another unknown is the possibility of years of assisted living expenses. If you end up with years of assisted living expenses, these expenses can be deducted and cover the taxes you would pay on your RMD's. Much better to pay these assisted living expenses from your IRA than from your Roth.
I was just going to comment this. Very very few people understand this. You can deduct any qualifying medical expenses >7.5% of your income. Home health care, assisted living, nursing home, retrofitting your house for accessibility, all standard medical expenses etc.
@@jarjar45123 To elaborate...a SNF or skilled nursing facility is 100% deductible. A senior living facility which includes meals and rent is not deductible. But are typical 'end of life' solutions, and average stays are less than 12 months. Exceptions are memory care where patients might be much healthier.
Thank you for all the great content. It's so much easier, in many ways to work, bring home a paycheck, healthcare, let my 401k grow, ect. Wow, retirment is so overwhelming and complicated!
My Roth conversion paid off immediately. My wife and I had to keep our reportable income at a certain level in order to qualify for subsidies on our health insurance. When we had an emergency come up we used the Roth conversion to pay for it and kept it from disqualifying us from the subsidies.
Only if you are under 59 and 1/2. Once you are over 59 and 1/2 and you have had ANY Roth IRA open for at least 5 years then all distributions are qualified and tax free. I opened a Roth when they first started and funded it each year. Then I retired at 61 and converted some of my company retirement funds into a Roth at my local bank. Since I had paid the taxes on the conversion and I was over the required age I had immediate access to the money.
But a Roth conversion DOES result in reportable income and it WILL affect your subsidies in the year that you take it. Unless you are saying it was worth it to give up the subsidies in that particular year? And if that was the case, why not just do a full conversion and then get both the full subsidies and the tax-free income going forward?
There are many examples which shows the math where the roth vs IRA comes out as a wash if all conditions are the same. There is no break even point. Now we know things are not the same as we transition into IRMMA for medicare, RMD, and higher tax bracket/rates changes in the future. All of these points to a Roth being more advantaged.
With only 1 million in tax-deferred assets, the RMD is about 40K/year. Even with 2 million in assets, the RMD is 80K. When you subtract the std deduction, you are still in a very low tax bracket. Don't go overboard in the desire to avoid taxes! The taxes in retirement come at you one year at a time. Converting forces you to pay extra taxes immediately. It may take many years to recoup this money.
The RMD stacks on top of SS, pension, partners SS and pension so unless you are basically pour to begin with in retirement with very little non RMD income the tax brackets will go up.
@@eikoGoldstein yes I was pointing out unless someone has nothing else just RMDs alone the RMDs will jack up the tax bracket when combined with other sources of income. I'm facing insane RMDs overtime if I don't convert any deferred accounts to Roth.
@@palerider7924 I hear you. I face similar issues. All one can do is convert each year, up to your targeted tax rate. If the market plunges, go big on the conversion. But no one knows where the markets will be in 10 years, so I believe moderation is the key word. You've got a problem many would like to have! Best wishes and good luck.
Good video. It highlights an important issues related to Roth conversions, which is focusing on the tax savings will make Roth a better choice in many more scenarios than focusing on the correct item which is after tax wealth. It takes much longer for a Roth to pay off when looking at after tax net worth. In fact, you can defer and pay twice as much tax and still come out ahead if those tax dollars are paid by you or your heirs at lower rates (%) than you would pay on the conversion
That kind of correctness only really matters if you have heirs. If you don’t end of life total wealth is generally irrelevant. Why bother maximizing something that you get no benefit from?
The main reason I'm thinking I'll probably do a conversion is to avoid the RMDs. I don't want to be forced to take out more than I need. I want to control what I withdraw.
Just did our first conversion. Seven more to go. Able to pay taxes out of brokerage which helps. Primary reasons for doing it is to avoid the widow tax with RMDs (we are not dying at the same time) and to make sure that my children do not get a tax bomb when they inherit what is left in our estate. Both kids are in high paying professional jobs and will be crushed by a taxable windfall.
ok. First, thanks for doing this video because our advisor is suggesting the Roth conversions and only gave the executive summary. I'm a numbers guy and want to know the details, but also whether this is just a numbers game. And your starting question is close to what I'm wondering. Frankly, is it worth it? And like someone mentioned earlier, we're in our go-go years and all the conversions would be at 22% and taxes paid for out of the retirement fund, so we're now depleting our investments (via living and taxes) at a faster rate and we don't know how long we will live. I can't see the upside. Basically, my wife and I were shown a 25-year window by the advisor (just an executive summary with no details). I'll be 87 at that point. It's like the idea of waiting for social security. You can't predict how long you'll live, so it's best to live now. It's not just a money game where we're trying to max out how much money we can make, it's a life conversation. I'd recommend a slight change to the video. Don't hop around. You're familiar with the topic and we're having to process it as you go. So just walk a simple example all the way to the end and then answer the base questions; e.g., how does this help us in our day-to-day/month-to-month budget? How does this result in more money in our accounts that we live off of and how likely is that? I'd even want to see a graph of the break-even point. Basically, I'm just concerned about funding our retirement and not too concerned whether there's an inheritance. And if there is, since my heirs did not work for the money, anything they get they should be thankful for since the funds were meant to fund the retirement and the tax hit is what it is. Having said that, I do want to make sure my wife is taken care of.
I think even if everything is even, if one spouse dies early the other goes into single bracket and just gets destroyed with taxes. This is reason alone to convert.
Excellent videos overall! I appreciate the one video where you included a single person as an example. Far too many retirement advisors focus on married couples only. Also, please include some state taxation on retirement accounts in at least some of your calculations. I know states are different but many states do tax capital gains so how does that affect retirement financials? You can choose say 4 or 5% state taxation on capital gains as an example. Does it fundamentally change anything?
One angle to be mindful, breakeven age is a number. Most ppl age rapidly before expiration. The best retirement years are the golden age when there is health & $ to enjoy. Paying the lowest taxes in life will never be my goal.
I contribute half into traditional 401k and half into Roth 401k. It’s good to have options when I’m retired on how much income I can take out at a low income rate as well as what are things I can deduct. All I’m saying is don’t go all in on Roth.
My concern is the ‘unpredictability’ of tax policy. For example Joey suggesting changes to capital gains and now Cammys suggestion to tax unrealized gains. All this forecasting is assuming a hungry government is predictable. I predict, Roth accumulations in the future will be a target, and be taxed when they realize they need more money. Personally I prefer to continue deferring taxes as long as I can, let my heirs figure out how to play the game in the future
Great info, my dilemma is that we have a sizeable amount of retirement savings in traditional IRA, just don't have that much cash to pay for the conversions, the only way would be from the conversation itself, and I'm not sure if that would be worthwhile.
Don’t be afraid of paying for the conversion using distributions from your traditional IRA. The real question is how much to convert and how much to convert each year. For this you need deep understanding of tax brackets, IRMAA, and the RMD schedule. Answer depends on your age, how large your IRA savings actually are and expected income in retirement (Social Security, pension, etc).
You can do that ONLY if you are already 59 1/2 where the part of your ira you use to pay taxes wont be charged the additional 10 percent penalty. The portion you use to pay the taxes is considered earnings and NOT a conversion so taxes will be assessed. If you are not 59 1/2 then you will pay taxes on that portion AND 10 percent penalty
Don't forget you paid taxes on that money too. If you add in the pre-tax value of your after-tax savings you will see that paying the tax out of the IRA withdrawal is not so bad.
I think the question is, not how much taxes you pay or save, but what strategy yields the most money long term. I modeled the following. Assume you have $1M in an IRA, and the tax will be a total of $300k, and you covert the $1M over 5 years to stay in a lower bracket, and also of course spread the tax payment over the same 5 yrs. Then run out how much you have in 20 yrs, 30 yrs. Now scenario 2: instead of converting, take that money you have in cash or equivalent, and invest it in S&P500 for 20 yrs, 30 years, you’ll have enough growth from that investment to pay the taxes on your RMD’s as well as the taxes needed to cover the withdrawal to pay the taxes. I even modeled the taxes going up 35% and it the accounts still had more in them at 30 years then they would have if you had paid the taxes now and converted. So to me it seems to be a question of are you looking to pay less in taxes, or have the most money. The models in Right Capital don’t seem to consider this angle. What you’re giving up on the growth of the money used to pay taxes now.
@@foundryfinancial I either didn’t explain it right or you aren’t understanding. What I’m saying is that it does not make sense to convert because of the amount that you make on what would have been used to pay taxes makes more than enough to cover all the taxes for RMDS and more.
@@gehartman I think this is why you should not pay the taxes from the conversion money, but from a separate taxable account. So the full amount can grow tax deferred. Then it becomes a comparison of taxes now versus taxes at a possibly higher rate in future. I think of it as effectively moving money from the taxable account into the Roth.
I’m in a quandry about this. I’m retired, 57 and single in CA w/ $1.6 in an IRA and $5.5 in a taxable brokerage account. I’m going back-and-forth on whether to convert over six years or kick the can down the road. I’d also have to pay the NIIT tax. I’m not keen on paying taxes over the next six years while at the same time wanting to manage IRMAA and Social Security properly. My heirs would be my nieces and nephews. Suggestions?
@@gehartmanI don't agree with your analysis. Whether there is savings or not depends on the individual's unique circumstances of which tax brackets they are paying at. If there were only a single flat tax rate, mathematically it would not matter at all whether you did a Roth conversion or not. The tax would be exactly the same. The only thing that changes is when you pay the tax. But we have tax brackets with differing rates, and that's where the magic happens.
After 30 years of IRA/401k growth, we have a tax problem that 55% of Americans would like to have. A lot of people are retiring with only SS because they did not plan. Some have a small nest egg if they got to 45 and started putting it away. But for those of us who started with our first job at 24, that money it has been growing for 35-40 years. It is all growth. So yes, we have to take out a large chunk of money under RMD, but almost all of it is growth (free money) that we will be paying tax on. In every case, we will have more to live on than the SS person or the person who has a small nest egg. Also, if you go to 50 and you decided to start a Roth, that might also have time to grow just by your normal funding for 15 years. Also, you will have all of the RMD in the 10 %and 12% tax brackets too, so it's all good.
