Roth conversion is not only complex because of convoluted taxation, even more confounding is that I can’t know future tax rates, investment returns, inflation rates, my income needs, or how long I will live. Seems hopeless to think I could ever pick the “best” choice for the future, when I know essentially nothing about the future! Seems best to do something middle of the road and stop fretting. Those 1000 Monte Carlo simulations tell me it’s impossible to get it just right.
@sir reptitious - agree. There are so many different scenarios that I have taken a leap of faith and just doing conversions at around 22 to 24 pct (I hope). I had planned 22 pct but then got an offer to work a little again after I retired so didn't want to pass up an easy short term job with good money. So trying to navigate extra income and my last year before having to worry about IRMAA. All in all, I have decided not to look at conversions as a way to pay less taxes but just a way to get all my 401k converted so that I don't have to pay taxes on it in the future and don't have to worry about RMD's when I am older and maybe not as on top of things when I am older. It will be so much harder to figure out and navigate when getting other income in the future such as pension and social so even if I end up paying more taxes by converting, I think it will just be less complicated than having non converted money that you start using when you need to pay RMD's and taxes could be a lot higher in the future. And IRMAA on top of that.
Totally onboard with your point! We think we won the game and have peace of mind only to find out the most complex aspects of managing our retirement assets are yet to come 😄
Interestingly, the "1000 Monte Carlo simulations" do help you pick the best choice for your future. And you can adjust future tax rates up or down, bracket changes, etc to make the simulation as complex as you want. The only thing you should not do is the suggestion you make, the "middle of the road" choice. Instead, even if you completely avoid simulating future returns, consider the downsides to making a wrong choice in each worse case direction. If your returns are horrible and your nest egg is shrinking constantly, the fear should be about running out of money. Paying high taxes now and future taxes low is a terrible choice. So first and foremost you need to calculate the risk of running out of money with a plan for withdrawal rates under terrible market conditions, especially terrible rates early in retirement. Once you have solved for this dilemma, you now have a baseline bottom for Roth conversions. Most of the video was talking about the top-line for conversions. If you want to make it easy and just pick a middle-of-the-road between these two, I have no complaints. But middle-of-the-road without establishing a baseline bottom is too risky.
No one talks about expecting to inherit a large amount of money in retirement That would encourage greater conversions. Your videos are insiteful, clear , and so educational. Thank you.
We’ve been doing Roth conversions to the top of the 24% bracket and sucking up the IRMAA charges from Medicare. We’re both 66 and want to complete the conversions before 2026 comes around because of social security and the sunset of the TCJA. The calculators we’ve used show it will save us over $1M over our projected life. In 2026 and on we won’t be above the first tier of IRMAA and will pay very low taxes. A little pain now for tax free growth later and maybe tax free living.
Are you converting all into Roth and paying it's taxes off from your cash/income or withholding some of your Conversion for taxes? The former puts more into Roth.
@@TheHouseofChameleons The target is the target. If you set your target taxable income to a specific number, then simply don't go over it period. All sources of income added together need to be below this. Then use that big pile of money to pay for everything including taxes, Roth conversions, groceries, insurance, and vacations. Everything. Once the money is in your hand, where it came from does not matter at all. If you have too much taxable income, its too much. It does not matter where that taxable income comes from.
Dumb question, the irma bracket is available on the SS site? And how does converting less to cover the tax work, if you still have to pull out the money out of the same taxable account to pay taxes?
@@heynow01Your question is a bit confusing, but I’ll give it a shot. The SSA site will show the IRMAA cost for the current year on your benefit statement, but doesn’t show the brackets. You can Goggle IRMAA Brackets and find them easily. With Roth conversions, the best way to pay the tax is from funds available in a taxable account, which is what I do. Of course, you have to have the funds available. You can pay the tax from the IRA or 401k you’re converting from, but this will cause you to pay additional tax on the money you withdraw to pay the tax.
Hi, I have really enjoyed your informative videos on ROTH conversions. I have recently retired and I think I have come up with a technique to work the conversions. My income projections for the year are now pretty stable (i.e. pension plus my wife's small SS, plus my traditional IRA) and I aim for keeping the income below the first IRMAA tier to avoid any future addition Medicare costs which will begin January of 2024. We definitely do not need all of the IRMAA tier income to live on so we plan to make the difference in budget a ROTH conversion. We currently have a significant ROTH basis and we are both > 62. My plan is to make an initial ROTH conversion about $10K less than the IRMA limit minus that year's budget. We will live off the pension and small SS and when we need additional income sources we will pull from the ROTH. In this way at the end of the year, when we are more certain of the next year's IRMAA limits we may pull more money from the traditional IRA to either use for our budget of transfer more to the ROTH. Our thinking is that this will maximize the ROTH transfers. Hopefully you can understand my thinking and maybe comment. Thanks Again!
Nice plan same as ours my pension, IRA & wife taking SS at 62 y/o due to breast cancer we are both 58 y/o. My wife will retire end of this year. Definitely not DYI we will seek out qualified help confusing.
I have learned so much more from your videos than reading any articles and books on the subject...which I have done. Invaluable information and extremely well presented. Thank you.
With Roth IRA, the money you are contributing has already been taxed. At any time for any reason, you can withdraw your contributions tax-free and penalty-free. Additionally, any earnings on investments can also be withdrawn tax-free and penalty-free, Not sure how much to contribute, I'm still at a crossroads deciding if to liquidate my $338k stock portfolio.
For the average person, the strategies are fairly demanding. In actuality, most professionals who have the necessary abilities and knowledge to complete such occupations do so successfully.
Having an investment adviser is the best way to go about the stock market right now, especially for near retirees, I've been in touch with a coach for awhile now mostly and I made over $800K within a short time
She is Natalie Lynn Fisk, my consultant. Since then, she has devoted section and leave attention to safeguards that I have been keeping an eye out for. You can locate information about the chief online, on the off chance that you're interested. I made no regrets about substantially adhering to their exchange strategy.
The biggest change of tax rate that can occur is a switch from the rate for filing jointly to one from filing as single when one of the spouses passes away.
