I have two pensions. I would much rather have had a Roth 401k throughout my working lifetime. $500/month invested from 25 - 65 at 9% is $2.3mil. I hate my job but can't leave because of I won't get my state pension. What do you think about doing a 70/30 stocks bond ratio?
I would avoid the index funds, mutual funds, or specific stocks for the time being. 5% fixed incomes are the safest bet for now. Save your cash for when the market actually shows signs of recovery
At a point like this, when the pressure is already on you to retire, its best recommended you seek the services of an advisor, as this allows you make smarter investing decisions.
Generally speaking, a good number of people discredit the effectiveness of financial advisor in planning for retirement, For over the past 5years, I’ve had a financial advisor consistently restructure and diversify my portfolio/expenses and I’ve made over $1million in gains… might not be a lot but retirement doesn’t seem so farfetched anymore.
The advisor that guides me is Melissa Terri Swayne , most likely the internet is where to find her basic info, just search her name. She's established.
I converted my 401k to a Roth IRA to avoid higher taxes in the future. I'd rather pay taxes now than be stuck paying taxes on my retirement income when I'm 59 and living off my savings
Pre-tax contributions may help reduce income taxes in your pre-retirement years while after-tax contributions may help reduce your income tax burden during retirement.
Both have their perks but you can also save for retirement outside of a retirement plan, such as an individual investment account or employing the services of a retirement planner/financial Advisor.
My CFA Julianne Iwersen Niemann, a renowned figure in her line of work. I recommend researching her credentials further. She has many years of experience and is a valuable resource for anyone looking to navigate the financial market.
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.
You are correct, but it doesn't even apply in his case. You don't get capital gains rates for money pulled from a retirement account, it's all taxed as ordinary income.
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.
Increasing tax rates are the reason I rolled over my 401k to a Roth. I don’t want to be 59 paying taxes on current income on withdrawals made from my retirement account. I'm now seeking best possible areas or strategy to keep my retirement contributions on track to my $5m goal.
Pre-tax contributions may help reduce income taxes in your pre-retirement years while after-tax contributions may help reduce your income tax burden during retirement.
Both have their perks but you can also save for retirement outside of a retirement plan, such as in an individual investment account or employing the services of a retirement planner/advisor.
Great advice here. Keep it simple, buy things you understand, take some risk but don't try to shoot the lights out. I currently have 75% SCHD and 25% ROTH IRA. Brokerage account is 40% VOO, 35% SCHD, 25% XLK. Combine balance ~$3.3m Less than 3 years until retirement.... I have about 400k in cash. My portfolio has yielded far more than I expected for my retirement. Kudos to my advisor.
I've stuck with ‘’ Izella Annette Anderson ” for more than 9 years now, and her performance has been consistently impressive. She’s quite known in her field, look her up.
Also -. New Retirement ( now Boldin) let’s you model total lifetime taxation as well as legacy amounts to heirs. It led us to look into creating a DAF & looking for charitable contributions.
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!)
In most circumstances, you are correct. It makes sense to be all Roth if you'll have a LOT of other income already coming in before you start to draw any money from retirement accounts. This guy is claiming his tax rate in retirement will be 37%, which means he's expecting to have a couple of hundred thousand a year of other income coming in. Not the case for probably 90% or more of people. For people who DON'T have tons of other expected income in retirement, I think as long as your traditional account isn't growing well beyond your needs (snowballing) you're doing OK. This scenario only applies to that small slice of retirees who will have loads of other income.
I have 2 pensions that put me near $100k, plus rental income. I’m converting now before I take SS ($2696 at 62 if I take it). It makes sense for me to convert now.
Obviously if you are getting well over $100k in income before touching your portfolio, or drawing SS, then you are in a totally different category from 95% of retirees. And, yes then it is just a math equation on when to convert. Of note it will also have no effect on your lifestyle. There are always exceptions, I was addressing average and above average retirees. For the wealthy, IRMAA and Social Security penalties are math problems, not lifestyle issues. Roth conversions, even in higher brackets can obviously make sense from a math standpoint point. For those of us that are well off or less, but not blessed with large pensions, some traditional money still makes sense.
A 14% rate of return is way too optimistic in my opinion. But you’re absolutely right about the time horizon. I’m 65, have an IRA of 2 million, along with a pension and SS. During my working years was in the 24% tax bracket making Roth conversions unattractive. And my tax bracket hasn’t really diminished much in retirement. Factoring time horizon, I’m not seeing the benefit of converting at this point.