My thinking is! I’d only move $ to a Roth and pay the tax if we had a major market crash and my account dropped big time. 25 years ago I split what I had saved in a mutual fund that I had starter at age 18. I put 1/2 into a Roth and paid the taxes then. Figuring I would split my risk. I don’t trust the government to “not” change the game and try to tax that $ again! I tell the youth to split investments 50/50. Half Roth and half not. And to remember always take the Roth $ last!
Interesting...I have never heard of break even point for roth conversions. I have for social security, regarding age to claim. I may need to watch this video again to better understand this roth conversion breakeven point. Any articles about it anywhere?
One important thing you did not mention is the time value of money. The dollars you pay in taxes now are worth far more than the money you will get in later years to make up for the non-taxability of the Roth. I would predict that the present value of a Roth conversion is never going to break even.
David, that's not the case for me. I am single, so those lower tax bracket fill up fast. I built a large spreadsheet and was shocked that my future RMDs will be coming out at a couple tax brackets higher than what I saved when taking the contributions deduction. Roth was not a thing when I was saving early in my career. By deferring SS to 70, my spreadsheet shows Roth conversions in my first 8 years of retirement will bring those smaller future RMDs down into about the same tax bracket as I saved while contributing. I will be living off taxable brokerage accounts, while doing the conversions, at the lower qualified dividends and capital gains rates. As far as time value of money, I adjusted all expected bond interest and stock returns by subtracting 3% for inflation so that all numbers on future years in the spreadsheet stay at present value. The cash account is even adjusted to show loss in value (in real terms) year over year.
Time value of money can be ignored if all future years in the analysis are displayed in today's dollars. This is easy to do by setting inflation to zero, but also subtracting expected inflation from whatever you choose for investment returns.
I've converted 95K 2 years ago and 98K this year of stock into a Roth. That account is already worth 327K. I paid the tax from savings outside the IRA. I'm 66 and am trying to convert all my IRA money before I hit RMD age. It really depends on where your money is invested. Many of my friends, about the same age, I believe are way to conservative with their funds and may outlive their money or have problems when big expenses come up.
If your doing this during good market years that's the huge unmentioned factor. I wouldn't think converting in a down market would be advisable.. any thoughts?
@@Terry-cg7kt Everyone's situation is different. It depends more on the length of time you can let the money grow and what type of investment return you are getting. It also helps if you can pay the taxes from other money. I'm fortunate enough to not need the money in my IRA accounts. I'm trying to leave a tax free nest egg for my wife and kids.
I like the certainty and future flexibility that Roth conversions provide, as well as the tax-free bucket my wife can draw from should I predecease her.
Exactly this. I call this, "solving for simplicity." It may cost me more now, but I can afford it and it is "buying" future simplicity when I cannot predict the future.
The certainty is that you choose to pay your marginal (i.e. highest) tax rate up front that you could have dodged with traditional contributions, and now that taxed money can't grow for you and can't be Roth converted later at lower income tax brackets.
@@ordinaryhuman5645 I'd be very pleasantly surprised if my tax rate at any time in the next 40 years is as low as I'm paying right now. Converting now is a known thing. And converting eliminated the uncertainty of future income tax rates, the uncertainty of that income on medicare and social security taxation, the uncertainty of RMDs, the uncertainty of taxes when needing to take an unexpected withdrawal, the uncertainty of my wife needing to deal with that should she outlive me, etc
@@ordinaryhuman5645 They didn't specify when these conversions take place... if one does the Roth conversions during the "golden window" between retirement and SS, you can choose your tax bracket. It would seem that most people with traditional tax-deferred retirement accounts over a few $100K would profit from converting up to a 10% or 12% bracket.
@@momhouser Even with SS, you still have control over how much you convert and which tax bracket you end up in. And it's not hard to keep that rate lower than your marginal rate when you were working. That'll be even more true for younger folks today, because SS income is likely going to be reduced and delayed, and pensions will be long gone.
The thing you don't mention here which has a huge impact on the time line is the market return you are using for the calculation. Outside of a couple of years the market has been yielding consistently high returns for over 15 years and if your throw out a few years in the early 2000s and 2008 it's been closer to 30 years. If you're figuring that break even point using 6 - 8% returns compared to using 3-5% the break-even is a lot sooner.
To have a break even point, you have to have an initial cost. If you plan on spending the money, you have to pay tax. And, if you are going to spend the money, tax dollars are irrelevant. After tax dollars are the spendable portion which is the only thing that needs to be optimized. You have roughly the same investment options both pre and post conversion. The only thing that matters is the tax rate applying at the time of conversion. AxB=BxA, right? There is no benefit from tax deferral unless your tax rate decreases.
Comments on Eric @ Safeguard (my co-favorite YT finance guy) video that “break-even on Roth conversions” is a bit of a non-sensical question? If you fill a tax bucket higher than your projected and terminal tax rate, it will be a loss. Lower and you benefit. It’s purely tax rate arbitrage.
But don’t you have to consider the returns you are missing out on my paying taxes now vs later? It seems like there has to be more to it than just tax rates.
@@debratateisu92 - There is, but to a man with a hammer everything is a nail. If you are going to be mostly in "safe" and low performing assets in retirement, then you could consider it only a matter of taxation and you'll assume pessimistic return assumptions. But if you're planning to invest through retirement with a mind to long life and inflation protection, then it isn't just a matter of taxation and you'll think of the tax free returns. Assumptions are everything.
It feels weird to talk about a "break even" point with Roth conversions, because isn't the entire +/- related to a Roth vs Traditional in the tax rate at contribution(conversion) and withdrawal? As you say, it is complicated, but builed down to it's simplest form it's tax rate at contribution vs withdrawal. Spreading out the conversions and determining the withdrawals are ALL assumptions. If our assumptions are incorrect, then the calculations are incorrect. All we can do is make the best assumptions we can, right? We have to guess whether we'll have a LOT of years of VERY large RMDs or widow(er) penalties, etc. If someone knows that they'll have WAAAAAY more money in their traditional account than they'll ever need, AND they'll be passing that to their heirs, then that's one thing. I feel ike calling it a "break-even" is kind of incorrect. Social Security has a break-even date when assuming only an internal rate of return. The ONLY variable in that equation is the IRR. A Roth conversion has about a million variables. It's hard for me to call that a break-even time frame. It's more of a: how does your specific situation, in the specific scenario that you've chosen work out if you only live x years, because that totally changes the tax rates which is the only thing that affects a Roth conversion decision.
It was developed in response to a client’s question, but people do need to realize there’s a payoff period and sometimes it’s simply not worth it. The longer you live the more eye popping the savings. But, generally I agree it’s not possible to calculate in the same way as say Social Security because there are so many variables at play.
My overall thinking when Roth first came out, was just to defer taxes, and let the 401-K money I already had, grow tax deferred. With the bigger pool of money, i felt more comfortable taking more risk in the market. More winners, than losers, so worked out. I also view the Roth conversion as an upfront money grab by the Feds. If i was younger, I would do the Roth with new money, and the longer duration to earn tax free. Now 68, and retired 2 years, i am taking 401-K money to be in the 22 to 24% tax bracket. Trips, discretionary spending taken out of savings, so no additional taxes.
I need to find the WSJ article that the break even point is way longer than most people realize. My financial planner recommends keeping it in the 401K as long as possible because you get the benefits of big numbers for even minimal gains in the market. Ah, here it is: _"Unless converting to a Roth can yield a greater present value return than the after tax present value of the traditional IRA, it is not a compelling transaction. In English: if you pay 25% of the withdrawn amount as tax, you HAVE TO EARN THAT BACK to be even. And that's 25% less that's compounding until it is earned back"_
The break even for social security is complex enough. 401k to roth conversations are way more complex. All that, and the government can just decide to change the rules. Interesting stuff tho.
A lot of the perceived "saved tax $$" is merely because one now has less $$ after the Roth conversion, thus one pays less taxes on less $$. It's counterintuitive, but consider: having more $$ usually means paying more taxes. So your point about solving for *both* needs to be balanced. One thing not considered is the devaluing of $$ over time via inflation. Those $$ lost up front are worth more than $$ paid as taxes later. You should recalculate these numbers with that in mind.
Something interesting about conversions is that it’s deceiving to compare taxes paid today versus taxes to be paid 15 to 30 years in the future. You really need to understand the escalation of the money owed now versus the scary RMD. The future RMD looks huge but so is the unrealized income from the money used for taxes today. If those funds used for taxes were saved and invested and earned about 6 percent per year they would also be huge when you are 75 to 90 years old. Also you need to face the fact that money will have different meaning when you are in the last few years of life, so the conversion is really for your beneficiaries and not yourself.
Thanks, their realistic life expectancy is 80 and 82, so convertions only good if retire early and have a big window? Don't really need the spousal longevity insurance as taking SS at 70 so is covered?
As I understand it, this is assuming an average market return. One of the biggest risks early in retirement is sequence of return risk…you get multiple years of low returns while also selling investments to live off of. If you have several years of poor returns right after doing a Roth conversion it seems the break even would take even longer. So on average it might be a good thing but worse if you do it and then have a period of low returns. At least that’s how I think about it.
As a hedge against that sequence of returns risk, here is a simple solution (you can make this more complex if you choose) put 3 years into iBonds or T-bills. If the market goes sideways or down, live off that cash. If the market does well, pull the money from the market for that year. A 3 year cushion will smooth out most bumps. I have been doing that for 6 years and no issues, even when market took a dive during Covid. Sound too good to be true? Run some scenarios with your own portfolio and calculate the results
If healthy, using leverage of life insurance owned by ILIT or kids on one or both of parents would be way more tax efficient. If you then do QCD’s for RMD, further increase tax benefits
This was my issue. I would have loved to do ROTH conversions prior to Medicare but the extra income from the conversion would have reduced the premium tax credit I was getting through the Affordable Care Act.
