cash (if stock market is in a big decline).
The answer is yes most of the time (not all of the time), but it might be converting the entire pretax amounts…or it could be only partial conversions each year. Depends on each year’s cash flow situation in comparison with other future years.
From what I've heard mostly on Dave Ramsey's channel, if you can't leave it alone for at least 10 years, you should not bother with the conversion to Roth. The real benefit is putting money in there and giving it time to compound. Plus, converting increases your reportable income. Depending on how much you convert, you could bump a good chunk of that conversion into one or more higher brackets.
If you convert your 403b to Roth IRA, are you able to withdraw when I need it?
On the Roth vs traditional and the argument on RMDs: I don't think people like myself are worried about the rmd itself. It is that it doesn't put it on fair footing when comparing the before and after tax comparison about growth.
So when I turn age X and am forced to take RMDs when the market is down, then it sucks because I still have to take it. But if the market is down, then the Roth can just hang out for a better day.
In my own planning, because the advantage of the Roth is not paying taxes on growth, it becomes the account of last resort. So when I retire I'll probably pull more than the rmd from my 401k, while leaving my Roth a bit more aggressively allocated for an additional 5-10 years. With the bulk of a decade of extra growth, it is much more savings in taxes on the back end.
My other thought on the Roth is that it makes things simpler later in life. As I age, the less I need to account for things like taxes if my taxable assets are drained first. Or at the very least (like you mentioned in the first video) having assets in multiple asset types and multiple vehicles, it gives options and flexibility. It isn't a Roth vs traditional, because both are good and needed. It is getting picky about what percentage should be in each... And in that view, you can only put a relatively small amount in a Roth, so my thought is to max that out, and then do any additional in the traditional account.
Very well said!
If I have a pension that pays me 75% of my salary at the time of retirement.
Would a Roth 401k be better than a traditional 401k?
Would my pension keep me in a higher tax bracket and limit the amount of each withdrawal?
This will all vary on that dollar amount and any other income producing assets you may have. Happy to take a look into it for you if you'd like. My email is erik@90daysfromretirement.com
I see the FRA going to 70 for younger workers within 5 years. Means testing would not surprise me either.
Totally. We'll see where it all ends up 😬
Existing SS tax rules are effectively a means test based on income rather than assets. That they are not indexed for inflation is a nasty stealth tax increase.
I agree. They have already planted the seed by increasing the RMD age to 75 in order to prepare for this.
Bill in Congress went thru one house to raise the SS age to 69
Revoking the ROTH untaxed status would be a third rail move for any pollution that would end their political career faster than them being hit by a train. Now making it reportable as income to determine ones tax rate I can see that happening but not being taxed its self.
Whenever I see anyone talk about Traditional versus ROTH its "ALWAYS" about if someone should convert a Traditional into a ROTH and not what they should do with their current money to put into a retirement account. I would love to see someone actually talk about if someone should put their current retirement money into a Traditional or ROTH. Now for me I am 100% in the ROTH camp as I max out my ROTH 401K every year as that will give me more money when I retire as I am not having to give some of my retirement money as taxes I also make more money as I spend so paying the taxes now is in no way hurting me now.
Great video, however, you referred to the "Bush era tax cuts expiring", did you mean :the Trump era tax cuts of 2017 are expiring"? The tax cuts in that bill for corporations were permanent, but for ordinary tax payers, the bill sunsets in 2025.
Yes! We tried to put some text in the screen to clarify. Just a brain slip 🙂
That’s called MEGA back door Roth😂
Can I please get a free mini-analysis like the guy below? I watched the full hour as well! Thanks for the great content either way.
Hey Dylan, send me an email to erik@theretirementnerds.com and I'll connect you with Zacc's team
I've been maxing Roth 401k, Roth IRA and HSA because I can but maybe I need more Trad contributions plus taxable? I hate how complicated taxes are. Almost just want to do Roth always and be done with it.
When it comes to IRAs, does it even matter if I invest in growth stocks versus dividend payers? Essentially, after retirement, whether I sell 3.5% per year for expenses, versus harvesting the dividends landing in the IRA for expenses, does it really matter? In fact, even holding the ever confusing master limited partnerships (MLPs) of an oil company where one downside is dealing with the K-1s for taxes, an IRA effectively makes that moot. So where am I going wrong? Anyone?
If you live off dividends, your balance never goes down, obviously, so that is one benefit of dividend investing versus selling off your stock.
