Qualified dividend and LTCG are taxed at zero, 15% or 20% depending on income. To be in the 20% bracket you need to be in the 37% fed bracket or pretty close which would put you near the top 1% so using 15% is valid for most.
It would still make sense to convert even in your 60s due to RMDs which could force you to take more than you need or want to draw then force you into a higher tax bracket and mess up your Medicare rate and cause your SS to be taxed.
Having NO traditional money makes no sense! A small amount of traditional allows withdrawals at the standard deduction and lowest brackets. Unless the government starts looking at Roth values in deciding taxation, there will always be some option to take money from traditional at 0-15%. We are in that situation now in retirement. At an income of about $100k our effective tax rate is about 8.5%. We are pulling from traditional first, while allowing Roth and HSA to grow. Future RMDs will not push us past this point. All of our money going in was while in the 20-30% brackets(including for the HSA money!)
I just switched up my Roth IRA to 50% SCHD, 25% SCHX, and 20% SCHG. My Roth 401k is 70% vanguard S&P 500 index, 20% vanguard growth index, and 10% vanguard international index. Seeking best possible ways to grow $350k into $1m+ before retirement in 5 years.
Agreed, I'm in line with having an advisor oversee my day-to-day investing cos, my job doesn't permit me the time to analyze stocks myself. Thankfully, my portfolio has 5X in barely 5 years, summing up nearly $1m as of today.
thanks for putting this out, curiously inputted Katherine Nance Dietz on the web, spotted her consulting page and was able to schedule a call session, she actually shows a great deal of expertise.
Some fund custodians complicate conversions. Your fund custodian may not allow you to convert the entire amount and pay the taxes separately from personal funds. Some custodians insist on liquidating 20% of the fund value and sending that to the IRS. If only 80% of your investment can convert to a Roth, the earnings down the road will be reduced. This may affect your decision.
Almost everyone will have taxable income in retirement. Even if you went all Roth..company matches are typically only ever pre-tax and subject to rmd’s. Also social security and pensions will create income. Of course there are conversion strategies and loss harvesting/charitable giving strategies that mitigate
Your retirement tax bracket is not the right calculation. In your example of being in the 37% bracket now and in the future, you pay 37% on the entire conversion all up front using today’s dollars. When you defer you pay at a mix of rates and only a portion is taxed at 37%. In fact at $1.2m of income the average will be about 30%. Also you don’t pay it all at once you pay it on RMDs slowly with inflation adjusted dollars. Also how young you are has no impact. If investment rate of return is the same and % tax paid is the same, you come out the same whether it is 5 years or 50.
I’d disagree. I’m assuming making the same income (before conversion or before taking distributions in retirement). In either case the income stacks on top of what income I’d already have and at the same rate. Thats my situation and many clients I work with. I realize some people have less income in retirement (no w-2 job or biz) and will have a lower rate in retirement and I state that in the video. And yes, the investment returns make a difference. If I converted $10k of traditional to Roth and paid say $4k in total tax but I turned that $10k into $1M from investment returns, then I have $1M coming out tax free. Instead of $1M coming out with $400k going to taxes. I realize I lost $4k in taxes (that could be invested in taxable accounts) but if I get excellent returns on the $10k I converted to Roth I’m better off converting.
Incorrect. First of all If you could turn $10k into $1m you would do that and not be doing you tube videos. At a minimum that would take a couple of decades. Let’s fantasize for a minute and say you can. That would also mean not paying the $4k of tax to convert and investing the $14k in the same magic investments you would have $1.4m. Year one RMD on that is about $50k. After inflation adjustments to the standard deduction and tax brackets there will be very little tax, let’s be conservative and say $6k which is high. Yes RMDs go up each year but brackets go up as well. Get out your fancy software and see how long it takes to make up the $400k.