It's impossible to know all the possibilities of future scenarios, but having a good amount in a Roth account gives one more options as you can take some from your Roth in certain years to avoid Irma charges or social security tax or to qualify for a subsidy for the ACA before Medicare kicks in. Small Roth withdrawals can help you stay in the sweet spot . I guess the same could be said about having a sizeable taxable account except the earnings are taxed.
great video. i will be doing my last conversion next yr and retire mid 2023 under "rule of 55". all our money will be in taxable and Roth accounts. for medicare we are "poor on paper" and will be under the first tier.
Sequence of return risk is itself a simplification; you cannot know what the correct numbers will be. Monte carlo is no more accurate to reality than using a low standard estimate. Until the actual numbers are know i will use 3 to 5 % gains and adjust when the time comes. The other issue is that ERMA is really a temporary uptick if doing roth conversions at 63 to 65. It then resets to the non-conversion income.
I think it’s almost impossible to calculate if conversions make financial sense, but I am converting to the top of 24% just so neither my wife (as a widow) nor my children will have to worry about RMD’s.
If one only worries about min-maxing the tax game, the more complicated strategies have distinct advantages. But your concern is with the inheritance after your death. Assuming you will have large balances to be inherited both pre-tax and roth, then Roth will win every time since IRA/401k/Roth all have to follow the 10-year withdrawal rule after inheritance, and they will already have to worry about too much taxable getting withdrawn from the IRA/401k.
LOL But just in case you are not joking, IRMAA is not a person, IRMAA is an increase in the amount you would pay in Medicare premiums due to a higher income. This can be a temporary increase or even an avoidable increase if you plan well.
With enhanced ACA subsidies being extended through 2025, the 8.5% premium cap remains. For folks under 65 this may be the difference quitting work earlier or later. Example: full price for couple in with $100k in retirement income (inc. Roth conversions) for Silver Plan on exchange about $18k, with enhanced subsidies $8.5k.
The issue I look at with Roth conversion is being taxed on the growth. Contributions going into the Roth are taxed going in anyway. I max my Roth each year and contribute the rest into my SEP and then just convert it over into my ROTH every 4 or 5yrs. Then it can be growing tax free as much as possible. I also don’t want so much taxable income in my SEP that would trigger my SS to be taxed.
Reference the forward looking tax plan at 7:40. What would be need to see the tax plan with a recommended roth conversions incorporated into it. What would go along with that nicely is the after tax equivalent net worth posted at say age 85 for each charts.
For situation #4, you have $80K in income. Ideally you should live in such a way to pay the additional roth conversion taxes out of the $80K in income and convert the whole roth target amount. This is one reason why you need buffer cash, or other income when you get into Roth conversion time - to allow you to convert the entire amount of your target while having $ set aside to pay taxes that doesn't trigger additional tax consequences, whether state, Fed, or IRMAA.
Thank you for the excellent video. Would the tax consideration change if the Roth conversion is targeted for inheritance (instead of retirement), for example one would take higher income tax so as to avoid the estate tax?
Thank you for these videos, they have been quite informative. What tool are you using to look at future income against tax brackets (~5:45-7:59)? Are there similar tools available for free? And is there a good method to estimate future tax bracket thresholds aside from guessing at inflation and increasing each threshold by that amount? I am also curious about tools to more easily see and calculate the impact of the social security tax torpedo with various income amounts.
I'm 67 and on my spouse's company insurance plan so I don't need Medicare right now. I assume the IRMAA brackets would be a factor in my Roth conversion strategy?
If RMDs are paid and being paid with a traditional rollover IRA w death benefit (spouse is bene)... Can you see any potential pitfalls in converting to a Roth? (Besides a current year potential tax increase?)
Excellent points to consider. Thank you. Personally, I don’t pay taxes on my conversions from the conversions; I pay taxes from other accounts. Is this wrong thinking?
The thing I never see mentioned with these examples is the lost opportunity cost of the time value of money you realize with the tax money that you pay out. It would be interesting to see how the IRA would grow if you never conveyed and see if the increase value would outweigh any future taxes
I'm currently using Vanguard for my investments. I'm 61 and trying to decide when to retire. I can at any time but I want to make sure I do it right. I want to do Roth conversions and I'm concerned they may not be as precise as you are. Thanks for all the great videos.
I'm in the same boat. Using Vanguard personal investment service. I too haven't retired yet and my Vanguard guy is encouraging me to do so but without providing any details about taxes other than saying they'll be paid 😄 We need more than that!
@@ivanvarykino8202 Yes, I get the same thing from Vanguard. I asked them if they would help me with tax issues concerning investing and they said No. I guess you get what you pay for.
12:17 Is this assuming you have no choice but to pay taxes with an additional pre-tax withdrawal? Paying out of taxable-account cash has no tax impact, and correctly selling assets from your taxable account incurs 15% CG tax and no impact on your earned income bracket, no? Unless you’re considering holding these assets until your heirs get a step-up in basis, you’re paying that 15% CG at some point.
Hi, Thanks for the great info! Can you add the Roth conversion complexity of the 62 yo family having 2 kids in college, and 0.25 of assets in taxable accounts?
Instead of using the conversion account to pay the taxes, would it be wiser to pay the taxes out of a savings account that has not been collecting much interest?
Mark, what you need to remember is that the IRS has tricky rules about paying taxes. If you do a Roth Conversion in December, they credit you with having done the conversion on the first of the previous January. That’s great and if you have the taxes withheld from the conversion, no problem. But if you think , well I just made the conversion so I will just send in the taxes myself out of other funds, then the IRS will charge penalties for not making quarterly tax payments for each quarter of the year. So basically if you want to use other funds like savings to pay the taxes, you should do the conversion early in the year and make quarterly tax payments.
I’ve been unable to find the IRMMA brackets for income this year (the 2024 brackets for IRMMA). I expected them to be announced in October, but doesn’t seem to have happened. Do you know when they will be announced?