I break even on day one with my tax free Roth conversion that I do slowly over time and under taxable limits using the form 8880 retirement saver's credit to bump up my tax free zone from the standard deduction. Alas, the Secure Act 2.0 ruins the saver's credit, turning into a deposit while Roth contributions are no longer eligible for the credit and you can no longer use IRA contributions to lower your taxable income to make yourself eligible for the credit. So while I can no longer convert all of our tax deferred accounts to our Roths it doesn't really matter as I can use what's left for income for the first 11.4 years or so of retirement and still remain income tax free as our taxable income will be just under the standard deduction and exemptions if/when those come back.
If the couple in the example had no heirs, and planned to leave any remaining assets at death to charity, then it makes absolutely no sense to convert. Their traditional IRA (normally a giant tax bomb) is completely TAX FREE when it goes into the hands of the charity
I agree. You absolutely have to consider this. It is not a conspiracy theory. The government is desperate for money, and the "rich" are a prime target.
@@beemankunkel It would be very unfair and break every promise the government has made. But they will use the standard line of "the rich can afford it since they have been so lucky." And they will say it is only on Roth IRAs over, say, $10 million. But could it happen? Absolutely.
I’m 51 and retired with 1.3 million traditional 401k money, $400,000 Roth 401k money, and I just ran out of taxable account money. I am extremely frugal with a budget of only $23,000 last year. My healthcare is covered by the VA. As far as income between now and 59.5, I can work part time and/or deal with the early withdrawal penalties. Is there a scenario for me where conversions make sense?
The only way this works for anyone is to have a very large (multiple years of living) savings account where on paper you earn no money. If you don't have that you can't 'fill up the 15% tax bracket' with a conversion because you are already higher than that living off of your pre-tax 401k.
If you withdraw at the amount much less than your current salary like (3-4% a year which can be 10-50% of your current salary) in your retirement, you should be in a much lower bracket than you are currently in so in that case, the money you saved on tax right now is more than what you will pay in the future. The current money is also worth more than the future money due to inflation (time value of money).
My perspective is to focus mostly on spendable dollars versus taxes paid. If I end up with more spendable dollars, and I pay 3x more taxes, who cares. I need more money for my wife and I period. No money is your money until you pay taxes. However actual dollars matter more because no one takes equity for groceries. This doesn't apply to everyone, just us. Also, should either or both of them die prior to RMDs, those tax savings disappear quickly due to the widow's tax trap. I am a firm believer that you pay taxes when you have to. Also, I am sure I missed this, but if he is converting all this money, how does he stay in the 12% tax bracket when he is working for $120k/year. If he stops working, and converts, then he has zero income during the conversion years because it all goes to ROTH. Please show me where I missed this, thanks.
One thing planners never talk about is the tax situation of the people, in this case my kids, who will inherit my Roth or traditional IRA money. If their marginal tax rate is less than mine, a Roth conversion makes no sense at all. RMDs are not some boogeyman to be feared. Just take the RMD, pay taxes on it and invest what you don’t need in a taxable account. That account will pass to them tax free. Simple.
I don't think it is a time question. If you convert a dollar in the 22% tax bracket today and withdraw it in the future in what would have been the 22% bracket you broke even.
Actually, you lost because the tax paid now would not grow over time because you paid it to the govt. So trading 22% today for 22% in the future is not a good trade. Where it makes sense is if you successfully invest in high risk high return, where in the future you would pay a higher tax rate (eg 35%).
I’m a bit confused about your math. Example: if I convert 100,000 to a Roth I pay 20% in tax. 80,000 goes into my Roth. At 6% rate of return it will take about 4 years to turn that 80,000 back to 100,000. I would think that would be my break even point.
You should never pay the tax with the money being converted. The entire $100,000 should be converted, and tax come from somewhere else, so the entire $100k grows.
@@jdgolf499 Agree if under age 59.5 as the tax paid from the conversion would trigger early withdrawal penalty. Disagree if over 59.5. Ideally, it makes sense to use other funds to pay the tax as you then essentially are making an extra contribution to your Roth that doesn’t count against the annual limit. Reality is that many people don’t have large balances in non-retirement accounts. So, those folks over 59.5 are just fine paying the tax from the conversion.
If you have the $20,000 to pay the taxes up front, you should take that $20,000 and invest it. Don't waste it on a Roth. Roths are all smoke an mirrors.
What's the best spreadsheet or calculator for visualizing what marginal tax bracket the conversion puts me in? I retired at 39. I want to convert my IRA slowly to only fill up the lowest income tax buckets.
Key question: does the analysis include the opportunity cost of the capital you are expending today to pay the taxes? If it doesn't, then it seems to me that the Roth conversion is strictly a play on whether your taxes in the future will be lower or higher than present.
I agree. Invest what the money that you would have used to pay tax on the conversion in a S&P500 EFT and it’ll grow more than enough to pay the taxes on what you didn’t convert, PLUS, what your pulling out to pay the taxes with. Because that will also be taxable.
Confused, 1) how is fill up the tax bracket 12% realistic? 2) When they make the conversion, to account for the tax payment, you either have to reduce the ROTH by $300,000 (est for taxes) or add the $300,000 that you would have paid in taxes a deferred annuity to make the example equal. How did you account for that?
MFJ, $200k is in the 22% bracket this year. Single, with the standard deduction, in the 24% bracket. “Highest” brackets start at over $600k. 35% starts at $243k and $487k. Other income obviously will affect this - I wouldn’t convert if you already have $500k in earned income. And “five years” - it could change with reverted/new brackets in 2026.
I don’t want to convert that much now because it will raise my Medicare premiums substantially. Met with my CPA. I can convert only about 75k per year and keep my Medicare premiums reasonable.
A conversion doesn't make sense for us if you need the money to live off. Plus limited taxable cash to pay for the conversion. Also, we will claim SS earlier at 62 y/o because my wife has breast cancer. My lifetime pension is affected by WEP & GPO!
Correct. It mostly makes sense if you can leave the money in a Roth for a long time. It can also make sense if you want to pay to simplify things for heirs and or if they'll be in a higher tax bracket than you. This happens when one spouse passes away and the other pays single tax rates, and is called the widow tax I think.
This is great but sometimes I wish you would use account vales and savings balances that are a bit more realistic, like 500-600k in retirement and maybe only 80-100k in savings and SS of 3600 less vales are closer to the average...
If that is your case, than nothing to worry about as you will be in the 10-12% tax bracket; making your RMD's and IRMMA a mute issue (as for yourselves). For you, converting does not buy you anything other than leaving your heirs with some tax free dollars.
It's mostly pointless to discuss this until whatever version of Trump's tax/tariff package is passed. One possibility is that if income taxes are eliminated, all current IRAs/401k's/etc effectively become ROTHs for free.
Nice video, but trying to follow along, I noted the free account has much fewer tabs at the top, and I don't seem to be able to adjust some of the tax stuff and the investment stuff. E.g. it does not seem to let me adjust how much capital gains or the dividends so I'm always stuck in a much higher bracket so that might impact my coputations. But my calculation using right capital shows that if I keep giving to charity along the way, there is never a break-even for Roth, i.e. I always pay more tax with roth. Does that make sense given your experience?
One item that has limited my IRA to Roth IRA conversion. I am eligible to Affordable Care Act. To be able to get this, I can have a maximum income of $60240 this year.
A lot, if it's taxable income. We've found that a pension (while great to have the guaranteed income) reduces the amount of flexibility you have to control taxes through these kind of strategies because you are easily pushed out of the best (lowest) tax brackets.
With birth rate falling & a higher percentage of the population being in the retirement age bracket. I think the government will be forced to abolish the Roth promise of no taxes on withdrawals. Especially in light of the fact that older Americans will be a heavier draw on the system through Social Security & Medicaid. That and there will be many who have not saved at all & it will seen as class issue. I'm afraid that the massive amount of capital in Roth retirement funds is going to be way to enticing for the government to ignore. I hope I'm wrong...
not sure the best way to contact you. I signed up for access to foundry and never got anything back via email. Does it take more than three days? I can just try again but wanted to check.
How about this. I move 50,000 from an IRA to ROTH and pay a 22% tax which equals 11,000 in tax. I know have 39K in my ROTH. Let's say the market averages 10% a year in growth which I think you will find it does. The next year my 39k in my ROTH now has grown 3,900, so I now have 42,900 at end of year 1. 39K + $3,9K=42.9K I make another 10% for the next year and I make 4,290 added to my 42.9K and I now have 47.190K end of year 2. The next making 10% "the market average" I make 4,719K plus my 47,190K I now have 51,909K which is well over the 50K I started with at end of year 3. This of course does not include inflation, but you did not say if your model included that as well and what number your model uses, and I am only 3 years out from the original event. And it depends on your tax bracket as well but you would have to pay taxes on the IRA withdrawal weather you spend it or put it in the ROTH. So the real extra cost of doing such a move depends on how much you move at a time and the tax bracket it puts you in. So just do a IRA to ROTH ladder and call it good, real good and live off the ROTH tax free interest the rest of your life and give the tax free ROTH to your heirs that they can hold for 10 years tax free before they have to withdraw it. I think you make it to difficult to understand and your model does not explain how it gets the numbers it does as far as I can tell. Thanks for the thought for food.
Great video. If I am in my early 50's and my Roth conversion strategy has me breaking even in my mid-80's (which is also my current life expectancy) and I have no heirs to whom I wish to leave tax-free money, do Roth conversions make sense? If it turns out I live well past my breakeven, I will have some "extra" money at that point, but will not likely be able to spend it to enjoy things like I would have if I hadn't done the conversions in the first place. If I have shorter life expectancy, then I have lost the "gamble". Also, if I do in fact pursue conversions, can I anticipate some of the potential tax savings in the future and take those savings as additional spending now? Thanks.
@@joycewright5386 I did too, back in like 2008. Now the balance looks good, but I often wonder what the balance would be if that money I paid in tax had been left there to grow for the last 16 years.
@@markroberts8975I think you made the right move, because that money is now insulated from any future tax increases. I think that’s the one piece that folks don’t consider, tax rates are not fixed, they can go up so having money growing that is immune to future taxes is probably the closest thing any of us will ever get to having some offshore account beyond the reach of the IRS.