@@keithmachado-pp6fv you are correct! Most people don’t understand that Roth conversions cause one to end up with LESS total money. All that “tax free growth” will be a smaller number than the pretax account. It is strictly an issue of taxation of the 2 pools of money(including secondary taxation effects). Absolutely the taxation can work in your favor on Roth moneys, BUT it “depends”, it is not a given as many assume. For some over converting leads to less money and wasted tax payments. I have used New Retirement to model Roth conversions, and that program takes into account various parameters to give an estimate of when and how much to convert. For us I was surprised how little was recommended, but it makes total sense when looking at the details.
Unless the software can address the following issues it is not going to be accurate 1. When will you (and your spouse die) 2. What legislative changes will be made to tax rates in future. 3. What will the inflation adjustments to SS and tax brackets and IRMAA be 4. What will your heirs tax brackets be in the 10 years after your death (see item 1 for exact dates). 5. What will the investment gains or losses be on your IRA each year. 6. What will the taxable income be from all your other sources. This requires knowledge of how they will be invested, as well as interest rates or gains or losses be in the assets. 7. What state you will be living in each year. 8. Any legislation changing SS or IRMAA or NIT. 9. How much you will spend each year and where you will pull that money from.
@@keithmachado-pp6fv again you are correct! However, the New Retirement software does allow some modeling of various parameters. While many of these are at best big guesses, several are somewhat more predictable, and running various scenarios at least helps understand some of the pros and cons of conversions. When I run our best guess probability assumptions, it is apparent that we should do only minimal conversions. The other big issue I have with most Roth calculations, is that they tend to look better with very high longevity. The majority of people currently in their 60’s will not live past 90, so using high longevity numbers clearly leads to bias in favor of conversions that is not necessarily warranted. Clearly converting in the 10-15% brackets will be no worse than a wash, but beyond that the variables become virtually unpredictable.
you keep saying that that calculator makes assumptions, when in fact they are just defaults. it's obvious that is the case because it allows you to change every field. and you should change the numbers to match your situation. that's just how calculators work. defaults are not assumptions. but then you turn completely around and make all kinds of assumptions even for your very own situation. you can't be 100% sure what the tax rates will be in a year's time let alone 20 years. by not doing anything, the trump tax cuts will end next year. but there's also talk of extending it. so yeah, we don't know. and we sure don't have a crystal ball 20 years into the future. and at your age, why anyone would want to convert $250K in a single year is beyond me. you should break up into amounts that edge up to the limit of your tax bracket and stay in your current tax bracket to save on taxes. then do the same the next year and every year after until it's all converted. converting $250K all at once is sure to jump you into at least the next tax bracket if not two. at your age, you have at least 20 years (your assumption), so what's the hurry. i'm all about converting to roth. but i don't pay more than i have to to do it.
If you convert all $248k in one year and you are 65 or older you will cause the following. 1. IRMAA surcharges 2. Additional 3.8% tax on all investment income. 3. Bump you into a higher tax bracket. Unless you have $5m+ in IRA you are unlikely to benefit from converting $248k in one year given above.
Sorry, but there is a fundamental conceptual flaw in your analysis, and the calculator has reasonable defaults. When you make the roth conversion, you are paying tax at the INCREMENTAL tax rate (i.e. your tax bracket). However, when you are making withdrawals in retirement for living expenses, you are not paying a total tax at your tax incremental amount because of the progressive taxation. For example, you are paying zero tax on the first $27K due to standard deduction for income withdrawals. In my case (I am retired and using traditional IRA as income), I would pay 22% on a roth conversion up to the next tax bracket. However my total federal tax on withdrawals for income is14% (total fed tax/total income for the year). Your analysis only applies if the future withdrawal is above and beyond what you would withdraw as your income source. Your analysis is quite incorrect.
I don’t care about the calculator. Unless you have over $1m in deferred i am challenged to see any benefit from converting unless you have so much other income that you are already in the 25%+ bracket before any distributions from IRA. I plan on managing my other income so by age 75 all I have is IRA withdrawals and SS. I will take advantage of the standard deduction and low tax brackets both adjusted annually for inflation. No one knows what future tax rates will be so assuming changes is no more correct than assuming no changes.