MLPs can sometimes pass out payments that are classified differently from dividends. It's a rare occurrence, but it can happen. I can't remember the exact explanation. That is the explanation I got from (I think) GenExDividendInvestor. I have two energy company MLPs in my Roth IRA and I'm holding my breath to see if I run into that situation. And yeah, K-1s are a pain in the ass. Maybe pay a one-time fee to talk to a retirement advisor. (maybe your 401k offers advisor counseling?)
I am 33 y/o and make 90k and am single no kids or other deductions. Should I contribute to traditional or Roth 401k?
This video goes over that decision in more detail. ruclips.net/video/VHHNYdpVwrU/видео.html
More detailed than yes or no based on income alone.
My spouse makes 45k from difficulty of care payment excluded from tax irs 14-7 payment, she has no w2 or offered any retirement plan.I make 35k earned income . Can I contribute to spousal IRA for her?
Is ROTH federal tax free or just state?
Both federal and state tax-free. The tax was paid at the front.
So for someone like myself who makes 350K per year, 52 years old, have 1.3 million in 403B/IRA accounts (contribute the max amount every year), high risk return strategy, plan on working at least another 10 yrs, have 170K in a brokerage account also in high risk return strategy (adding approximately 36K per year), 100k in a money market account, expecting $4500 in social security per month at 65 for both of us, and will have a pension that pays $3000 per month, should I start contributing my annual 403B money to the Roth 403B plan at my work and build that account for the next ten years? When my financial advisor (Raymond James) did future projections, at some point because of my RMDs, it had me projected to pay upwards of $140,000 in TAXES some years! I'm concerned that I don't have more assets in the "tax free bucket".
And I did watch the entire first episode, as well as this entire episode. You guys do a great job.🙂
Great questions. For sure this type of question is best answered through an analysis & projection of your situation which is something we do for clients…But here are some thoughts…
1. I don’t fully agree with the $140k future estimated tax bill. To pay $140k in taxes you probably would need to have more like 700k-800k of income. You already have 90K in future SS & Pension (not inflation adjusted). That means you would need to have another ~$600k+ of RMDs. That is an IRA of about $17M at 75 years old. Maybe, but hard to imagine based on current situation. Obviously you have other income so the RMD might be less and the IRA balance may be less, but you get the idea.
2. However, Assuming that projection was right, I’d do Roth contributions now. Your current tax rate is lower than your future one. You’ll have more spendable with the Roth route.
3. I think there are some issues with the projections, but just from a diversification standpoint for marginal tax bracket management, I would likely do at least some Roth…maybe 4-5%. Optionality in retirement is super helpful.
4. But if the projections are truly off (the calculations actually show lower pretax balances at RMD age) you might be better off doing all TRAD for now and then converting chunks to ROTH later when income is lower.
5. Sounds like you are the guy we normally have to tell to spend more in retirement. Congrats!
Thanks so much for your reply. For someone who came from very meager means it has been difficult not having an immediate family member or someone like that who is able to give sound financial advice. Especially when I was first starting, it felt like flying blind. The information y’all present on RUclips has been super educational so thank you for dedicating your time for those of us who are in need of that insight. I’m hoping to be that for my kids/grandkids if I live that long. Just trying not to make a mistake that sinks the ship at any point in the journey 🙂
I’m going to be selfish and just ask but what job and how do I get there? I’m barely under 100k and worried I’ll be too broke to retire in 36 years.
I believe that the point most people overlook is the fact that (correct me if I am wrong) the tax rate you pay is a blended rate. There are no straight 10, 12, 22 tax rates in 2024. When you are retired unless you work somewhere the income you get is from investments and SS for most people. Depending on what types of investments you have will determine how your income is taxed. When you talk about the tax rates that we currently have I believe that a lot of people assume that they will automatically pay a straight 22 percent on all their income (from 1 dollar to $100,524 dollars) If they make over $47,150 dollars in 2024. Taxes you pay are also dependent on where the income comes from and the state you live in. I am not worried very much about the taxes I pay now or in the future because I am lucky enough to have a large IRA and pension income plus SS. From my perspective I can use the SS income to pay taxes on my large IRA RMD withdrawals if I need too. I suppose it's just a matter of perspective. 😀
You are exactly right. The assumption from many is a flat tax rate, not marginal tax rate. Also, as you stated, it is much easier to control income in retirement to where yes, marginal tax rates may increase, but you can manage your income to have you in lower tax brackets than working years.
You nailed it. Thank you!