@@globalfamily8172 ROTH conversions need to take into account your current tax liability to make sense. This is why doing some backdoor ROTH conversions in your 401K now make sense, because those need 5-years before you can start withdrawing the growth tax-free. Assuming you have enough there and in other accounts that limit your tax liability when you retire, you can live off those while you start converting large chunks of your 401K to ROTH in retirement, up to whatever tax threshold you are comfortable with. It's going to be a multi-year process. And probably worth your time to talk with a live CFP about your situation.
Hmmm...$1M at $200K per year conversion brings you to zero in Traditional. Sounds good at first, but just do the math so you don't lose out on the yearly standard deduction. If the standard deduction is $30K, then you get that $30K free of taxes, every year.
In the best case your converted asset rises dramatically and it pays for it self quite rapidly. Some of mine paid for the taxes by their increase in the same year. That is the best case and you should never depend on that. I'm not counting on it happening in the future. But it happens sometimes for those converting into certain equities in a bull market.
If you have $1,000,000 in a pretax 401K and you have to take a first time Required Minimum Distribution - it will be $38,000. If Trump gets in and makes it so you don't have to pay tax on your Social Security benefits, you will owe $500 in taxes on the $38,000 if you are married and both 65 years or older
Actually if all you have is the RMD on $1m of $38k plus SS, after the standard deduction of $33k joint over 65, even under the current rules your SS is not going to be taxable and you will be in the 10% bracket on the $5k AGI so he or she is correct.
This was potentially a great topic, but the instructions in the video didnt flow well and difficult for caveman peabrain for myself. Maybe a quick summarization at the end of the steps to how to calculate
IT WILL TAKE LESS TIME AFTER 2026 AS INCOME TAX RATES WILL NEVER BE AS LOW AS THEY ARE TODAY. AS LONG AS YOUR CONVERSION TAX LIABILITY IS UNDER 30%, YOU ARE BETTER OFF CONVERTING AS MUCH AS POSSIBLE, ESPECIALLY BEFORE RMDS ARE MANDATORY.
The theory of Roth is misleading. In no case does prepayment of taxes, sometimes by decades, make any economic sense. Traditional IRAs grow tax free too, you only pay when you withdraw...similar to stock market transactions. In Roth, you lose out to economic price change over time, like inflation, you lose the 'yearly tax deductions', and with Trump, if he swaps out tariffs for income taxes, Roth people will now have prepaid taxes on income that you will not in the future. Traditional for me.
There are so many reasons not to convert. I just retired at 60 but my wife still works. With her salary and my IRA withdrawals, we keep our marginal federal tax rate just under the threshold where it jumps from 24 to 32%. If I were to begin to convert to a Roth, even over a period of 5 years, we would be paying marginal rates at 32-37% on literally several million dollars in converted income, resulting in several hundred thousand dollars in additional taxes, just from the higher brackets. No one knows, of course, what will happen to taxes in the future (current rates expire at the end of 2025), but even Dems seem hesitant to raise tax rates on families earning under $400k. And, I can plan income realization for higher rates once they are known. Even though I realize I will pay income on SS and may pay more for Medicare, these potential savings are dwarfed but the tax rate differences from converting. I don’t need a software program to tell me a conversion is a huge financial loser for me - I know it makes sense for some.
Tell someone with a high pre-tax portfolio "you only pay when you withdraw" and see what their reaction is. Tax preparers usually hate Roths because they only see it in terms of taxes paid in a single year. I'm a Roth multi-millionaire and I have a diff perspective. People that have no flexibility in their choices are like rats running in a maze.
Roth contributions when tax deductible Traditional contributions were an option may have only ever made sense for boomers with pensions and generous SS benefits, because their guaranteed income would push them into a higher bracket in retirement before pulling anything from their traditional account. For younger folks with no pension and delayed and diminished SS benefits likely, tax deductible traditional contributions are a no brainer.
@@ordinaryhuman5645 All depends on what you end up owning and how it performs later on, which you won't know until later in your life.. I've never made a high income and never had any chance of a pension, but I'm a saver and savvy investor with pre-tax, Roth, and taxable buckets. Dividends from taxable bucket from investments two decades ago along with SS when I'm forced to take it will drive me into higher tax rates. Glad I've poured money into Roth IRA (incl spousal Roth) and 401k Roth. I continue to make Roth conversions every year. I'll probably never spend the Roth money and pass it onto my heirs.
We all know that no one can time the market reliably. That said, I’d be very cautious holding assets with inflated current valuations and converting them to Roth IRA. You risk paying a big sum of taxes today and holding the bag on much lower valuations tomorrow. In other words if you convert your $1,000,000 ira full of VOO today and the stock market drops next month, with the S&P down 40%, then you just paid a ton of taxes on assets that now are worth a fraction of what you just paid taxes on. Just something to consider as the stock market continues its historic bull run.
If the market flies.... it is quick payoff because of the gains in gain on gains.... Not sure why the calcs being pimped is so simplistic.... It is ZERO Taxes ever forever.... Soooooo..... I stopped with pretty long ago &&&& I got into mega backdoor brilliance of my employer.... So I maxed that out aftertax.... instead of loading up brokerage...
A Roth Conversion breakeven has nothing to do with time. That is the wrong way to look at it. A Roth Conversion breakeven is determined solely by tax rates. Are you paying a lower tax rate today than you (or your heirs) would be paying on the withdrawals in the future? It really is that simple. The reality is future tax rates are uncertain. So, you make an educated decision and don’t look back.
This isn't entirely true if you pay taxes with outside funds; if those funds are invested and pay dividends, there is a "tax drag" on the invested funds so the break even tax rate goes down over time.
I dont care to leave my kids millions of dollars, so I won't be doing them. Plus, that will be money out of the market, and I expect returns to be much lower than present
Convert to Roth ASAP and never worry about the torpedo tax, the widows tax, RMDs, large medicare premiums and your inheritance being taxed to death. This analysis is over.
Realizing the many variables of a conversion, projecting success on life expectancy into late 80s and 90’s in this model or any software, is a rare exception. The very best if you’ve made it to 75 is early to mid 80’s ON AVERAGE. I just get annoyed with expert podcasts that say, “…if Sara lives to 102 and Harry to 89”, then this makes sense. Market conditions, gains or losses and unpredictable tax rates in the tiny window of maybe at best the last 1/4 of your life much greater impact on your tax burden vs how long you live. Not saying ignore ROTHs, but these projections are getting ridiculous and a conservative approach is best. Pardon the rant. In my layman’s opinion.
Seems like significant growth of converted money in a tax free Roth account is a X factor besides potential higher taxes in the future when deciding to do Roth conversions. For example a growth rate or 10-15 percent per year in a Roth account can quickly reduce the break even age. Thoughts?
Not true. Returns do not change the math (unless your account loses value in which case Roth loses big time). Otherwise whether your account grows by 2% or 200% does not matter. The only decision is regarding the % tax paid.
another unknown is the possibility of years of assisted living expenses. If you end up with years of assisted living expenses, these expenses can be deducted and cover the taxes you would pay on your RMD's. Much better to pay these assisted living expenses from your IRA than from your Roth.
I was just going to comment this. Very very few people understand this. You can deduct any qualifying medical expenses >7.5% of your income. Home health care, assisted living, nursing home, retrofitting your house for accessibility, all standard medical expenses etc.
@@jarjar45123 To elaborate...a SNF or skilled nursing facility is 100% deductible. A senior living facility which includes meals and rent is not deductible. But are typical 'end of life' solutions, and average stays are less than 12 months. Exceptions are memory care where patients might be much healthier.
@@thoswallace Most LTC policies DO cover memory care. I have one. Just make sure it is in the policy you buy.
As a nurse I’d rather die than be in a nursing home.
@@mcmable1 That choice may not be up to you.
Thank you for all the great content. It's so much easier, in many ways to work, bring home a paycheck, healthcare, let my 401k grow, ect. Wow, retirment is so overwhelming and complicated!
keep working then....there isnt a law...
@@88888gerald you missed the point I was making.
@@88888gerald Yes there is a law. The law that says you don't live forever.
My Roth conversion paid off immediately. My wife and I had to keep our reportable income at a certain level in order to qualify for subsidies on our health insurance. When we had an emergency come up we used the Roth conversion to pay for it and kept it from disqualifying us from the subsidies.
I thought you had to wait 5 years to access the conversion?
Only if you are under 59 and 1/2. Once you are over 59 and 1/2 and you have had ANY Roth IRA open for at least 5 years then all distributions are qualified and tax free. I opened a Roth when they first started and funded it each year. Then I retired at 61 and converted some of my company retirement funds into a Roth at my local bank. Since I had paid the taxes on the conversion and I was over the required age I had immediate access to the money.
@@johnscott2746 thank you for clarifying :)
@@mandypdxThe 5 year limit is only for the interest earned on the money. You are free to take the principal at anytime after 59 1/2.
But a Roth conversion DOES result in reportable income and it WILL affect your subsidies in the year that you take it. Unless you are saying it was worth it to give up the subsidies in that particular year? And if that was the case, why not just do a full conversion and then get both the full subsidies and the tax-free income going forward?
There are many examples which shows the math where the roth vs IRA comes out as a wash if all conditions are the same. There is no break even point. Now we know things are not the same as we transition into IRMMA for medicare, RMD, and higher tax bracket/rates changes in the future. All of these points to a Roth being more advantaged.
90% of advisors ignore the difference between marginal tax rates and progressive tax rates, just like you're doing in your analysis. Have both
With only 1 million in tax-deferred assets, the RMD is about 40K/year. Even with 2 million in assets, the RMD is 80K. When you subtract the std deduction, you are still in a very low tax bracket. Don't go overboard in the desire to avoid taxes! The taxes in retirement come at you one year at a time. Converting forces you to pay extra taxes immediately. It may take many years to recoup this money.
The RMD stacks on top of SS, pension, partners SS and pension so unless you are basically pour to begin with in retirement with very little non RMD income the tax brackets will go up.
@@palerider7924 RMD is considered as ordinary income and is taxed accordingly.