Neither you nor I know what will happen to future tax rates. Don’t confuse tax rates with tax collections. When the Corporate tax rate was cut we actually had more tax revenue as companies stopped moving operations offshore for tax purposes. I would argue that lower long term cap gains rates would incent more people to recognize some of the capital gains that otherwise may never be taxed as heirs get a step up in basis. Bottom line is no one knows the future.
Impossible? You must be watching those Ed Slott and David McKnight doomsday videos (I do think David is good but Ed is too Roth convert is for everyone).
Stupid wordy presentation. If you need to make this decision correctly you need to generate a forward looking income plan and then a forward looking tax plan. You look to see if you are actually at the best location to make a conversion or maybe when you retire, delay receiving SS for a few years and make the conversions later. The forward looking tax plan helps you see holes in your current plan and optimize conversions or withdrawal strategies that help increase you overall wealth (after taxes). But the author is assaulting the calculators bad assumptions and putting in his own bad assumptions with a fake basis for doing so. You're going to make 14% on your investments. You make Dave Ramsey Proud. You know when you fill out these calculators you have to figure out your personal situation and put in correct numbers. Without a reasonable idea what these numbers are or should be then expect: "Garbage in - Garbage out"
Ask Mat: matsorensen.com/ask-mat/
Qualified dividend and LTCG are taxed at zero, 15% or 20% depending on income. To be in the 20% bracket you need to be in the 37% fed bracket or pretty close which would put you near the top 1% so using 15% is valid for most.
It would still make sense to convert even in your 60s due to RMDs which could force you to take more than you need or want to draw then force you into a higher tax bracket and mess up your Medicare rate and cause your SS to be taxed.
Having NO traditional money makes no sense! A small amount of traditional allows withdrawals at the standard deduction and lowest brackets. Unless the government starts looking at Roth values in deciding taxation, there will always be some option to take money from traditional at 0-15%. We are in that situation now in retirement. At an income of about $100k our effective tax rate is about 8.5%. We are pulling from traditional first, while allowing Roth and HSA to grow. Future RMDs will not push us past this point. All of our money going in was while in the 20-30% brackets(including for the HSA money!)
Agreed. I’m not a tax planner but in my opinion, there are several missteps in this video.
I just switched up my Roth IRA to 50% SCHD, 25% SCHX, and 20% SCHG. My Roth 401k is 70% vanguard S&P 500 index, 20% vanguard growth index, and 10% vanguard international index. Seeking best possible ways to grow $350k into $1m+ before retirement in 5 years.
these are dividend stocks not growth, but not bad for 350k... consider financial advisory so you don’t keep switching it up
Agreed, I'm in line with having an advisor oversee my day-to-day investing cos, my job doesn't permit me the time to analyze stocks myself. Thankfully, my portfolio has 5X in barely 5 years, summing up nearly $1m as of today.
@@Biggerstaff4 this is huge! would you mind revealing info of your advisor here please? in dire need of portfolio rebalancing
Katherine Nance Dietz is the licensed advisor I use. Just research the name. You’d find necessary details to work with and set up an appointment.
thanks for putting this out, curiously inputted Katherine Nance Dietz on the web, spotted her consulting page and was able to schedule a call session, she actually shows a great deal of expertise.
I used NewRetirement which takes into account all the opportunity cost factors as well as tax brackets of future income
Nice
Some fund custodians complicate conversions. Your fund custodian may not allow you to convert the entire amount and pay the taxes separately from personal funds. Some custodians insist on liquidating 20% of the fund value and sending that to the IRS. If only 80% of your investment can convert to a Roth, the earnings down the road will be reduced. This may affect your decision.
Thanks Matt! Very, very logical on many fronts!
Mat, really good walkthrough. Thank you for the detail and warnings!
Of Course. If you have any questions, feel free to click the link pinned to ask and maybe I can answer it in a future video.