Most planners advocate Roth convsn bc most ppl are not converting millions of $. If one ends up at the highest tax bracket now, and still be in highest brkt in retirement, the breakeven point will be >25 years, when most retirees had lost their vitality.
Good video however the length of time does not matter. If you are 5,10, or 20 years from RMDs, the math is the same. If your tax rate is the same when converting or deferring comes out the same. If your tax % is less when converting you come out ahead and vice versa. Number of years does not change the outcome, nor does asset growth rate.
Exactly!!! This guy is making the same mistake other "experts" make regarding this issue starting at about 2:45 minutes into his video. Paying say 20% effective taxes now with a roth conversion or paying 20% effective taxes in 5-10-20 year from now leaves you with the EXACT same amount in your pocket in 5-10-20 years all other things being equal. This is true if you are using funds from tax deferred account to pay the taxes. You actually come ahead if you use money from a taxable account to pay taxes for the conversion because you don't have to pay taxes on the growth in the roth. That's why it is more cost effective to pay the taxes from a taxable account for a roth conversion.
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.
I don't understand why you didn't try and stay under the top of the tax bracket that you are currently in. Why jump brackets? Why not do just enough to stay in a lower bracket each year?
I am starting to look at these calculators. I don't understand what it is telling me. I anticipate, that I'll still be on the same tax bracket. Roth is the last bucket to drawn on and will be about the 11th year into my retirement (drawn on IRA acc first as well as converting to Roth). in addition to projection of taxes, shouldn't the calculator also look at RMD as well? With RMD kicking in, I see Roth is what is best for me (all Roth). I wish I have taken the time to look at that long ago (ease of tax liability (fed/state), but I still have a bit of time. Given the same tax bracket, same investment, & period, before and after tax at the end of day yield the same amount. Pros/Cons is all about the projection of how tax rate changes. Do the MATH.
The one thing I think you forgot to cover. ROTH IRAs are not taxed when inherited. If your older (65+) passing on your investment account to your kids might be worth doing it.
Current Income Tax tables are set for 2024 and 2025. 2026 is up in the air and may revert back to pre 2018 (higher?), Yes, it would be a speculation but what is the likelihood?
Great content!! Thanks so much!! Is it a good idea to also take into account the possible death of a spouse (thus causing the surviving spouse to be in the single tax bracket) and also passing Roth money to children? Also, does it make sense to leave some money in a traditional IRA to take advantage of the standard deduction? Any thoughts would be greatly appreciated. Thanks!
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.
Matt, question. Have you looked at medical insurance impact at retirement years? I assume your Social security with put you in the non- medicaid level of income if not you need to go put some regular 401k deferred back in the account in your higher earning years of work.
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
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.
Exactly ! Not sure he has really researched the variables going into the Roth conversions analysis. I guess he just wanted to vent on Roth calculators in this one.
I used to think the same way about converting a large sum like 250k, I converted about 50k last year and then I ended up converting way more than 250k this year, because of healthcare premiums. I'll save roughly 2k/month on my healthcare starting in 2025, and that will last for 9 years till I turn 65. If you are healthy you can find some private insurance cheaper, but my wife is not, so that's no longer an option. When I add the healthcare savings to the tax savings, it doesn't take long at all for me to make up the difference of paying a bunch of taxes this year. Something that's not mentioned very often, is that if you are able to lower your income enough, you can eliminate taxes on your social security. For a lot of people this can make it worthwhile converting more sooner. The other item rarely talked about, is investment strategy. For example, if you have 250k in a traditional account that receives a 10% dividend and plan to only pull the 25K in dividends every year and never sell the investments, you are signing up to pay taxes on the 25k every year until you die. It's not just a matter of the tax on the 250k or how much it's worth in 20 years.
No taxable IRA or 401K money still leaves you taxable Social Security, pension, rental income, dividends, etc. You have to base it on your own circumstances. I would put into your calculations anything you stand to inherit in the future too.
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 missed the number one reason not to convert so fast. If your under 65 and need health insurance and are no longer employed an IRA conversion counts as income. Till your 65 you don't have medicare as an option. Cobra is expensive and only gives you 18 months of medical coverage. If I retire at 65 I can convert up to the standard deduction and pay no tax on my conversion. If you want to covert a bit more you can convert the standard plus the 10% tax bracket, which is $11,600 so yoy pay $1,160 plus standard deduction of $14,600, $16500 if your over 65, so you can convert $26.200 any pay $1160 in federal taxes. The rest of your income can be all roth.