Mistake #5 (using a static yearly rate): I'm 62, taking SS at 70, currently have $750k in an IRA, $770k in an already taxed account earning 5% (so the dividends and interest will be taxed as 'ordinary income'). I will have a pension at 65. I have 2 rental properties cash flowing. I have a $60k ROTH. I will go on Medicare at 65. I put an EXCEL workbook 29-year plan together (2023 - 2051 [I will 90]) whereby I convert $100K a year for next 7 years (2023 -2029) and project out all the taxes I will owe until 2051. I accounted for ordinary income taxes (fed and state), IRMAA, LTGCs and qualified dividends. I show RMDs that will occur starting at 73. I account for living off $85k each year for the 1st 10 years, then I am not concerned what the yearly income is there after (though it is sufficient). I have 1 model that takes IRA compounding at a 'static rate' of 7.58% for 29 years. After 29 years, total savings (taxes and IRMAA) for doing the ROTH conversions is approx $328K. I have another model that takes IRA compounding at various hypothetical future rates (positive and negative years to handle the ‘sequence of returns risk’) for 29 years totaling all years an average of 7.58%. After 29 years, total savings (taxes and IRMAA) doing the conversions is approx $115K. Big difference between the tax rate models. Does that sound correct? Also, I thought I would have MUCH more total savings (taxes and IRMAA). I have the comprehensive EXCEL workbook (the 29-year plan) that I would love to have you validate.
I viewed the situation as... My wife and I are eligible to make ROTH Contributions of 7 k each. I basically view the benefit of a Roth contribution to be more valuable than a conversion. So I am trying to keep the conversion amount adjusted so that we do not lose the Roth Contribution eligibility, which for a married couple is like 203 k or something MAGI ... (my rough recollection). That too seems like a relevant constraint, possibly more than a few thousand of conversion in a higher tax rate... Is that correct??? Seems like a pitfall that you should be considering.. for people that are still working and want to make Roth Contribution.
@@SafeguardWealthManagement Thank you for the response... Are you absolutely sure? I thought the conversions were considered as part of the income. I really hope you are correct and I am wrong.. might be an interesting topic, particularly if I am wrong since I have scaled back my conversions for this specific reason - and others might have as well. BTW, you have an excellent channel, not sure why you don't have more subs. If you could only talk a little slower or pause for a second after defining a complex relationship and give people 2-3 seconds to process it... would help us old people. thanks. My channel is complete opposite of yours if you are curious.
@@Speedospearo - Wow I learned something here. So confusing. On CNN Money, Your Top Roth Questions (I think pasting external links may disappear my comment), I found the below bits of text (the author of piece containing these was Ed Slott CPA, who is the author of newsletter "Ed Slott's IRA Advisor"): "The conversion amount is taxed at your regular income tax rates. It is included in your Adjusted Gross Income (AGI), but the conversion amount is not included as income for Roth IRA eligibility. For example, if your AGI without the conversion income is $90,000 and you convert $60,000, your AGI will be $150,000, but you will still be eligible to convert to the Roth IRA because the $60,000 conversion income does not count towards the $100,000 Roth conversion eligibility limit." "... The correct term [to use for IRA contribution limit] is actually "Modified Adjusted Gross Income" (MAGI), which begins with AGI and makes certain adjustments. The biggest adjustment would be deducting any conversion income from AGI, because the conversion income itself does not count as income in computing MAGI."
Why do you view the Roth contribution to be more valuable than a conversion? I'm not questioning it, just wanted to see if you'd share your reasoning. Or are you not yet 59.5 years old and would have to pay 10% penalty on conversions? I've been doing Roth contributions (and 401-Roth too) but it strains my income and I was thinking I should shift to conversions instead now that I've cleared 59.5 years of age.
@@5metoo Thanks, I subsequently looked that up as well. This ignorance on my part has cost me a considerable amount of lost conversions in the past. I have always that that I must carefully manage my conversions, so I don't loose the contribution ability. I was wrong for years! I would almost certainly have converted more in the past.
For item 5, worth doing aggressive roll overs and even paying high tax, even 35 %, in down years as you could convert twice as much stock volume, for the same money?
I've been looking for the name of the software package Eric uses to show multiple years of income and brackets (@5:45 in this video). I think he's mentioned the name in other videos but can't find it. Can anyone help out with this question?
how is that marginal tax rate shown in your chart calculated? 4.2 and 5.2 percent marginal tax increase? I don't follow how this is calculated. Can someone help me understand?
I dont understand your tax calcs. If a couple is paying $68/mo in IRMAA when earning above $181,000 until $228,000 Then isn’t the marginal tax = $68x12x2 or $1,632? If so, that is only 0.90% of $182,000 or 0.72% of 228,000. I cant get any amount close to your 4.2%. Also, You need to consider the additional $12.40 per month per person for Part D IRMAA as well. The base $170.10 Medicare premium should be ignored as it is paid regardless of income level. Am I missing something?
He may be including the additional IRMAA tax on Medicare Part D. Also, it's really 96,000% on the 91,000th dollar, and zero percent on the rest up to $114,000.
unless a person is moving from a traditional ira to a roth ira to keep future rmd taxation down....and your exclaimation points hint of clickbait....lol...I have enjoyed some of your posts...
I am contributing to a 401 ROTH account just enough to get the match. However, this year I have an extra $5,000 to invest. Should I use the money to pay taxes on a ROTH conversion, or contribute the $5,000 to the 401 ROTH at work? I am 59.
@@_-Karl-_ But anytime after 59.5 years of age you can shift 401k-Roth funds to Roth-IRA so you won't have RMDs. There will be no tax consequences because it is like for like post tax money. I do this quarterly to send my 401k-Roth contributions to my Roth-IRA because the Roth-IRA has better options.
@@_-Karl-_ You've summed it up well. Yes, contribution vs. conversion the question. Thanks so much for your thoughtful comments! And you're right, there is a "should you perform Roth conversions while working" video on this channel. It was helpful. I suspect it's something close to a wash for me. My spouse doesn't work; I have a relatively low income in a high tax state (not likely to move), and my portfolio is much larger than typical for my income level. Not sure when I'll retire, but very likely within 5 years. Due to my lowish income, I need cap gains to supplement income so as to max IRA (14k /incl spouse) and 401k Roth (26k, sent to my Roth-IRA quarterly for 40k total. Though cap gains are more favorable tax wise than regular income, my tax bracket isn't that awful either. My pretax rollover IRA is under a million, and it's my smallest bucket believe it or not. Roth and taxable considerably larger. But it wouldn't be surprising if the rollover IRA exceeds 1m in a few years. I suppose I could even split the difference and contribute to IRA and do incremental rollover instead of just one or the other. I also need some cap gains to reduce a bit of non-mortgage debt and be able to gift some money to family. As someone else said, it seems too complex to really run numbers very effectively. Probably just need to figure out what other things matter most to me.