I think I missed something. If you have no taxable income, won’t your future tax rate be zero?
I think I missed something. If you have no taxable income, won’t your tax rate be zero?
Almost everyone will have taxable income in retirement. Even if you went all Roth..company matches are typically only ever pre-tax and subject to rmd’s. Also social security and pensions will create income. Of course there are conversion strategies and loss harvesting/charitable giving strategies that mitigate
Thanks Mat
You're Welcome! Thank You for watching
Your retirement tax bracket is not the right calculation. In your example of being in the 37% bracket now and in the future, you pay 37% on the entire conversion all up front using today’s dollars. When you defer you pay at a mix of rates and only a portion is taxed at 37%. In fact at $1.2m of income the average will be about 30%. Also you don’t pay it all at once you pay it on RMDs slowly with inflation adjusted dollars. Also how young you are has no impact. If investment rate of return is the same and % tax paid is the same, you come out the same whether it is 5 years or 50.
I’d disagree. I’m assuming making the same income (before conversion or before taking distributions in retirement). In either case the income stacks on top of what income I’d already have and at the same rate. Thats my situation and many clients I work with. I realize some people have less income in retirement (no w-2 job or biz) and will have a lower rate in retirement and I state that in the video. And yes, the investment returns make a difference. If I converted $10k of traditional to Roth and paid say $4k in total tax but I turned that $10k into $1M from investment returns, then I have $1M coming out tax free. Instead of $1M coming out with $400k going to taxes. I realize I lost $4k in taxes (that could be invested in taxable accounts) but if I get excellent returns on the $10k I converted to Roth I’m better off converting.
Incorrect. First of all If you could turn $10k into $1m you would do that and not be doing you tube videos. At a minimum that would take a couple of decades. Let’s fantasize for a minute and say you can. That would also mean not paying the $4k of tax to convert and investing the $14k in the same magic investments you would have $1.4m. Year one RMD on that is about $50k. After inflation adjustments to the standard deduction and tax brackets there will be very little tax, let’s be conservative and say $6k which is high. Yes RMDs go up each year but brackets go up as well. Get out your fancy software and see how long it takes to make up the $400k.
@@keithmachado-pp6fv you are correct!
Most people don’t understand that Roth conversions cause one to end up with LESS total money. All that “tax free growth” will be a smaller number than the pretax account.
It is strictly an issue of taxation of the 2 pools of money(including secondary taxation effects). Absolutely the taxation can work in your favor on Roth moneys, BUT it “depends”, it is not a given as many assume. For some over converting leads to less money and wasted tax payments.
I have used New Retirement to model Roth conversions, and that program takes into account various parameters to give an estimate of when and how much to convert. For us I was surprised how little was recommended, but it makes total sense when looking at the details.
Unless the software can address the following issues it is not going to be accurate
1. When will you (and your spouse die)
2. What legislative changes will be made to tax rates in future.
3. What will the inflation adjustments to SS and tax brackets and IRMAA be
4. What will your heirs tax brackets be in the 10 years after your death (see item 1 for exact dates).
5. What will the investment gains or losses be on your IRA each year.
6. What will the taxable income be from all your other sources. This requires knowledge of how they will be invested, as well as interest rates or gains or losses be in the assets.
7. What state you will be living in each year.
8. Any legislation changing SS or IRMAA or NIT.
9. How much you will spend each year and where you will pull that money from.
@@keithmachado-pp6fv again you are correct! However, the New Retirement software does allow some modeling of various parameters. While many of these are at best big guesses, several are somewhat more predictable, and running various scenarios at least helps understand some of the pros and cons of conversions. When I run our best guess probability assumptions, it is apparent that we should do only minimal conversions. The other big issue I have with most Roth calculations, is that they tend to look better with very high longevity.
The majority of people currently in their 60’s will not live past 90, so using high longevity numbers clearly leads to bias in favor of conversions that is not necessarily warranted.