@@eikoGoldstein yes I was pointing out unless someone has nothing else just RMDs alone the RMDs will jack up the tax bracket when combined with other sources of income. I'm facing insane RMDs overtime if I don't convert any deferred accounts to Roth.
@@palerider7924 I hear you. I face similar issues. All one can do is convert each year, up to your targeted tax rate. If the market plunges, go big on the conversion. But no one knows where the markets will be in 10 years, so I believe moderation is the key word. You've got a problem many would like to have! Best wishes and good luck.
Thank you for the access to Right Capital!! Very helpful!!
I love the ending statement in that “This is how we got into this situation in the first place!”
Good video. It highlights an important issues related to Roth conversions, which is focusing on the tax savings will make Roth a better choice in many more scenarios than focusing on the correct item which is after tax wealth. It takes much longer for a Roth to pay off when looking at after tax net worth. In fact, you can defer and pay twice as much tax and still come out ahead if those tax dollars are paid by you or your heirs at lower rates (%) than you would pay on the conversion
That kind of correctness only really matters if you have heirs. If you don’t end of life total wealth is generally irrelevant. Why bother maximizing something that you get no benefit from?
The main reason I'm thinking I'll probably do a conversion is to avoid the RMDs. I don't want to be forced to take out more than I need. I want to control what I withdraw.
Just did our first conversion. Seven more to go. Able to pay taxes out of brokerage which helps. Primary reasons for doing it is to avoid the widow tax with RMDs (we are not dying at the same time) and to make sure that my children do not get a tax bomb when they inherit what is left in our estate. Both kids are in high paying professional jobs and will be crushed by a taxable windfall.
What about step up in cost basis?
No step up for 401ks that are inherited. See changes under the secure act. Not pretty:
ok. First, thanks for doing this video because our advisor is suggesting the Roth conversions and only gave the executive summary. I'm a numbers guy and want to know the details, but also whether this is just a numbers game. And your starting question is close to what I'm wondering. Frankly, is it worth it? And like someone mentioned earlier, we're in our go-go years and all the conversions would be at 22% and taxes paid for out of the retirement fund, so we're now depleting our investments (via living and taxes) at a faster rate and we don't know how long we will live. I can't see the upside. Basically, my wife and I were shown a 25-year window by the advisor (just an executive summary with no details). I'll be 87 at that point. It's like the idea of waiting for social security. You can't predict how long you'll live, so it's best to live now. It's not just a money game where we're trying to max out how much money we can make, it's a life conversation. I'd recommend a slight change to the video. Don't hop around. You're familiar with the topic and we're having to process it as you go. So just walk a simple example all the way to the end and then answer the base questions; e.g., how does this help us in our day-to-day/month-to-month budget? How does this result in more money in our accounts that we live off of and how likely is that? I'd even want to see a graph of the break-even point. Basically, I'm just concerned about funding our retirement and not too concerned whether there's an inheritance. And if there is, since my heirs did not work for the money, anything they get they should be thankful for since the funds were meant to fund the retirement and the tax hit is what it is. Having said that, I do want to make sure my wife is taken care of.
I think even if everything is even, if one spouse dies early the other goes into single bracket and just gets destroyed with taxes. This is reason alone to convert.
Destroyed, that is until the next wedding....
@@TheRogerhill1234 🥰
Flexibility is a big benefit of Roth conversions, and that's why I don't split hairs quite as much as others because that itself has a value for me.
Agree with you and did mine for this reason
Excellent videos overall! I appreciate the one video where you included a single person as an example. Far too many retirement advisors focus on married couples only.
Also, please include some state taxation on retirement accounts in at least some of your calculations. I know states are different but many states do tax capital gains so how does that affect retirement financials? You can choose say 4 or 5% state taxation on capital gains as an example. Does it fundamentally change anything?
One angle to be mindful, breakeven age is a number. Most ppl age rapidly before expiration. The best retirement years are the golden age when there is health & $ to enjoy. Paying the lowest taxes in life will never be my goal.
I contribute half into traditional 401k and half into Roth 401k. It’s good to have options when I’m retired on how much income I can take out at a low income rate as well as what are things I can deduct. All I’m saying is don’t go all in on Roth.
My concern is the ‘unpredictability’ of tax policy. For example Joey suggesting changes to capital gains and now Cammys suggestion to tax unrealized gains. All this forecasting is assuming a hungry government is predictable. I predict, Roth accumulations in the future will be a target, and be taxed when they realize they need more money. Personally I prefer to continue deferring taxes as long as I can, let my heirs figure out how to play the game in the future
Correct answer. Never prepay taxes.
One thing I didn’t hear you mention is that another benefit of converting to Roth is that by avoiding RMD’s, you can also potentially avoid IRMAA.
Mentioned @ 2:20
Great info, my dilemma is that we have a sizeable amount of retirement savings in traditional IRA, just don't have that much cash to pay for the conversions, the only way would be from the conversation itself, and I'm not sure if that would be worthwhile.
Don’t be afraid of paying for the conversion using distributions from your traditional IRA. The real question is how much to convert and how much to convert each year. For this you need deep understanding of tax brackets, IRMAA, and the RMD schedule. Answer depends on your age, how large your IRA savings actually are and expected income in retirement (Social Security, pension, etc).
That’s why you need the software that he uses or some other modeling tool to be able to run the numbers
You can do that ONLY if you are already 59 1/2 where the part of your ira you use to pay taxes wont be charged the additional 10 percent penalty. The portion you use to pay the taxes is considered earnings and NOT a conversion so taxes will be assessed. If you are not 59 1/2 then you will pay taxes on that portion AND 10 percent penalty
Makes a huge difference if you pay the conversion taxes with cash!
If you have a lot of cash, you may be losing to inflation.
Don't forget you paid taxes on that money too. If you add in the pre-tax value of your after-tax savings you will see that paying the tax out of the IRA withdrawal is not so bad.
I think the question is, not how much taxes you pay or save, but what strategy yields the most money long term. I modeled the following. Assume you have $1M in an IRA, and the tax will be a total of $300k, and you covert the $1M over 5 years to stay in a lower bracket, and also of course spread the tax payment over the same 5 yrs. Then run out how much you have in 20 yrs, 30 yrs.
Now scenario 2: instead of converting, take that money you have in cash or equivalent, and invest it in S&P500 for 20 yrs, 30 years, you’ll have enough growth from that investment to pay the taxes on your RMD’s as well as the taxes needed to cover the withdrawal to pay the taxes. I even modeled the taxes going up 35% and it the accounts still had more in them at 30 years then they would have if you had paid the taxes now and converted.
So to me it seems to be a question of are you looking to pay less in taxes, or have the most money.
The models in Right Capital don’t seem to consider this angle. What you’re giving up on the growth of the money used to pay taxes now.
They do take that into account. They’re running all of that in the back end. That’s how it’s deciding what the tax adjusted value will be.
@@foundryfinancial I either didn’t explain it right or you aren’t understanding. What I’m saying is that it does not make sense to convert because of the amount that you make on what would have been used to pay taxes makes more than enough to cover all the taxes for RMDS and more.
@@gehartman I think this is why you should not pay the taxes from the conversion money, but from a separate taxable account. So the full amount can grow tax deferred. Then it becomes a comparison of taxes now versus taxes at a possibly higher rate in future. I think of it as effectively moving money from the taxable account into the Roth.
I’m in a quandry about this. I’m retired, 57 and single in CA w/ $1.6 in an IRA and $5.5 in a taxable brokerage account. I’m going back-and-forth on whether to convert over six years or kick the can down the road. I’d also have to pay the NIIT tax. I’m not keen on paying taxes over the next six years while at the same time wanting to manage IRMAA and Social Security properly. My heirs would be my nieces and nephews. Suggestions?
@@gehartmanI don't agree with your analysis. Whether there is savings or not depends on the individual's unique circumstances of which tax brackets they are paying at. If there were only a single flat tax rate, mathematically it would not matter at all whether you did a Roth conversion or not. The tax would be exactly the same. The only thing that changes is when you pay the tax. But we have tax brackets with differing rates, and that's where the magic happens.
So pay all those taxes in your go go years to have more money in your no go years? 🤔
great video ! thank you .
After 30 years of IRA/401k growth, we have a tax problem that 55% of Americans would like to have. A lot of people are retiring with only SS because they did not plan. Some have a small nest egg if they got to 45 and started putting it away. But for those of us who started with our first job at 24, that money it has been growing for 35-40 years. It is all growth. So yes, we have to take out a large chunk of money under RMD, but almost all of it is growth (free money) that we will be paying tax on. In every case, we will have more to live on than the SS person or the person who has a small nest egg. Also, if you go to 50 and you decided to start a Roth, that might also have time to grow just by your normal funding for 15 years. Also, you will have all of the RMD in the 10 %and 12% tax brackets too, so it's all good.
My thinking is! I’d only move $ to a Roth and pay the tax if we had a major market crash and my account dropped big time. 25 years ago I split what I had saved in a mutual fund that I had starter at age 18. I put 1/2 into a Roth and paid the taxes then. Figuring I would split my risk. I don’t trust the government to “not” change the game and try to tax that $ again! I tell the youth to split investments 50/50. Half Roth and half not. And to remember always take the Roth $ last!
Interesting...I have never heard of break even point for roth conversions. I have for social security, regarding age to claim. I may need to watch this video again to better understand this roth conversion breakeven point. Any articles about it anywhere?
I’m sure there’s writing on the topic. We explored this because a client asked about it.
One important thing you did not mention is the time value of money. The dollars you pay in taxes now are worth far more than the money you will get in later years to make up for the non-taxability of the Roth. I would predict that the present value of a Roth conversion is never going to break even.
David, that's not the case for me. I am single, so those lower tax bracket fill up fast. I built a large spreadsheet and was shocked that my future RMDs will be coming out at a couple tax brackets higher than what I saved when taking the contributions deduction. Roth was not a thing when I was saving early in my career. By deferring SS to 70, my spreadsheet shows Roth conversions in my first 8 years of retirement will bring those smaller future RMDs down into about the same tax bracket as I saved while contributing. I will be living off taxable brokerage accounts, while doing the conversions, at the lower qualified dividends and capital gains rates.