@@_-Karl-_ The 5k figure was from someone else, but I think your points stand just the same. I don't have a pension, but I get dividends in my taxable account from a long time held high conviction stock that originally didn't give dividends but has for last decade and increases them modestly. That and some other modest passive income means I can't expect taxes to be much lower in the future, if any. No guarantees, but the best case is that the combination is equivalent of a decent pension in the near future. Not banking on it, but can't ignore it's a good possibility for tax purposes since it's significant now. So it wouldn't be tight to come up with money to pay modest Roth conversions, at least I don't think; it is crimping me to max Roth contributions with 40k post tax money, at least now that I want to generate some additional cash from cap gains to spend on family stuff at the same time. I'm trying to do too many things at once. I think I'll take your advice and start nibbling away at modest conversions, and reduce my 401k-Roth contribution to minimum to get company match, thus hanging onto more payroll money. I guess my goal -funny how it takes time to be able to articulate simple things- is to reduce the cap gains burn rate needed to stuff ~40k into a Roth, so I can use more cap gains for other family needs. But I suppose, as you say, the tax effect of this new way may not be that much different. I don't think it could hurt me much so I want to try it. If it helps to nibble away traditional IRA can't hurt. I could still contribute to Roth-IRA in the catch up period after looking at the prior year's tax returns. Thank so much Karl for your thoughtful comments. I've learned important stuff just today. I would pay for this advice. I've learned the hard way these tax issues come down to DIY and chatting with others because tax preparers (even CPAs) don't seem to want to deal with such things (and many are adamant that Roth conversions are always and everywhere bad), and financial planners (I don't generally use them and they annoy me no end) when asked about taxes need to make everything into financial advice and simplistically tell you to hit the minimum tax rates, as if that is your only goal in life. There seems to be no in-between; no real tax advisors out there. Thanks again.
I know you said simplified example... but on the #5 asset growth chart labeled "Bad Start" the average number in the "growth" column is 6%, but the average return is 5.079%. Each percentage growth needs to be corrected higher by 0.921%. If you do that, the actual average return is back to being 6%. Now, reusing these adjusted growth percentages and withdrawals from your chart the end portfolio size is $568,870, still considerably lower than $1,247,809 that the constant 6% return generates. You have put in great effort to be exact on your statements and calculations in all your videos, so I have to assume this is part of what you meant by "simplified example" and that you would enjoy that someone noticed it. And I particularly enjoyed the massive effect losing half your initial portfolio while increasing your withdrawal rate every year (over 14% in year 15!) you can still have positive overall results.
I just quick went back to that slide deck and added the bad start numbers together and still had a 6% average return. Now the actual CAGR would have been lower but I used average for simplification. I appreciate the compliments, however, on our normal accuracy. Let me know if you still got a lower average than I just quickly got.
@@SafeguardWealthManagement No, you are good. I was thinking of CAGR as the "actual average growth". I never use the simple average, and I quickly popped out an adjustment to get a 6% CAGR. The difference is not nearly as large as I expected, which is always a joy in maths. Please feel free in occasional videos to be 10x more technical in the statistics and maths. Some of your audience enjoys that as much as they enjoy getting ready for retirement. 😄 I am still trying to decide on my risk vs yearly withdrawal vs moving portions out of stocks into fixed income for the first few years. And all of that to retire somewhere between 55-59. (I am 51)
Why do all of you RUclips financial experts focus on such a small audience? According to EBRI estimates based on the latest Federal Reserve Survey of Consumer Finances, 3.2% of retirees have over $1 million in their retirement accounts, while just 0.1% have $5 million or more. I'd like to see a Roth Conversion strategy for IRAs of $250 - $500k. With an audience of only 4 of 100 people who wouldn't be watching RUclips for financial advice, why are you wasting your time and mine? Thanks anyway.
I didn't quite understand his explanation there either. If it was me I'd convert the $90,050 to Roth and pay the taxes out of a separate normal account. Which I would have already done as part of my estimated tax payments.
John this is my plan as well. Since you have to do the RMD anyway , just use it for withholding to cover the taxes on the conversion so you don’t have to take taxes out of the conversion.
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Roth conversion is not only complex because of convoluted taxation, even more confounding is that I can’t know future tax rates, investment returns, inflation rates, my income needs, or how long I will live. Seems hopeless to think I could ever pick the “best” choice for the future, when I know essentially nothing about the future! Seems best to do something middle of the road and stop fretting. Those 1000 Monte Carlo simulations tell me it’s impossible to get it just right.
@sir reptitious - agree. There are so many different scenarios that I have taken a leap of faith and just doing conversions at around 22 to 24 pct (I hope). I had planned 22 pct but then got an offer to work a little again after I retired so didn't want to pass up an easy short term job with good money. So trying to navigate extra income and my last year before having to worry about IRMAA. All in all, I have decided not to look at conversions as a way to pay less taxes but just a way to get all my 401k converted so that I don't have to pay taxes on it in the future and don't have to worry about RMD's when I am older and maybe not as on top of things when I am older. It will be so much harder to figure out and navigate when getting other income in the future such as pension and social so even if I end up paying more taxes by converting, I think it will just be less complicated than having non converted money that you start using when you need to pay RMD's and taxes could be a lot higher in the future. And IRMAA on top of that.
Totally onboard with your point!
We think we won the game and have peace of mind only to find out the most complex aspects of managing our retirement assets are yet to come 😄
Interestingly, the "1000 Monte Carlo simulations" do help you pick the best choice for your future. And you can adjust future tax rates up or down, bracket changes, etc to make the simulation as complex as you want. The only thing you should not do is the suggestion you make, the "middle of the road" choice. Instead, even if you completely avoid simulating future returns, consider the downsides to making a wrong choice in each worse case direction.