So many bad bits of info / questionable arguments here, as others have pointed out. I’m a big Roth advocate, but going 100% is taking it too far. There is plenty of opportunity to manage taxable income to keep it in the lowest (even 0%) effective tax in retirement. You wouldn’t want to leave Roth to the end of your retirement - you’d draw on it strategically to keep your taxable income in lower brackets. This makes your overall retirement fund last much longer. And all things being equal, Roth vs deferred tax works out exactly the same at the end - the difference is in other factors like paying the conversion taxes out of taxable income to maximize the Roth balance. Or using Roth to drive down your effective tax rate in retirement.
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.
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.
This video is incorrect!!! If the tax bracket is the same after retirement, you should not convert!!!! You should look at an effective tax rate, not a marginal tax bracket after retirement. Your effective tax rate will be only 15% even when the marginal tax bracket is 25% during retirement!!!
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).
Take your portfolio return and divide 72 that shows the years to double the portfolio with that return. Is that the amount you want for rmd to be rough about 3%? If you don't want that on top of your SS then do some Roth conversion if not be happy. Large conversion can be done over time in small each year. But if you have a large portfolio the growth can be larger than the small conversion each year. Then larger once can make sense. With the smaller to fine tune. This is just money management.
You are severely biased by your client pool. For majority US retirees, they won’t be at 37% tax bracket - they will be far less. 77% of US people are in the 15% or lower, while only 0.7% are in the 37% tax bracket. Given majority US people will be in lower bracket (by statistics, not your severely biased client pool), the retiree in 37% bracket is less than 0.7%. And most of them are in 37% already when they are young. The scenario you analyzed (25% at young age and 37%) is rare. Don’t use a rare scenario to guide general population- 99% times you give wrong suggestions. In addition, you misunderstand marginal tax brackets. When you have a solid salary, Roth conversion is taxed at the top of your bracket - in your example, 25% since those amounts are added into your current income, but when you retire, even if your tax bracket is 37%, a big trunk of your money is taxed at 10%, 15%, 22%, etc. Your effective tax rate could still be less than 25%. Futher, you ignored state tax. When you retire, you could move to a state with 7:32 no state income tax state or a state not taxing on retirement income, thus you could save a lot from state incomes. In summary, your calculation and suggestion makes no sense for majority of RUclipsr, and is misleading.
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"
I converted my 401k to a Roth IRA to avoid higher taxes in the future. I'd rather pay taxes now than be stuck paying taxes on my retirement income when I'm 59 and living off my savings.
Pre-tax contributions may help reduce income taxes in your pre-retirement years while after-tax contributions may help reduce your income tax burden during retirement.
A lot of folks downplay the role of advisors until being burnt by their own emotions. I remember couple summers back, after my lengthy divorce, I needed a good boost to help my business stay afloat, hence I researched for licensed advisors and came across someone of utmost qualifications. She's helped grow my reserve notwithstanding inflation, from $275k to $850k.
My CFA Sophia Maurine Lanting, a renowned figure in her line of work. I recommend researching her credentials further. She has many years of experience and is a valuable resource for anyone looking to navigate the financial market.
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Ask Mat: matsorensen.com/ask-mat/
I have two pensions. I would much rather have had a Roth 401k throughout my working lifetime. $500/month invested from 25 - 65 at 9% is $2.3mil. I hate my job but can't leave because of I won't get my state pension. What do you think about doing a 70/30 stocks bond ratio?
I would avoid the index funds, mutual funds, or specific stocks for the time being. 5% fixed incomes are the safest bet for now. Save your cash for when the market actually shows signs of recovery
At a point like this, when the pressure is already on you to retire, its best recommended you seek the services of an advisor, as this allows you make smarter investing decisions.
Generally speaking, a good number of people discredit the effectiveness of financial advisor in planning for retirement, For over the past 5years, I’ve had a financial advisor consistently restructure and diversify my portfolio/expenses and I’ve made over $1million in gains… might not be a lot but retirement doesn’t seem so farfetched anymore.
Hope you don't mind if I ask you to recommend this particular professional you use their service?