Clearly converting in the 10-15% brackets will be no worse than a wash, but beyond that the variables become virtually unpredictable.
you keep saying that that calculator makes assumptions, when in fact they are just defaults. it's obvious that is the case because it allows you to change every field. and you should change the numbers to match your situation. that's just how calculators work. defaults are not assumptions.
but then you turn completely around and make all kinds of assumptions even for your very own situation. you can't be 100% sure what the tax rates will be in a year's time let alone 20 years. by not doing anything, the trump tax cuts will end next year. but there's also talk of extending it. so yeah, we don't know. and we sure don't have a crystal ball 20 years into the future.
and at your age, why anyone would want to convert $250K in a single year is beyond me. you should break up into amounts that edge up to the limit of your tax bracket and stay in your current tax bracket to save on taxes. then do the same the next year and every year after until it's all converted. converting $250K all at once is sure to jump you into at least the next tax bracket if not two. at your age, you have at least 20 years (your assumption), so what's the hurry.
i'm all about converting to roth. but i don't pay more than i have to to do it.
If you convert all $248k in one year and you are 65 or older you will cause the following.
1. IRMAA surcharges
2. Additional 3.8% tax on all investment income.
3. Bump you into a higher tax bracket.
Unless you have $5m+ in IRA you are unlikely to benefit from converting $248k in one year given above.
2 year look back on IRMAA, so income from 63 and 64 counts
Sorry, but there is a fundamental conceptual flaw in your analysis, and the calculator has reasonable defaults. When you make the roth conversion, you are paying tax at the INCREMENTAL tax rate (i.e. your tax bracket). However, when you are making withdrawals in retirement for living expenses, you are not paying a total tax at your tax incremental amount because of the progressive taxation. For example, you are paying zero tax on the first $27K due to standard deduction for income withdrawals. In my case (I am retired and using traditional IRA as income), I would pay 22% on a roth conversion up to the next tax bracket. However my total federal tax on withdrawals for income is14% (total fed tax/total income for the year). Your analysis only applies if the future withdrawal is above and beyond what you would withdraw as your income source. Your analysis is quite incorrect.
Well stated.
I don’t care about the calculator. Unless you have over $1m in deferred i am challenged to see any benefit from converting unless you have so much other income that you are already in the 25%+ bracket before any distributions from IRA. I plan on managing my other income so by age 75 all I have is IRA withdrawals and SS. I will take advantage of the standard deduction and low tax brackets both adjusted annually for inflation. No one knows what future tax rates will be so assuming changes is no more correct than assuming no changes.
Our national debt interest is $1 trillion and growing. Hmm, what will happen to future income tax rates?
Neither you nor I know what will happen to future tax rates. Don’t confuse tax rates with tax collections. When the Corporate tax rate was cut we actually had more tax revenue as companies stopped moving operations offshore for tax purposes. I would argue that lower long term cap gains rates would incent more people to recognize some of the capital gains that otherwise may never be taxed as heirs get a step up in basis. Bottom line is no one knows the future.
@@keithmachado-pp6fv With federal debt accumulation at its unsustainable rate, it will be impossible for tax rates not to rise.
We agree to disagree.
Impossible? You must be watching those Ed Slott and David McKnight doomsday videos (I do think David is good but Ed is too Roth convert is for everyone).
Stupid wordy presentation. If you need to make this decision correctly you need to generate a forward looking income plan and then a forward looking tax plan. You look to see if you are actually at the best location to make a conversion or maybe when you retire, delay receiving SS for a few years and make the conversions later. The forward looking tax plan helps you see holes in your current plan and optimize conversions or withdrawal strategies that help increase you overall wealth (after taxes). But the author is assaulting the calculators bad assumptions and putting in his own bad assumptions with a fake basis for doing so. You're going to make 14% on your investments. You make Dave Ramsey Proud. You know when you fill out these calculators you have to figure out your personal situation and put in correct numbers. Without a reasonable idea what these numbers are or should be then expect: "Garbage in - Garbage out"