If your returns are horrible and your nest egg is shrinking constantly, the fear should be about running out of money. Paying high taxes now and future taxes low is a terrible choice. So first and foremost you need to calculate the risk of running out of money with a plan for withdrawal rates under terrible market conditions, especially terrible rates early in retirement. Once you have solved for this dilemma, you now have a baseline bottom for Roth conversions. Most of the video was talking about the top-line for conversions. If you want to make it easy and just pick a middle-of-the-road between these two, I have no complaints. But middle-of-the-road without establishing a baseline bottom is too risky.
No one talks about expecting to inherit a large amount of money in retirement That would encourage greater conversions. Your videos are insiteful, clear , and so educational. Thank you.
Paying taxes out of the conversion money can trigger an early withdrawal penalty if you are too young (59.5).
I have learned so much from your videos. I feel like I have audited a college course. Thank you
Agreed. The amount of free information SWM puts out is incredible.
@@swright5690 Sure does. I'm trying to learn every trick in his book!
We’ve been doing Roth conversions to the top of the 24% bracket and sucking up the IRMAA charges from Medicare. We’re both 66 and want to complete the conversions before 2026 comes around because of social security and the sunset of the TCJA. The calculators we’ve used show it will save us over $1M over our projected life. In 2026 and on we won’t be above the first tier of IRMAA and will pay very low taxes. A little pain now for tax free growth later and maybe tax free living.
Doing the same-converting to the top of 24%.
Are you converting all into Roth and paying it's taxes off from your cash/income or withholding some of your Conversion for taxes? The former puts more into Roth.
@@TheHouseofChameleons The target is the target. If you set your target taxable income to a specific number, then simply don't go over it period. All sources of income added together need to be below this. Then use that big pile of money to pay for everything including taxes, Roth conversions, groceries, insurance, and vacations. Everything. Once the money is in your hand, where it came from does not matter at all. If you have too much taxable income, its too much. It does not matter where that taxable income comes from.
Dumb question, the irma bracket is available on the SS site? And how does converting less to cover the tax work, if you still have to pull out the money out of the same taxable account to pay taxes?
@@heynow01Your question is a bit confusing, but I’ll give it a shot. The SSA site will show the IRMAA cost for the current year on your benefit statement, but doesn’t show the brackets. You can Goggle IRMAA Brackets and find them easily.
With Roth conversions, the best way to pay the tax is from funds available in a taxable account, which is what I do. Of course, you have to have the funds available. You can pay the tax from the IRA or 401k you’re converting from, but this will cause you to pay additional tax on the money you withdraw to pay the tax.
Hi, I have really enjoyed your informative videos on ROTH conversions. I have recently retired and I think I have come up with a technique to work the conversions. My income projections for the year are now pretty stable (i.e. pension plus my wife's small SS, plus my traditional IRA) and I aim for keeping the income below the first IRMAA tier to avoid any future addition Medicare costs which will begin January of 2024. We definitely do not need all of the IRMAA tier income to live on so we plan to make the difference in budget a ROTH conversion. We currently have a significant ROTH basis and we are both > 62. My plan is to make an initial ROTH conversion about $10K less than the IRMA limit minus that year's budget. We will live off the pension and small SS and when we need additional income sources we will pull from the ROTH. In this way at the end of the year, when we are more certain of the next year's IRMAA limits we may pull more money from the traditional IRA to either use for our budget of transfer more to the ROTH. Our thinking is that this will maximize the ROTH transfers. Hopefully you can understand my thinking and maybe comment. Thanks Again!
Nice plan same as ours my pension, IRA & wife taking SS at 62 y/o due to breast cancer we are both 58 y/o. My wife will retire end of this year. Definitely not DYI we will seek out qualified help confusing.
I have learned so much more from your videos than reading any articles and books on the subject...which I have done. Invaluable information and extremely well presented. Thank you.
With Roth IRA, the money you are contributing has already been taxed. At any time for any reason, you can withdraw your contributions tax-free and penalty-free. Additionally, any earnings on investments can also be withdrawn tax-free and penalty-free, Not sure how much to contribute, I'm still at a crossroads deciding if to liquidate my $338k stock portfolio.
For the average person, the strategies are fairly demanding. In actuality, most professionals who have the necessary abilities and knowledge to complete such occupations do so successfully.
Having an investment adviser is the best way to go about the stock market right now, especially for near retirees, I've been in touch with a coach for awhile now mostly and I made over $800K within a short time
Please who is the consultant that assist you with your investment and if you don't mind, how do I get in touch with them?
She is Natalie Lynn Fisk, my consultant. Since then, she has devoted section and leave attention to safeguards that I have been keeping an eye out for. You can locate information about the chief online, on the off chance that you're interested. I made no regrets about substantially adhering to their exchange strategy.
Thank you for this Pointer. It was easy to find your handler, She seems very proficient and flexible. I booked a call session with her.
The biggest change of tax rate that can occur is a switch from the rate for filing jointly to one from filing as single when one of the spouses passes away.
It's impossible to know all the possibilities of future scenarios, but having a good amount in a Roth account gives one more options as you can take some from your Roth in certain years to avoid Irma charges or social security tax or to qualify for a subsidy for the ACA before Medicare kicks in. Small Roth withdrawals can help you stay in the sweet spot . I guess the same could be said about having a sizeable taxable account except the earnings are taxed.
@@drmarkm5693 yes, but not the earnings ☺️
great video. i will be doing my last conversion next yr and retire mid 2023 under "rule of 55". all our money will be in taxable and Roth accounts. for medicare we are "poor on paper" and will be under the first tier.
Sequence of return risk is itself a simplification; you cannot know what the correct numbers will be. Monte carlo is no more accurate to reality than using a low standard estimate. Until the actual numbers are know i will use 3 to 5 % gains and adjust when the time comes. The other issue is that ERMA is really a temporary uptick if doing roth conversions at 63 to 65. It then resets to the non-conversion income.
I think it’s almost impossible to calculate if conversions make financial sense, but I am converting to the top of 24% just so neither my wife (as a widow) nor my children will have to worry about RMD’s.