The advisor that guides me is Melissa Terri Swayne , most likely the internet is where to find her basic info, just search her name. She's established.
I converted my 401k to a Roth IRA to avoid higher taxes in the future. I'd rather pay taxes now than be stuck paying taxes on my retirement income when I'm 59 and living off my savings
Pre-tax contributions may help reduce income taxes in your pre-retirement years while after-tax contributions may help reduce your income tax burden during retirement.
Both have their perks but you can also save for retirement outside of a retirement plan, such as an individual investment account or employing the services of a retirement planner/financial Advisor.
How can one find a verifiable financial planner? I would not mind looking up the professional that helped you
My CFA Julianne Iwersen Niemann, a renowned figure in her line of work. I recommend researching her credentials further. She has many years of experience and is a valuable resource for anyone looking to navigate the financial market.
Found her online page by searching her full name, I wrote her an email and scheduled a call, hopefully she responds.
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.
I was hearing him and wondered what he was talking about.
You are correct, but it doesn't even apply in his case. You don't get capital gains rates for money pulled from a retirement account, it's all taxed as ordinary income.
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.
Not necessarily. Rather than convert to Roth live off your IRA in your 60’s thereby money decreasing RMD’s and taking SS at 70.
Increasing tax rates are the reason I rolled over my 401k to a Roth. I don’t want to be 59 paying taxes on current income on withdrawals made from my retirement account. I'm now seeking best possible areas or strategy to keep my retirement contributions on track to my $5m goal.
Pre-tax contributions may help reduce income taxes in your pre-retirement years while after-tax contributions may help reduce your income tax burden during retirement.
Both have their perks but you can also save for retirement outside of a retirement plan, such as in an individual investment account or employing the services of a retirement planner/advisor.
Great advice here. Keep it simple, buy things you understand, take some risk but don't try to shoot the lights out. I currently have 75% SCHD and 25% ROTH IRA. Brokerage account is 40% VOO, 35% SCHD, 25% XLK. Combine balance ~$3.3m Less than 3 years until retirement.... I have about 400k in cash. My portfolio has yielded far more than I expected for my retirement. Kudos to my advisor.
@@ThomasChai05I’ve been looking to switch to an advisor for a while now. Any help pointing me to who your advisor is?
I've stuck with ‘’ Izella Annette Anderson ” for more than 9 years now, and her performance has been consistently impressive. She’s quite known in her field, look her up.
I used NewRetirement which takes into account all the opportunity cost factors as well as tax brackets of future income
Nice
Also -. New Retirement ( now Boldin) let’s you model total lifetime taxation as well as legacy amounts to heirs. It led us to look into creating a DAF & looking for charitable contributions.
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.
In most circumstances, you are correct. It makes sense to be all Roth if you'll have a LOT of other income already coming in before you start to draw any money from retirement accounts. This guy is claiming his tax rate in retirement will be 37%, which means he's expecting to have a couple of hundred thousand a year of other income coming in. Not the case for probably 90% or more of people. For people who DON'T have tons of other expected income in retirement, I think as long as your traditional account isn't growing well beyond your needs (snowballing) you're doing OK. This scenario only applies to that small slice of retirees who will have loads of other income.
I have 2 pensions that put me near $100k, plus rental income. I’m converting now before I take SS ($2696 at 62 if I take it). It makes sense for me to convert now.
Obviously if you are getting well over $100k in income before touching your portfolio, or drawing SS, then you are in a totally different category from 95% of retirees.
And, yes then it is just a math equation on when to convert. Of note it will also have no effect on your lifestyle.
There are always exceptions, I was addressing average and above average retirees.
For the wealthy, IRMAA and Social Security penalties are math problems, not lifestyle issues. Roth conversions, even in higher brackets can obviously make sense from a math standpoint point.
For those of us that are well off or less, but not blessed with large pensions, some traditional money still makes sense.
@@Liledgy100 So when to take SS becomes mostly an issue of expected longevity, or the survivor benefits desired for a spouse.
A 14% rate of return is way too optimistic in my opinion. But you’re absolutely right about the time horizon. I’m 65, have an IRA of 2 million, along with a pension and SS. During my working years was in the 24% tax bracket making Roth conversions unattractive. And my tax bracket hasn’t really diminished much in retirement. Factoring time horizon, I’m not seeing the benefit of converting at this point.