As far as time value of money, I adjusted all expected bond interest and stock returns by subtracting 3% for inflation so that all numbers on future years in the spreadsheet stay at present value. The cash account is even adjusted to show loss in value (in real terms) year over year.
Time value of money can be ignored if all future years in the analysis are displayed in today's dollars. This is easy to do by setting inflation to zero, but also subtracting expected inflation from whatever you choose for investment returns.
I've converted 95K 2 years ago and 98K this year of stock into a Roth. That account is already worth 327K. I paid the tax from savings outside the IRA. I'm 66 and am trying to convert all my IRA money before I hit RMD age. It really depends on where your money is invested. Many of my friends, about the same age, I believe are way to conservative with their funds and may outlive their money or have problems when big expenses come up.
If your doing this during good market years that's the huge unmentioned factor. I wouldn't think converting in a down market would be advisable.. any thoughts?
@@Terry-cg7kt Everyone's situation is different. It depends more on the length of time you can let the money grow and what type of investment return you are getting. It also helps if you can pay the taxes from other money. I'm fortunate enough to not need the money in my IRA accounts. I'm trying to leave a tax free nest egg for my wife and kids.
I like the certainty and future flexibility that Roth conversions provide, as well as the tax-free bucket my wife can draw from should I predecease her.
Exactly this. I call this, "solving for simplicity." It may cost me more now, but I can afford it and it is "buying" future simplicity when I cannot predict the future.
The certainty is that you choose to pay your marginal (i.e. highest) tax rate up front that you could have dodged with traditional contributions, and now that taxed money can't grow for you and can't be Roth converted later at lower income tax brackets.
@@ordinaryhuman5645 I'd be very pleasantly surprised if my tax rate at any time in the next 40 years is as low as I'm paying right now. Converting now is a known thing.
And converting eliminated the uncertainty of future income tax rates, the uncertainty of that income on medicare and social security taxation, the uncertainty of RMDs, the uncertainty of taxes when needing to take an unexpected withdrawal, the uncertainty of my wife needing to deal with that should she outlive me, etc
@@ordinaryhuman5645 They didn't specify when these conversions take place... if one does the Roth conversions during the "golden window" between retirement and SS, you can choose your tax bracket. It would seem that most people with traditional tax-deferred retirement accounts over a few $100K would profit from converting up to a 10% or 12% bracket.
@@momhouser Even with SS, you still have control over how much you convert and which tax bracket you end up in. And it's not hard to keep that rate lower than your marginal rate when you were working.
That'll be even more true for younger folks today, because SS income is likely going to be reduced and delayed, and pensions will be long gone.
The thing you don't mention here which has a huge impact on the time line is the market return you are using for the calculation. Outside of a couple of years the market has been yielding consistently high returns for over 15 years and if your throw out a few years in the early 2000s and 2008 it's been closer to 30 years. If you're figuring that break even point using 6 - 8% returns compared to using 3-5% the break-even is a lot sooner.
To have a break even point, you have to have an initial cost. If you plan on spending the money, you have to pay tax. And, if you are going to spend the money, tax dollars are irrelevant. After tax dollars are the spendable portion which is the only thing that needs to be optimized. You have roughly the same investment options both pre and post conversion. The only thing that matters is the tax rate applying at the time of conversion. AxB=BxA, right? There is no benefit from tax deferral unless your tax rate decreases.
Comments on Eric @ Safeguard (my co-favorite YT finance guy) video that “break-even on Roth conversions” is a bit of a non-sensical question? If you fill a tax bucket higher than your projected and terminal tax rate, it will be a loss. Lower and you benefit. It’s purely tax rate arbitrage.
But don’t you have to consider the returns you are missing out on my paying taxes now vs later? It seems like there has to be more to it than just tax rates.
@@debratateisu92 - There is, but to a man with a hammer everything is a nail. If you are going to be mostly in "safe" and low performing assets in retirement, then you could consider it only a matter of taxation and you'll assume pessimistic return assumptions. But if you're planning to invest through retirement with a mind to long life and inflation protection, then it isn't just a matter of taxation and you'll think of the tax free returns. Assumptions are everything.
It feels weird to talk about a "break even" point with Roth conversions, because isn't the entire +/- related to a Roth vs Traditional in the tax rate at contribution(conversion) and withdrawal? As you say, it is complicated, but builed down to it's simplest form it's tax rate at contribution vs withdrawal. Spreading out the conversions and determining the withdrawals are ALL assumptions. If our assumptions are incorrect, then the calculations are incorrect. All we can do is make the best assumptions we can, right? We have to guess whether we'll have a LOT of years of VERY large RMDs or widow(er) penalties, etc. If someone knows that they'll have WAAAAAY more money in their traditional account than they'll ever need, AND they'll be passing that to their heirs, then that's one thing.
I feel ike calling it a "break-even" is kind of incorrect. Social Security has a break-even date when assuming only an internal rate of return. The ONLY variable in that equation is the IRR. A Roth conversion has about a million variables. It's hard for me to call that a break-even time frame. It's more of a: how does your specific situation, in the specific scenario that you've chosen work out if you only live x years, because that totally changes the tax rates which is the only thing that affects a Roth conversion decision.
It was developed in response to a client’s question, but people do need to realize there’s a payoff period and sometimes it’s simply not worth it. The longer you live the more eye popping the savings. But, generally I agree it’s not possible to calculate in the same way as say Social Security because there are so many variables at play.
My overall thinking when Roth first came out, was just to defer taxes, and let the 401-K money I already had, grow tax deferred.
With the bigger pool of money, i felt more comfortable taking more risk in the market.
More winners, than losers, so worked out.
I also view the Roth conversion as an upfront money grab by the Feds.
If i was younger, I would do the Roth with new money, and the longer duration to earn tax free.
Now 68, and retired 2 years, i am taking 401-K money to be in the 22 to 24% tax bracket.
Trips, discretionary spending taken out of savings, so no additional taxes.
I need to find the WSJ article that the break even point is way longer than most people realize. My financial planner recommends keeping it in the 401K as long as possible because you get the benefits of big numbers for even minimal gains in the market. Ah, here it is:
_"Unless converting to a Roth can yield a greater present value return than the after tax present value of the traditional IRA, it is not a compelling transaction. In English: if you pay 25% of the withdrawn amount as tax, you HAVE TO EARN THAT BACK to be even. And that's 25% less that's compounding until it is earned back"_
This is going off of the tax brackets not changing. If we will be paying higher taxes in the near future the earlier the better for Roth conversions.
The break even for social security is complex enough. 401k to roth conversations are way more complex. All that, and the government can just decide to change the rules. Interesting stuff tho.
A lot of the perceived "saved tax $$" is merely because one now has less $$ after the Roth conversion, thus one pays less taxes on less $$. It's counterintuitive, but consider: having more $$ usually means paying more taxes.
So your point about solving for *both* needs to be balanced.
One thing not considered is the devaluing of $$ over time via inflation. Those $$ lost up front are worth more than $$ paid as taxes later. You should recalculate these numbers with that in mind.
I agree with your statements, but we have no idea of what the tax rate will be in the future. I don’t foresee the rate staying the same or going down.
Something interesting about conversions is that it’s deceiving to compare taxes paid today versus taxes to be paid 15 to 30 years in the future. You really need to understand the escalation of the money owed now versus the scary RMD. The future RMD looks huge but so is the unrealized income from the money used for taxes today. If those funds used for taxes were saved and invested and earned about 6 percent per year they would also be huge when you are 75 to 90 years old. Also you need to face the fact that money will have different meaning when you are in the last few years of life, so the conversion is really for your beneficiaries and not yourself.
Thanks, their realistic life expectancy is 80 and 82, so convertions only good if retire early and have a big window? Don't really need the spousal longevity insurance as taking SS at 70 so is covered?
As I understand it, this is assuming an average market return. One of the biggest risks early in retirement is sequence of return risk…you get multiple years of low returns while also selling investments to live off of. If you have several years of poor returns right after doing a Roth conversion it seems the break even would take even longer. So on average it might be a good thing but worse if you do it and then have a period of low returns. At least that’s how I think about it.
As a hedge against that sequence of returns risk, here is a simple solution (you can make this more complex if you choose) put 3 years into iBonds or T-bills. If the market goes sideways or down, live off that cash. If the market does well, pull the money from the market for that year. A 3 year cushion will smooth out most bumps. I have been doing that for 6 years and no issues, even when market took a dive during Covid. Sound too good to be true? Run some scenarios with your own portfolio and calculate the results
If healthy, using leverage of life insurance owned by ILIT or kids on one or both of parents would be way more tax efficient. If you then do QCD’s for RMD, further increase tax benefits
Boy, were you sold a bill of goods to suggest life insurance.
Any ideas or videos on ways to maximize Roth conversions while at the same time minimize Affordable Care Act costs?
Careful planning. It’s possible but tricky
@@foundryfinancial I think that would make for a great video (with some examples) if possible. Thanks. 🙂
This was my issue. I would have loved to do ROTH conversions prior to Medicare but the extra income from the conversion would have reduced the premium tax credit I was getting through the Affordable Care Act.
Link to the calculator tool? Or did I misunderstand that a link for it would be provided?
It’s there now! I forgot to post it.
@@foundryfinancialis the link there now? I still don't see it? Thanks!
I break even on day one with my tax free Roth conversion that I do slowly over time and under taxable limits using the form 8880 retirement saver's credit to bump up my tax free zone from the standard deduction. Alas, the Secure Act 2.0 ruins the saver's credit, turning into a deposit while Roth contributions are no longer eligible for the credit and you can no longer use IRA contributions to lower your taxable income to make yourself eligible for the credit. So while I can no longer convert all of our tax deferred accounts to our Roths it doesn't really matter as I can use what's left for income for the first 11.4 years or so of retirement and still remain income tax free as our taxable income will be just under the standard deduction and exemptions if/when those come back.