If one only worries about min-maxing the tax game, the more complicated strategies have distinct advantages. But your concern is with the inheritance after your death. Assuming you will have large balances to be inherited both pre-tax and roth, then Roth will win every time since IRA/401k/Roth all have to follow the 10-year withdrawal rule after inheritance, and they will already have to worry about too much taxable getting withdrawn from the IRA/401k.
I have been watching this. It’s made me have a whole array of emotions, and still don’t know who Irma is. 😢
LOL But just in case you are not joking, IRMAA is not a person, IRMAA is an increase in the amount you would pay in Medicare premiums due to a higher income. This can be a temporary increase or even an avoidable increase if you plan well.
Another factor for some is the loss of ACA subsidies as you increase Roth conversions pre 65. Can you account for this?
With enhanced ACA subsidies being extended through 2025, the 8.5% premium cap remains. For folks under 65 this may be the difference quitting work earlier or later. Example: full price for couple in with $100k in retirement income (inc. Roth conversions) for Silver Plan on exchange about $18k, with enhanced subsidies $8.5k.
@@sukjinderpurewal4527 Yes. My point was that a negative aspect of Roth conversions is that they increase your MAGI and reduce your subsidy.
The issue I look at with Roth conversion is being taxed on the growth. Contributions going into the Roth are taxed going in anyway. I max my Roth each year and contribute the rest into my SEP and then just convert it over into my ROTH every 4 or 5yrs. Then it can be growing tax free as much as possible.
I also don’t want so much taxable income in my SEP that would trigger my SS to be taxed.
Reference the forward looking tax plan at 7:40. What would be need to see the tax plan with a recommended roth conversions incorporated into it. What would go along with that nicely is the after tax equivalent net worth posted at say age 85 for each charts.
For situation #4, you have $80K in income. Ideally you should live in such a way to pay the additional roth conversion taxes out of the $80K in income and convert the whole roth target amount. This is one reason why you need buffer cash, or other income when you get into Roth conversion time - to allow you to convert the entire amount of your target while having $ set aside to pay taxes that doesn't trigger additional tax consequences, whether state, Fed, or IRMAA.
This one was over my head.
Wow clear as mud!
Thank you for your videos!
How about if you are on Medicare Advantage
Thank you for the excellent video. Would the tax consideration change if the Roth conversion is targeted for inheritance (instead of retirement), for example one would take higher income tax so as to avoid the estate tax?
@@_-Karl-_ Thank you for the excellent reply. Do you provide fee based consultation service?
Thank you for these videos, they have been quite informative. What tool are you using to look at future income against tax brackets (~5:45-7:59)? Are there similar tools available for free? And is there a good method to estimate future tax bracket thresholds aside from guessing at inflation and increasing each threshold by that amount? I am also curious about tools to more easily see and calculate the impact of the social security tax torpedo with various income amounts.
I'm 67 and on my spouse's company insurance plan so I don't need Medicare right now. I assume the IRMAA brackets would be a factor in my Roth conversion strategy?
Looking for clarity, please. At about 10:20 are you saying would NOT want to perform more aggressive conversion right now? Thank you.
If RMDs are paid and being paid with a traditional rollover IRA w death benefit (spouse is bene)... Can you see any potential pitfalls in converting to a Roth? (Besides a current year potential tax increase?)
Excellent points to consider. Thank you. Personally, I don’t pay taxes on my conversions from the conversions; I pay taxes from other accounts. Is this wrong thinking?
I think it might change when you're old enough to take $ from your IRA without any penalties.
The thing I never see mentioned with these examples is the lost opportunity cost of the time value of money you realize with the tax money that you pay out. It would be interesting to see how the IRA would grow if you never conveyed and see if the increase value would outweigh any future taxes
Good point.
I'm currently using Vanguard for my investments. I'm 61 and trying to decide when to retire. I can at any time but I want to make sure I do it right. I want to do Roth conversions and I'm concerned they may not be as precise as you are. Thanks for all the great videos.
I'm in the same boat. Using Vanguard personal investment service. I too haven't retired yet and my Vanguard guy is encouraging me to do so but without providing any details about taxes other than saying they'll be paid 😄 We need more than that!
@@ivanvarykino8202 Yes, I get the same thing from Vanguard. I asked them if they would help me with tax issues concerning investing and they said No. I guess you get what you pay for.
12:17 Is this assuming you have no choice but to pay taxes with an additional pre-tax withdrawal? Paying out of taxable-account cash has no tax impact, and correctly selling assets from your taxable account incurs 15% CG tax and no impact on your earned income bracket, no? Unless you’re considering holding these assets until your heirs get a step-up in basis, you’re paying that 15% CG at some point.
Good job Eric
Thank you Boyd!
How does living in CA affect these Roth Conversion examples? 9.3% State tax.
Can someone suggest a roth conversion calculator?
Nicely done
What about when you reach a certain income amount and your social security starts getting taxed. How does this affect how to make a roth conversion?
Would doing a backdoor Roth then rolling a 401k into a IRA be mistake #6?
Hi, Thanks for the great info! Can you add the Roth conversion complexity of the 62 yo family having 2 kids in college, and 0.25 of assets in taxable accounts?
Being 33, anything I should think about in preparing for this in a couple decades?
Instead of using the conversion account to pay the taxes, would it be wiser to pay the taxes out of a savings account that has not been collecting much interest?
There is a video they did about this within the last 18 months.
Mark, what you need to remember is that the IRS has tricky rules about paying taxes. If you do a Roth Conversion in December, they credit you with having done the conversion on the first of the previous January. That’s great and if you have the taxes withheld from the conversion, no problem. But if you think , well I just made the conversion so I will just send in the taxes myself out of other funds, then the IRS will charge penalties for not making quarterly tax payments for each quarter of the year. So basically if you want to use other funds like savings to pay the taxes, you should do the conversion early in the year and make quarterly tax payments.
apparently there is a way around this if you check a certain box on the tax form to show divided conversions. Worth looking into
I’ve been unable to find the IRMMA brackets for income this year (the 2024 brackets for IRMMA). I expected them to be announced in October, but doesn’t seem to have happened. Do you know when they will be announced?
Mistake #5 (using a static yearly rate):
I'm 62, taking SS at 70, currently have $750k in an IRA, $770k in an already taxed account earning 5% (so the dividends and interest will be taxed as 'ordinary income'). I will have a pension at 65. I have 2 rental properties cash flowing. I have a $60k ROTH. I will go on Medicare at 65.