Most planners advocate Roth convsn bc most ppl are not converting millions of $. If one ends up at the highest tax bracket now, and still be in highest brkt in retirement, the breakeven point will be >25 years, when most retirees had lost their vitality.
Good video however the length of time does not matter. If you are 5,10, or 20 years from RMDs, the math is the same. If your tax rate is the same when converting or deferring comes out the same. If your tax % is less when converting you come out ahead and vice versa. Number of years does not change the outcome, nor does asset growth rate.
Exactly!!! This guy is making the same mistake other "experts" make regarding this issue starting at about 2:45 minutes into his video. Paying say 20% effective taxes now with a roth conversion or paying 20% effective taxes in 5-10-20 year from now leaves you with the EXACT same amount in your pocket in 5-10-20 years all other things being equal. This is true if you are using funds from tax deferred account to pay the taxes. You actually come ahead if you use money from a taxable account to pay taxes for the conversion because you don't have to pay taxes on the growth in the roth. That's why it is more cost effective to pay the taxes from a taxable account for a roth conversion.
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.
Thanks Matt! Very, very logical on many fronts!
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.
I don't understand why you didn't try and stay under the top of the tax bracket that you are currently in. Why jump brackets? Why not do just enough to stay in a lower bracket each year?
I am starting to look at these calculators. I don't understand what it is telling me. I anticipate, that I'll still be on the same tax bracket. Roth is the last bucket to drawn on and will be about the 11th year into my retirement (drawn on IRA acc first as well as converting to Roth).
in addition to projection of taxes, shouldn't the calculator also look at RMD as well? With RMD kicking in, I see Roth is what is best for me (all Roth). I wish I have taken the time to look at that long ago (ease of tax liability (fed/state), but I still have a bit of time.
Given the same tax bracket, same investment, & period, before and after tax at the end of day yield the same amount. Pros/Cons is all about the projection of how tax rate changes. Do the MATH.
Thanks Mat
You're Welcome! Thank You for watching
The one thing I think you forgot to cover. ROTH IRAs are not taxed when inherited. If your older (65+) passing on your investment account to your kids might be worth doing it.
Can you convert small chunks of traditional funds within that IRA over a few years or have to do the whole thing at once?
Current Income Tax tables are set for 2024 and 2025. 2026 is up in the air and may revert back to pre 2018 (higher?), Yes, it would be a speculation but what is the likelihood?
Heck - what I want to know is how you are (confidently) anticipating a 14% rate of return on your investments!
Great content!! Thanks so much!! Is it a good idea to also take into account the possible death of a spouse (thus causing the surviving spouse to be in the single tax bracket) and also passing Roth money to children? Also, does it make sense to leave some money in a traditional IRA to take advantage of the standard deduction? Any thoughts would be greatly appreciated. Thanks!
how does the fact that you are paying the government in future (devalued) dollars affect your decision to do roth?
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.
Matt, question. Have you looked at medical insurance impact at retirement years? I assume your Social security with put you in the non- medicaid level of income if not you need to go put some regular 401k deferred back in the account in your higher earning years of work.
Great vid on making the choice to convert early.
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
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.
Exactly ! Not sure he has really researched the variables going into the Roth conversions analysis. I guess he just wanted to vent on Roth calculators in this one.
I used to think the same way about converting a large sum like 250k, I converted about 50k last year and then I ended up converting way more than 250k this year, because of healthcare premiums. I'll save roughly 2k/month on my healthcare starting in 2025, and that will last for 9 years till I turn 65. If you are healthy you can find some private insurance cheaper, but my wife is not, so that's no longer an option. When I add the healthcare savings to the tax savings, it doesn't take long at all for me to make up the difference of paying a bunch of taxes this year.
Something that's not mentioned very often, is that if you are able to lower your income enough, you can eliminate taxes on your social security. For a lot of people this can make it worthwhile converting more sooner.
The other item rarely talked about, is investment strategy. For example, if you have 250k in a traditional account that receives a 10% dividend and plan to only pull the 25K in dividends every year and never sell the investments, you are signing up to pay taxes on the 25k every year until you die. It's not just a matter of the tax on the 250k or how much it's worth in 20 years.
I think I missed something. If you have no taxable income, won’t your future tax rate be zero?
No taxable IRA or 401K money still leaves you taxable Social Security, pension, rental income, dividends, etc. You have to base it on your own circumstances. I would put into your calculations anything you stand to inherit in the future too.