If the couple in the example had no heirs, and planned to leave any remaining assets at death to charity, then it makes absolutely no sense to convert. Their traditional IRA (normally a giant tax bomb) is completely TAX FREE when it goes into the hands of the charity
What about opportunity costs of paying tax now vs investing those tax payment funds.
The problem with opportunity costs when it comes to IRAs is that the effect of the opportunities are different for pre-tax, post-tax, and taxable.
My concern is when and if the government will start taxing Roth.
I agree. You absolutely have to consider this. It is not a conspiracy theory. The government is desperate for money, and the "rich" are a prime target.
I wouldn't rule that out even though most financial planners assume that it will never happen.
@@beemankunkel It would be very unfair and break every promise the government has made. But they will use the standard line of "the rich can afford it since they have been so lucky." And they will say it is only on Roth IRAs over, say, $10 million. But could it happen? Absolutely.
This is one of the key reasons I didn't focus savings in a roth
Great never thought about that
Sooner than you think if your spouse passes. Might also help if SS gets means-tested.
I’m 51 and retired with 1.3 million traditional 401k money, $400,000 Roth 401k money, and I just ran out of taxable account money. I am extremely frugal with a budget of only $23,000 last year. My healthcare is covered by the VA. As far as income between now and 59.5, I can work part time and/or deal with the early withdrawal penalties. Is there a scenario for me where conversions make sense?
The only way this works for anyone is to have a very large (multiple years of living) savings account where on paper you earn no money. If you don't have that you can't 'fill up the 15% tax bracket' with a conversion because you are already higher than that living off of your pre-tax 401k.
If you withdraw at the amount much less than your current salary like (3-4% a year which can be 10-50% of your current salary) in your retirement, you should be in a much lower bracket than you are currently in so in that case, the money you saved on tax right now is more than what you will pay in the future. The current money is also worth more than the future money due to inflation (time value of money).
My perspective is to focus mostly on spendable dollars versus taxes paid. If I end up with more spendable dollars, and I pay 3x more taxes, who cares. I need more money for my wife and I period. No money is your money until you pay taxes. However actual dollars matter more because no one takes equity for groceries. This doesn't apply to everyone, just us. Also, should either or both of them die prior to RMDs, those tax savings disappear quickly due to the widow's tax trap. I am a firm believer that you pay taxes when you have to. Also, I am sure I missed this, but if he is converting all this money, how does he stay in the 12% tax bracket when he is working for $120k/year. If he stops working, and converts, then he has zero income during the conversion years because it all goes to ROTH. Please show me where I missed this, thanks.
One thing planners never talk about is the tax situation of the people, in this case my kids, who will inherit my Roth or traditional IRA money. If their marginal tax rate is less than mine, a Roth conversion makes no sense at all. RMDs are not some boogeyman to be feared. Just take the RMD, pay taxes on it and invest what you don’t need in a taxable account. That account will pass to them tax free. Simple.
I can't understand anything with showing more options at once. An Excel model with charts would be way more useful
Will the Roth ever go away? Meaning would the government ever take away this option? Or change it so that it becomes taxable somehow?
There’s a always a risk.
@@foundryfinancial Where’s the crystal ball when you need it?
I don't think it is a time question. If you convert a dollar in the 22% tax bracket today and withdraw it in the future in what would have been the 22% bracket you broke even.
Actually, you lost because the tax paid now would not grow over time because you paid it to the govt. So trading 22% today for 22% in the future is not a good trade. Where it makes sense is if you successfully invest in high risk high return, where in the future you would pay a higher tax rate (eg 35%).
@@AstuteCA - Indeed, the pro/con debates about Roth IMO usually revolve around optimistic vs pessimistic return assumptions.
Not to mention the positive affect a Roth has Social Security versus a 401k or IRA
I’m a bit confused about your math. Example: if I convert 100,000 to a Roth I pay 20% in tax. 80,000 goes into my Roth. At 6% rate of return it will take about 4 years to turn that 80,000 back to 100,000. I would think that would be my break even point.
You should never pay the tax with the money being converted. The entire $100,000 should be converted, and tax come from somewhere else, so the entire $100k grows.
@@jdgolf499Where else does it come from?
@@jdgolf499 Agree if under age 59.5 as the tax paid from the conversion would trigger early withdrawal penalty. Disagree if over 59.5. Ideally, it makes sense to use other funds to pay the tax as you then essentially are making an extra contribution to your Roth that doesn’t count against the annual limit. Reality is that many people don’t have large balances in non-retirement accounts. So, those folks over 59.5 are just fine paying the tax from the conversion.
If you have the $20,000 to pay the taxes up front, you should take that $20,000 and invest it. Don't waste it on a Roth. Roths are all smoke an mirrors.
@@dublinbluetune Huh? Why can't you invest from within the Roth? Anything you can invest in from an IRA you could do the same from a Roth.
What's the best spreadsheet or calculator for visualizing what marginal tax bracket the conversion puts me in? I retired at 39. I want to convert my IRA slowly to only fill up the lowest income tax buckets.
Key question: does the analysis include the opportunity cost of the capital you are expending today to pay the taxes? If it doesn't, then it seems to me that the Roth conversion is strictly a play on whether your taxes in the future will be lower or higher than present.
It is also going to grow tax free, and you may live another 30 years!
Why pay tax before you have to and significantly reduce the principal income base of your account by giving away a large part it?
The idea is to use extra money to pay those taxes, not the funds from the 401K (assuming, you have it)
I agree. Invest what the money that you would have used to pay tax on the conversion in a S&P500 EFT and it’ll grow more than enough to pay the taxes on what you didn’t convert, PLUS, what your pulling out to pay the taxes with. Because that will also be taxable.
@@TheRogerhill1234 money is money no matter where you draw it from. you pay $200,000 to $300,000 in taxes and therefore have that much less
@@jaynelson8304 Since I have no extra money to convert my Million dollar 401K, I guess I am paying my taxes over time....
Confused, 1) how is fill up the tax bracket 12% realistic? 2) When they make the conversion, to account for the tax payment, you either have to reduce the ROTH by $300,000 (est for taxes) or add the $300,000 that you would have paid in taxes a deferred annuity to make the example equal. How did you account for that?
How old are Phil and Claire at conversion? Did I miss it…
Where is the Link to the calculator tool? is it provided?
If I'm converting $200,000 a year for five years isn't each conversion going to automatically put me in the highest tax bracket for those five years?
The highest? I doubt it. Unless you have other income.
MFJ, $200k is in the 22% bracket this year. Single, with the standard deduction, in the 24% bracket. “Highest” brackets start at over $600k. 35% starts at $243k and $487k. Other income obviously will affect this - I wouldn’t convert if you already have $500k in earned income. And “five years” - it could change with reverted/new brackets in 2026.
I don’t want to convert that much now because it will raise my Medicare premiums substantially. Met with my CPA. I can convert only about 75k per year and keep my Medicare premiums reasonable.
@@artsie8282 So, that's fine. You convert a little to take the edge off of things, right?
@ Great question. I won’t be spending it. I am just trying to avoid future taxes
A conversion doesn't make sense for us if you need the money to live off. Plus limited taxable cash to pay for the conversion. Also, we will claim SS earlier at 62 y/o because my wife has breast cancer. My lifetime pension is affected by WEP & GPO!
Correct. It mostly makes sense if you can leave the money in a Roth for a long time. It can also make sense if you want to pay to simplify things for heirs and or if they'll be in a higher tax bracket than you. This happens when one spouse passes away and the other pays single tax rates, and is called the widow tax I think.
This is great but sometimes I wish you would use account vales and savings balances that are a bit more realistic, like 500-600k in retirement and maybe only 80-100k in savings and SS of 3600 less vales are closer to the average...
If that is your case, than nothing to worry about as you will be in the 10-12% tax bracket; making your RMD's and IRMMA a mute issue (as for yourselves). For you, converting does not buy you anything other than leaving your heirs with some tax free dollars.
It's mostly pointless to discuss this until whatever version of Trump's tax/tariff package is passed. One possibility is that if income taxes are eliminated, all current IRAs/401k's/etc effectively become ROTHs for free.
Nice video, but trying to follow along, I noted the free account has much fewer tabs at the top, and I don't seem to be able to adjust some of the tax stuff and the investment stuff. E.g. it does not seem to let me adjust how much capital gains or the dividends so I'm always stuck in a much higher bracket so that might impact my coputations. But my calculation using right capital shows that if I keep giving to charity along the way, there is never a break-even for Roth, i.e. I always pay more tax with roth. Does that make sense given your experience?
why do you stick with such a low tax bracket? I am older and still working, is it worth doing for me? No way I am getting into that low a bracket.
One item that has limited my IRA to Roth IRA conversion. I am eligible to Affordable Care Act. To be able to get this, I can have a maximum income of $60240 this year.
I’ve run the numbers on this for clients and it’s normally with it to lose the ACA subsidy rather than to delay. But it’s a case by case basis.
How would a 34000 per year pension affect that scenario?
A lot, if it's taxable income. We've found that a pension (while great to have the guaranteed income) reduces the amount of flexibility you have to control taxes through these kind of strategies because you are easily pushed out of the best (lowest) tax brackets.
Sorry, I do not see the link to Right Capital to run calculations?
Because I forgot to put it there. Look in a minute.
Do we pay the taxes on the Roth conversions when we file taxes, which is by April the following year?
With birth rate falling & a higher percentage of the population being in the retirement age bracket. I think the government will be forced to abolish the Roth promise of no taxes on withdrawals. Especially in light of the fact that older Americans will be a heavier draw on the system through Social Security & Medicaid. That and there will be many who have not saved at all & it will seen as class issue. I'm afraid that the massive amount of capital in Roth retirement funds is going to be way to enticing for the government to ignore. I hope I'm wrong...
not sure the best way to contact you. I signed up for access to foundry and never got anything back via email. Does it take more than three days? I can just try again but wanted to check.