I put an EXCEL workbook 29-year plan together (2023 - 2051 [I will 90]) whereby I convert $100K a year for next 7 years (2023 -2029) and project out all the taxes I will owe until 2051. I accounted for ordinary income taxes (fed and state), IRMAA, LTGCs and qualified dividends. I show RMDs that will occur starting at 73. I account for living off $85k each year for the 1st 10 years, then I am not concerned what the yearly income is there after (though it is sufficient).
I have 1 model that takes IRA compounding at a 'static rate' of 7.58% for 29 years. After 29 years, total savings (taxes and IRMAA) for doing the ROTH conversions is approx $328K.
I have another model that takes IRA compounding at various hypothetical future rates (positive and negative years to handle the ‘sequence of returns risk’) for 29 years totaling all years an average of 7.58%. After 29 years, total savings (taxes and IRMAA) doing the conversions is approx $115K.
Big difference between the tax rate models. Does that sound correct? Also, I thought I would have MUCH more total savings (taxes and IRMAA).
I have the comprehensive EXCEL workbook (the 29-year plan) that I would love to have you validate.
I viewed the situation as... My wife and I are eligible to make ROTH Contributions of 7 k each. I basically view the benefit of a Roth contribution to be more valuable than a conversion. So I am trying to keep the conversion amount adjusted so that we do not lose the Roth Contribution eligibility, which for a married couple is like 203 k or something MAGI ... (my rough recollection). That too seems like a relevant constraint, possibly more than a few thousand of conversion in a higher tax rate... Is that correct??? Seems like a pitfall that you should be considering.. for people that are still working and want to make Roth Contribution.
Roth Conversions do not count towards the Roth Contribution income limit. So this is not a constraint you need to consider.
@@SafeguardWealthManagement Thank you for the response... Are you absolutely sure? I thought the conversions were considered as part of the income. I really hope you are correct and I am wrong.. might be an interesting topic, particularly if I am wrong since I have scaled back my conversions for this specific reason - and others might have as well. BTW, you have an excellent channel, not sure why you don't have more subs. If you could only talk a little slower or pause for a second after defining a complex relationship and give people 2-3 seconds to process it... would help us old people. thanks. My channel is complete opposite of yours if you are curious.
@@Speedospearo - Wow I learned something here. So confusing. On CNN Money, Your Top Roth Questions (I think pasting external links may disappear my comment), I found the below bits of text (the author of piece containing these was Ed Slott CPA, who is the author of newsletter "Ed Slott's IRA Advisor"):
"The conversion amount is taxed at your regular income tax rates. It is included in your Adjusted Gross Income (AGI), but the conversion amount is not included as income for Roth IRA eligibility. For example, if your AGI without the conversion income is $90,000 and you convert $60,000, your AGI will be $150,000, but you will still be eligible to convert to the Roth IRA because the $60,000 conversion income does not count towards the $100,000 Roth conversion eligibility limit."
"... The correct term [to use for IRA contribution limit] is actually "Modified Adjusted Gross Income" (MAGI), which begins with AGI and makes certain adjustments. The biggest adjustment would be deducting any conversion income from AGI, because the conversion income itself does not count as income in computing MAGI."
Why do you view the Roth contribution to be more valuable than a conversion? I'm not questioning it, just wanted to see if you'd share your reasoning. Or are you not yet 59.5 years old and would have to pay 10% penalty on conversions? I've been doing Roth contributions (and 401-Roth too) but it strains my income and I was thinking I should shift to conversions instead now that I've cleared 59.5 years of age.
@@5metoo Thanks, I subsequently looked that up as well. This ignorance on my part has cost me a considerable amount of lost conversions in the past. I have always that that I must carefully manage my conversions, so I don't loose the contribution ability. I was wrong for years! I would almost certainly have converted more in the past.
What software do you use for those charts?
For item 5, worth doing aggressive roll overs and even paying high tax, even 35 %, in down years as you could convert twice as much stock volume, for the same money?
Taking advantage of a recession or flash crash “could” be an ideal time to convert. I have missed 2 of these and regret it
I've been looking for the name of the software package Eric uses to show multiple years of income and brackets (@5:45 in this video). I think he's mentioned the name in other videos but can't find it. Can anyone help out with this question?
how is that marginal tax rate shown in your chart calculated? 4.2 and 5.2 percent marginal tax increase? I don't follow how this is calculated. Can someone help me understand?
Can you do IRA (not 401k) to Roth conversion while employed?
Yes
Comment
I dont understand your tax calcs. If a couple is paying $68/mo in IRMAA when earning above $181,000 until $228,000 Then isn’t the marginal tax = $68x12x2 or $1,632? If so, that is only 0.90% of $182,000 or 0.72% of 228,000. I cant get any amount close to your 4.2%. Also, You need to consider the additional $12.40 per month per person for Part D IRMAA as well. The base $170.10 Medicare premium should be ignored as it is paid regardless of income level. Am I missing something?
This gets to the heart of my question, which I'm struggling to figure out right now. Have you ever heard back from anyone or determined an answer?
Are you for hire? I live in Texas (no state tax).
I wonder how he calculated marginal tax increase +4.2% for IRMAA level 1. My calculation is +3.5%. (238.1-170.2)x12/(114,000-91,000) = 3.5%
@@_-Karl-_ it has nothing to do with Fed income tax. It is Medicare surcharge for IRMAA base on additional income
@@_-Karl-_ Exactly. It is equivalent +3.5%, not +4.2%. Would like to know how you or him arrive at +4.2%
@@you78750 didnt he say for both people. So is he doing married and adding both increases by the income?
He may be including the additional IRMAA tax on Medicare Part D. Also, it's really 96,000% on the 91,000th dollar, and zero percent on the rest up to $114,000.
unless a person is moving from a traditional ira to a roth ira to keep future rmd taxation down....and your exclaimation points hint of clickbait....lol...I have enjoyed some of your posts...
and I kept my transfers low enough that I didnt go over the 85k single person limit....