Yes, it's progressive. Drives me crazy to hear people talk about fearing being bumped into a higher tax bracket, when it's only a portion of the earnings
At 21 min, did he mean Roth IRA v 401k?
Referring to backdoor Roth IRA: you want a $0.00 balance traditional IRA [by moving t-IRA to t-401(k)] so that backdoor Roth IRA is painless tax free non pro rate tax event.
@@alrocky I’m missing something. How does moving a t-ira to t-401k equal a backdoor Roth?
Do most t-401k let you transfer in from t-ira?
@@bmiller7017Let's say you've never contributed to traditional IRA (so $0.00 t-IRA balance) and this year you want to contribute $7,000 to Roth IRA but your income is too high so you can't. Solution: contribute $7,000 to traditional IRA and then convert that $7,000 t-IRA to $7,000 Roth IRA and owe $0.00 tax for that conversion. Now let's say your t-IRA balance is $7,000 (you never paid taxes on) and this year you want to contribute $7,000 to Roth IRA but your income is too high. You contribute $7,000 to t-IRA so now have $14k t-IRA balance and when you convert $7k to Roth IRA IRS taxes you proportionally $7k/14k so half of the $7k is taxable. If you had $93k t-IRA and contributed $7k, 93% would be taxable - this is tax nightmare.
Q1 Moving t-IRA to t-401(k) is first step to backdoor Roth IRA and removes nightmare of pro rata tax.
Q2 If your 401(k) allows transfers from t-IRA, your backdoor Roth IRA will be nightmare free.
Well explained! You’re a pro
Your example of the man with$2M in IRA and he and wife have~$70k in SS income making it"go away" is not exactly true. The taxable SS comes in with~$32k .... that$70k isn't going away totally
Win win scenario:
1. max Traditional 401k
2. then max Roth IRA annually
3. Remove step 1, Then max Roth 401k
4. Max other investments
5. Retirement Plans 👍🏻
This is what I tell the "kids" at work. Two additional points. Step 0 is get your company match at least.
If they have the discipline to do so, prioritize the Roth IRA contribution first before maxing the 401k. I find they don't like the IRA because they "see" the money, whereas just increasing the 401k withholdings 1% at a time isn't noticed. Psychology basically.
@@chrisjackson9102
Either way works but maxing Traditional 401k has more benefits.
1. Less income to pay for taxes.
2. Employer matching of your 401(k) contributions means that your employer contributes a certain amount to your retirement savings plan ((based on the amount of your annual contribution.))
I find the less you contribute, the less the employer will give you since it goes by a percentage of your contribution.
@@Ydoit "1. max Traditional 401(k)" is not ideal especially for those in relatively low tax bracket and those with horrible 401(k) and poor investment choices. As chris recommends, contribute enough to receive company 401(k) match takes precedence over maxing out 401(k).
1. contribute enough to receive company 401(k) match
2. max out Roth IRA
3. max out 401(k)
If in relatively low (12% federal) tax bracket favor contributing to Roth 401(k), if in relatively high tax bracket favor contributing to traditional 401(k).
If you have the money to make backdoor Roth contributions over and above maxing out 401(k) contributions, chances are good that you're making enough money to be able to afford to retire early (when IRA withdrawals would have early withdrawal penalties). In that case, you probably want to have enough in ordinary taxable accounts to live off until you hit at least 59 1/2. So maybe just make your life easy and put that money into a taxable account and ignore the backdoor hassles. Sure, you're going to pay long-term capital gains rates (which seem pretty decent to me) instead of 0%, but that gives you more flexibility to enjoy your wealth earlier.
This is SOOOOOOO true. Everyone undervalues the benefits of having a normal non-retirement brokerage account…flexibility, tax loss harvesting, donating appreciated investments, borrowing against it, earlier withdrawals, long term cap gain rates, and more!!! Great point!!
I’m just doing a Roth 401k fuck it
You'll have no lower tax brackets in retirement?
Or do you just want to overpay taxes because your patriotic?
@@johngill2853 how would I know what the tax brackets are going to be in the future. Theres no point i already invested in roth so i have no taxes i have to pay in the future. and im in a low tax bracket rn because I dont make enough for the traditional to make sense
@@Noobnubnoob not tax brackets in general but your specific taxes
The Standard deduction is tax free and covers the first $14,600
Yep, having some Social security income, pension income, or pre-tax money is good since you get the first part of your income back tax free or only 10%!
Trump era