Hmm. It should be automatic. Email my assistant: Jeannette@foundryfinancial.org
How about this. I move 50,000 from an IRA to ROTH and pay a 22% tax which equals 11,000 in tax. I know have 39K in my ROTH. Let's say the market averages 10% a year in growth which I think you will find it does. The next year my 39k in my ROTH now has grown 3,900, so I now have 42,900 at end of year 1. 39K + $3,9K=42.9K I make another 10% for the next year and I make 4,290 added to my 42.9K and I now have 47.190K end of year 2. The next making 10% "the market average" I make 4,719K plus my 47,190K I now have 51,909K which is well over the 50K I started with at end of year 3. This of course does not include inflation, but you did not say if your model included that as well and what number your model uses, and I am only 3 years out from the original event. And it depends on your tax bracket as well but you would have to pay taxes on the IRA withdrawal weather you spend it or put it in the ROTH. So the real extra cost of doing such a move depends on how much you move at a time and the tax bracket it puts you in. So just do a IRA to ROTH ladder and call it good, real good and live off the ROTH tax free interest the rest of your life and give the tax free ROTH to your heirs that they can hold for 10 years tax free before they have to withdraw it. I think you make it to difficult to understand and your model does not explain how it gets the numbers it does as far as I can tell. Thanks for the thought for food.
Great video. If I am in my early 50's and my Roth conversion strategy has me breaking even in my mid-80's (which is also my current life expectancy) and I have no heirs to whom I wish to leave tax-free money, do Roth conversions make sense? If it turns out I live well past my breakeven, I will have some "extra" money at that point, but will not likely be able to spend it to enjoy things like I would have if I hadn't done the conversions in the first place. If I have shorter life expectancy, then I have lost the "gamble". Also, if I do in fact pursue conversions, can I anticipate some of the potential tax savings in the future and take those savings as additional spending now? Thanks.
Be careful with the timing of a Roth conversion with respect to when you start Medicare.
12% tax rate.wonderful. Most folks would be in the 21% tax rate with SSA and other income.
What is the name of this software you are using comparing strategies?
The video is using "Right Capital". I believe they are offering free (limited) access in the description.
I don't see a link to the tool here... unless I am missing something.
In all caps it says Right Capital link about halfway down.
You gotta pay taxes now or later. Pay up front and let it ride tax free
Yes but I converted mine when the market had tanked. Now it has made more profit than I paid in taxes and still growing.
@@joycewright5386 I did too, back in like 2008. Now the balance looks good, but I often wonder what the balance would be if that money I paid in tax had been left there to grow for the last 16 years.
@@markroberts8975I think you made the right move, because that money is now insulated from any future tax increases. I think that’s the one piece that folks don’t consider, tax rates are not fixed, they can go up so having money growing that is immune to future taxes is probably the closest thing any of us will ever get to having some offshore account beyond the reach of the IRS.
What if you are a high earner? I was told it makes no sense to pay a higher amount now.
@@globalfamily8172 ROTH conversions need to take into account your current tax liability to make sense. This is why doing some backdoor ROTH conversions in your 401K now make sense, because those need 5-years before you can start withdrawing the growth tax-free. Assuming you have enough there and in other accounts that limit your tax liability when you retire, you can live off those while you start converting large chunks of your 401K to ROTH in retirement, up to whatever tax threshold you are comfortable with. It's going to be a multi-year process. And probably worth your time to talk with a live CFP about your situation.
Hmmm...$1M at $200K per year conversion brings you to zero in Traditional. Sounds good at first, but just do the math so you don't lose out on the yearly standard deduction. If the standard deduction is $30K, then you get that $30K free of taxes, every year.
I'm considering a Roth IRA conversion. How long did it take for yours to pay off?
In the best case your converted asset rises dramatically and it pays for it self quite rapidly. Some of mine paid for the taxes by their increase in the same year. That is the best case and you should never depend on that. I'm not counting on it happening in the future. But it happens sometimes for those converting into certain equities in a bull market.
If you have $1,000,000 in a pretax 401K and you have to take a first time Required Minimum Distribution - it will be $38,000. If Trump gets in and makes it so you don't have to pay tax on your Social Security benefits, you will owe $500 in taxes on the $38,000 if you are married and both 65 years or older
If you think they’ll end tax on Social Security, I have some oceanfront property in Kansas you might be interested in. :)
Actually if all you have is the RMD on $1m of $38k plus SS, after the standard deduction of $33k joint over 65, even under the current rules your SS is not going to be taxable and you will be in the 10% bracket on the $5k AGI so he or she is correct.
I am trying the free tool, however can not get any 401k (tax deferred) numbers to show up in the data. Guess I am doing something wrong.
What is Right Capital?
It's the modeling software he was using to analyze the sample case.
This was potentially a great topic, but the instructions in the video didnt flow well and difficult for caveman peabrain for myself. Maybe a quick summarization at the end of the steps to how to calculate
IT WILL TAKE LESS TIME AFTER 2026 AS INCOME TAX RATES WILL NEVER BE AS LOW AS THEY ARE TODAY.
AS LONG AS YOUR CONVERSION TAX LIABILITY IS UNDER 30%, YOU ARE BETTER OFF CONVERTING AS MUCH AS POSSIBLE, ESPECIALLY BEFORE RMDS ARE MANDATORY.
The theory of Roth is misleading. In no case does prepayment of taxes, sometimes by decades, make any economic sense. Traditional IRAs grow tax free too, you only pay when you withdraw...similar to stock market transactions. In Roth, you lose out to economic price change over time, like inflation, you lose the 'yearly tax deductions', and with Trump, if he swaps out tariffs for income taxes, Roth people will now have prepaid taxes on income that you will not in the future. Traditional for me.
There are so many reasons not to convert. I just retired at 60 but my wife still works. With her salary and my IRA withdrawals, we keep our marginal federal tax rate just under the threshold where it jumps from 24 to 32%. If I were to begin to convert to a Roth, even over a period of 5 years, we would be paying marginal rates at 32-37% on literally several million dollars in converted income, resulting in several hundred thousand dollars in additional taxes, just from the higher brackets. No one knows, of course, what will happen to taxes in the future (current rates expire at the end of 2025), but even Dems seem hesitant to raise tax rates on families earning under $400k. And, I can plan income realization for higher rates once they are known. Even though I realize I will pay income on SS and may pay more for Medicare, these potential savings are dwarfed but the tax rate differences from converting. I don’t need a software program to tell me a conversion is a huge financial loser for me - I know it makes sense for some.
Tell someone with a high pre-tax portfolio "you only pay when you withdraw" and see what their reaction is. Tax preparers usually hate Roths because they only see it in terms of taxes paid in a single year. I'm a Roth multi-millionaire and I have a diff perspective. People that have no flexibility in their choices are like rats running in a maze.
Roth contributions when tax deductible Traditional contributions were an option may have only ever made sense for boomers with pensions and generous SS benefits, because their guaranteed income would push them into a higher bracket in retirement before pulling anything from their traditional account.
For younger folks with no pension and delayed and diminished SS benefits likely, tax deductible traditional contributions are a no brainer.
@@ordinaryhuman5645 All depends on what you end up owning and how it performs later on, which you won't know until later in your life.. I've never made a high income and never had any chance of a pension, but I'm a saver and savvy investor with pre-tax, Roth, and taxable buckets. Dividends from taxable bucket from investments two decades ago along with SS when I'm forced to take it will drive me into higher tax rates. Glad I've poured money into Roth IRA (incl spousal Roth) and 401k Roth. I continue to make Roth conversions every year. I'll probably never spend the Roth money and pass it onto my heirs.
it pays off the first year.....and then evey year after.....
We all know that no one can time the market reliably. That said, I’d be very cautious holding assets with inflated current valuations and converting them to Roth IRA. You risk paying a big sum of taxes today and holding the bag on much lower valuations tomorrow.
In other words if you convert your $1,000,000 ira full of VOO today and the stock market drops next month, with the S&P down 40%, then you just paid a ton of taxes on assets that now are worth a fraction of what you just paid taxes on.
Just something to consider as the stock market continues its historic bull run.
If the market flies.... it is quick payoff because of the gains in gain on gains....
Not sure why the calcs being pimped is so simplistic....
It is ZERO Taxes ever forever....
Soooooo.....
I stopped with pretty long ago &&&& I got into mega backdoor brilliance of my employer....
So I maxed that out aftertax.... instead of loading up brokerage...
That does play into it, but of course that’s a big unknown.
A Roth Conversion breakeven has nothing to do with time. That is the wrong way to look at it. A Roth Conversion breakeven is determined solely by tax rates. Are you paying a lower tax rate today than you (or your heirs) would be paying on the withdrawals in the future? It really is that simple. The reality is future tax rates are uncertain. So, you make an educated decision and don’t look back.
This isn't entirely true if you pay taxes with outside funds; if those funds are invested and pay dividends, there is a "tax drag" on the invested funds so the break even tax rate goes down over time.
I dont care to leave my kids millions of dollars, so I won't be doing them. Plus, that will be money out of the market, and I expect returns to be much lower than present
Convert to Roth ASAP and never worry about the torpedo tax, the widows tax, RMDs, large medicare premiums and your inheritance being taxed to death. This analysis is over.
I would like to use the software you demonstrated. Could you please tell me where I can obtain it? Thank you
Realizing the many variables of a conversion, projecting success on life expectancy into late 80s and 90’s in this model or any software, is a rare exception. The very best if you’ve made it to 75 is early to mid 80’s ON AVERAGE. I just get annoyed with expert podcasts that say, “…if Sara lives to 102 and Harry to 89”, then this makes sense. Market conditions, gains or losses and unpredictable tax rates in the tiny window of maybe at best the last 1/4 of your life much greater impact on your tax burden vs how long you live.
Not saying ignore ROTHs, but these projections are getting ridiculous and a conservative approach is best.
Pardon the rant. In my layman’s opinion.
Seems like significant growth of converted money in a tax free Roth account is a X factor besides potential higher taxes in the future when deciding to do Roth conversions. For example a growth rate or 10-15 percent per year in a Roth account can quickly reduce the break even age. Thoughts?
For sure. But it’s hard to know what those returns will be.
Not true. Returns do not change the math (unless your account loses value in which case Roth loses big time). Otherwise whether your account grows by 2% or 200% does not matter. The only decision is regarding the % tax paid.