I am contributing to a 401 ROTH account just enough to get the match. However, this year I have an extra $5,000 to invest. Should I use the money to pay taxes on a ROTH conversion, or contribute the $5,000 to the 401 ROTH at work? I am 59.
@@_-Karl-_ But anytime after 59.5 years of age you can shift 401k-Roth funds to Roth-IRA so you won't have RMDs. There will be no tax consequences because it is like for like post tax money. I do this quarterly to send my 401k-Roth contributions to my Roth-IRA because the Roth-IRA has better options.
@@_-Karl-_ You've summed it up well. Yes, contribution vs. conversion the question. Thanks so much for your thoughtful comments! And you're right, there is a "should you perform Roth conversions while working" video on this channel. It was helpful.
I suspect it's something close to a wash for me. My spouse doesn't work; I have a relatively low income in a high tax state (not likely to move), and my portfolio is much larger than typical for my income level. Not sure when I'll retire, but very likely within 5 years. Due to my lowish income, I need cap gains to supplement income so as to max IRA (14k /incl spouse) and 401k Roth (26k, sent to my Roth-IRA quarterly for 40k total. Though cap gains are more favorable tax wise than regular income, my tax bracket isn't that awful either. My pretax rollover IRA is under a million, and it's my smallest bucket believe it or not. Roth and taxable considerably larger. But it wouldn't be surprising if the rollover IRA exceeds 1m in a few years.
I suppose I could even split the difference and contribute to IRA and do incremental rollover instead of just one or the other. I also need some cap gains to reduce a bit of non-mortgage debt and be able to gift some money to family. As someone else said, it seems too complex to really run numbers very effectively. Probably just need to figure out what other things matter most to me.
@@_-Karl-_ The 5k figure was from someone else, but I think your points stand just the same. I don't have a pension, but I get dividends in my taxable account from a long time held high conviction stock that originally didn't give dividends but has for last decade and increases them modestly. That and some other modest passive income means I can't expect taxes to be much lower in the future, if any. No guarantees, but the best case is that the combination is equivalent of a decent pension in the near future. Not banking on it, but can't ignore it's a good possibility for tax purposes since it's significant now.
So it wouldn't be tight to come up with money to pay modest Roth conversions, at least I don't think; it is crimping me to max Roth contributions with 40k post tax money, at least now that I want to generate some additional cash from cap gains to spend on family stuff at the same time. I'm trying to do too many things at once. I think I'll take your advice and start nibbling away at modest conversions, and reduce my 401k-Roth contribution to minimum to get company match, thus hanging onto more payroll money.
I guess my goal -funny how it takes time to be able to articulate simple things- is to reduce the cap gains burn rate needed to stuff ~40k into a Roth, so I can use more cap gains for other family needs. But I suppose, as you say, the tax effect of this new way may not be that much different. I don't think it could hurt me much so I want to try it. If it helps to nibble away traditional IRA can't hurt. I could still contribute to Roth-IRA in the catch up period after looking at the prior year's tax returns.
Thank so much Karl for your thoughtful comments. I've learned important stuff just today. I would pay for this advice. I've learned the hard way these tax issues come down to DIY and chatting with others because tax preparers (even CPAs) don't seem to want to deal with such things (and many are adamant that Roth conversions are always and everywhere bad), and financial planners (I don't generally use them and they annoy me no end) when asked about taxes need to make everything into financial advice and simplistically tell you to hit the minimum tax rates, as if that is your only goal in life. There seems to be no in-between; no real tax advisors out there. Thanks again.
I know you said simplified example... but on the #5 asset growth chart labeled "Bad Start" the average number in the "growth" column is 6%, but the average return is 5.079%. Each percentage growth needs to be corrected higher by 0.921%. If you do that, the actual average return is back to being 6%. Now, reusing these adjusted growth percentages and withdrawals from your chart the end portfolio size is $568,870, still considerably lower than $1,247,809 that the constant 6% return generates. You have put in great effort to be exact on your statements and calculations in all your videos, so I have to assume this is part of what you meant by "simplified example" and that you would enjoy that someone noticed it. And I particularly enjoyed the massive effect losing half your initial portfolio while increasing your withdrawal rate every year (over 14% in year 15!) you can still have positive overall results.
I just quick went back to that slide deck and added the bad start numbers together and still had a 6% average return. Now the actual CAGR would have been lower but I used average for simplification. I appreciate the compliments, however, on our normal accuracy. Let me know if you still got a lower average than I just quickly got.
@@SafeguardWealthManagement No, you are good. I was thinking of CAGR as the "actual average growth". I never use the simple average, and I quickly popped out an adjustment to get a 6% CAGR. The difference is not nearly as large as I expected, which is always a joy in maths. Please feel free in occasional videos to be 10x more technical in the statistics and maths. Some of your audience enjoys that as much as they enjoy getting ready for retirement. 😄 I am still trying to decide on my risk vs yearly withdrawal vs moving portions out of stocks into fixed income for the first few years. And all of that to retire somewhere between 55-59. (I am 51)
Why do all of you RUclips financial experts focus on such a small audience?
According to EBRI estimates based on the latest Federal Reserve Survey of Consumer Finances, 3.2% of retirees have over $1 million in their retirement accounts, while just 0.1% have $5 million or more.
I'd like to see a Roth Conversion strategy for IRAs of $250 - $500k. With an audience of only 4 of 100 people who wouldn't be watching RUclips for financial advice, why are you wasting your time and mine? Thanks anyway.
For the Roth Conversion $90,050:Is it better Convert all $90,050 to Roth, then the money can grow in Roth free?
I didn't quite understand his explanation there either. If it was me I'd convert the $90,050 to Roth and pay the taxes out of a separate normal account. Which I would have already done as part of my estimated tax payments.
If I'm wrong, someone please enlighten me.
I believe his assumption in that example is that you're withdrawing the conversion taxes out of the IRA. Otherwise, the example wouldn't make sense.
No ones talks about withholding the tax, for a Roth conversion, from a RMD. 10+ year younger spouse with future SS benefit.
John this is my plan as well. Since you have to do the RMD anyway , just use it for withholding to cover the taxes on the conversion so you don’t have to take taxes out of the conversion.
Jesus is the answer…and you won’t pay taxes in Heaven.