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 missed the number one reason not to convert so fast. If your under 65 and need health insurance and are no longer employed an IRA conversion counts as income. Till your 65 you don't have medicare as an option. Cobra is expensive and only gives you 18 months of medical coverage. If I retire at 65 I can convert up to the standard deduction and pay no tax on my conversion. If you want to covert a bit more you can convert the standard plus the 10% tax bracket, which is $11,600 so yoy pay $1,160 plus standard deduction of $14,600, $16500 if your over 65, so you can convert $26.200 any pay $1160 in federal taxes. The rest of your income can be all roth.
So many bad bits of info / questionable arguments here, as others have pointed out.
I’m a big Roth advocate, but going 100% is taking it too far. There is plenty of opportunity to manage taxable income to keep it in the lowest (even 0%) effective tax in retirement.
You wouldn’t want to leave Roth to the end of your retirement - you’d draw on it strategically to keep your taxable income in lower brackets. This makes your overall retirement fund last much longer.
And all things being equal, Roth vs deferred tax works out exactly the same at the end - the difference is in other factors like paying the conversion taxes out of taxable income to maximize the Roth balance. Or using Roth to drive down your effective tax rate in retirement.
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.
Not if you have other income, pension, rental, maybe your wife has inherited ira with mandatory withdrawals m, etc.
Assuming a 14% return for the next 20 years is foolhardy
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
That’s why u convert before Medicare.
@@randolphh8005 not if u fill out irs form stating your income at 65 is under irmaa limits.
You my be in a lower tax bracket after retirement until your spouse dies then look out.
This video is incorrect!!!
If the tax bracket is the same after retirement, you should not convert!!!!
You should look at an effective tax rate, not a marginal tax bracket after retirement. Your effective tax rate will be only 15% even when the marginal tax bracket is 25% during retirement!!!
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).
Take your portfolio return and divide 72 that shows the years to double the portfolio with that return. Is that the amount you want for rmd to be rough about 3%? If you don't want that on top of your SS then do some Roth conversion if not be happy. Large conversion can be done over time in small each year. But if you have a large portfolio the growth can be larger than the small conversion each year. Then larger once can make sense. With the smaller to fine tune. This is just money management.
You are severely biased by your client pool. For majority US retirees, they won’t be at 37% tax bracket - they will be far less. 77% of US people are in the 15% or lower, while only 0.7% are in the 37% tax bracket. Given majority US people will be in lower bracket (by statistics, not your severely biased client pool), the retiree in 37% bracket is less than 0.7%. And most of them are in 37% already when they are young. The scenario you analyzed (25% at young age and 37%) is rare. Don’t use a rare scenario to guide general population- 99% times you give wrong suggestions. In addition, you misunderstand marginal tax brackets. When you have a solid salary, Roth conversion is taxed at the top of your bracket - in your example, 25% since those amounts are added into your current income, but when you retire, even if your tax bracket is 37%, a big trunk of your money is taxed at 10%, 15%, 22%, etc. Your effective tax rate could still be less than 25%. Futher, you ignored state tax. When you retire, you could move to a state with 7:32 no state income tax state or a state not taxing on retirement income, thus you could save a lot from state incomes. In summary, your calculation and suggestion makes no sense for majority of RUclipsr, and is misleading.
14%?? Riiiiiiggghhhttt … Dave Ramsey wannabe I guess. And I thought his 12% was outrageously high.
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"
I converted my 401k to a Roth IRA to avoid higher taxes in the future. I'd rather pay taxes now than be stuck paying taxes on my retirement income when I'm 59 and living off my savings.
Pre-tax contributions may help reduce income taxes in your pre-retirement years while after-tax contributions may help reduce your income tax burden during retirement.
A lot of folks downplay the role of advisors until being burnt by their own emotions. I remember couple summers back, after my lengthy divorce, I needed a good boost to help my business stay afloat, hence I researched for licensed advisors and came across someone of utmost qualifications. She's helped grow my reserve notwithstanding inflation, from $275k to $850k.
How can one find a verifiable financial planner? I would not mind looking up the professional that helped you
My CFA Sophia Maurine Lanting, a renowned figure in her line of work. I recommend researching her credentials further. She has many years of experience and is a valuable resource for anyone looking to navigate the financial market.
Found her online page by searching her full name, I wrote her an email and scheduled a call, hopefully she responds.