Roth IRA Conversions: Variables That Can Impact Whether Converting is Right for You
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- Опубликовано: 11 сен 2024
- Roth Conversions provide a unique opportunity to withdraw from your retirement savings tax-free, and have no required minimum distributions (RMDs), providing flexibility and potentially allowing the account to grow over time.
But are they right for most people?
Inspired by a comment from our viewer, Golden Griffon, Troy Sharpe examines real-life scenarios, comparing shorter versus longer life expectancies, single versus married couples, and varying IRA balances ($1 million vs. $2 million). He analyzes these variables and their profound implications for making informed decisions regarding Roth conversions.
00:34 Can we expect life expectancy to continue to increase?
02:46 Golden Griffon’s Comment: Why he believes Roth Conversions may not be right for most
03:34 Troy’s Response
04:46 Setting up the variables we’re going to analyze
05:53 The First scenario: Single male, 65 years old, $1 million in retirement accounts
10:33 Comparing Outcomes by Account Value Only
12:14 Will most people be in a lower tax bracket in retirement?
13:34 Which account composition would you rather leave to your kids?
16:21 Next Scenario: Changing life expectancy from 83 to 88
18:34 Unique considerations when it comes to doing or not doing Roth Conversions
21:25 The importance of monitoring, assessing and adjusting
22:33 Married Couple Examples
Thanks to @goldengriffon2423 for the great discussion!
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💵 I’m 62 with a $2 Million IRA, $700k in Non-Qualified Accounts: Which Distribution Strategy is Right? • I’m 62 with a $2 Milli...
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Disclaimer:
This video discusses fixed-income investing and utilizes the 10-year U.S. treasury as a general representative fixed-income investment. Conclusions reached, opinions stated, and downside risks and potential returns presented should not be construed as applying to other types of bonds or fixed-income assets. Other types of fixed-income products carry different levels of risk and return potential and should be evaluated as an element of a diversified portfolio with your specific risk tolerance, investment objectives, and timeline in mind. Nothing in this video is investment advice, an investment recommendation, or an offer to buy or sell any security. Investing involves risk.
#retirementplanning #retirementincomeplanning #ira #socialsecurity #retirement #retirementinvestmentstrategies #rothconversions
TY for all the great info u provide, u explain In great detail 👍🏻
Glad it was helpful, Virginia! Thanks for the compliment.
Retired in June at 62.5 years old. Spouse is 59. I am doing roth conversions to the amount that keeps me in the 12% tax bracket, which is taxable income of about $89,000 so, total income can be around $117,000. So, $117,000 minus my needs for the year is what I will convert.
Hi @jdgolf499! Thanks for watching and sharing about your experience!
Nice analysis. This is a complex issue. A lot of people don't want to do Roth conversions because they would have to pay taxes on those conversions and, everyone hates paying income taxes. However, in the long run, in most situations, it is better to bite the bullet now over a period of years, and get money into a tax-free Roth account (and let it grow tax free), even if you have to pay the taxes on the conversions spread over a number of years. So, if you have the time and are able to do the Roth conversions over a number of years and are able to stay within a reasonable percentage tax bracket, it would be more advantageous tax-wise. And with the TCJA expiring at the end of 2025, the increase in those taxes alone is a compelling reason to pay the taxes now instead of a higher rate later, but as you show, there are other reasons to do so. I think people look at their tax deferred (Traditional IRA, 401K, 403B) and think that money is all theirs and in reality, there is a built in tax liability. They are going to have to pay taxes on those tax deferred accounts sooner or later. It is just a matter of when. Pay now (through a partial Roth conversion over a number of years when you are in lower tax bracket) or pay later when you are in a higher tax bracket. Yes, it hurts having to pay taxes, but wouldn't most people want to pay less overall? Plus, as you point out, if it is a couple and one spouse passes away, now as a single, the surviving spouse will be in even a higher tax bracket, especially if most of that couple's money is in a tax deferred account. And your point about the 3.89%net investment income tax (NIIT), and taxes to your heirs after you pass away are all valid considerations, also. Like I said, this is a complex issue. Thanks much for the video and your explanations.
You're right, it really is a complex issue, which is why we think having a financial advisor in your corner to establish, monitor and adjust your unique plan! Thanks so much for watching and weighing in, @RS-lw9cd. We really appreciate your perspective and we're happy you enjoy our videos.
Excellent video, I wish you had spent a little more time going through the details on the married couple, but I understand trying to fit as much relevant content in as short a video as possible. Even though these are very complex topics mathematically (not even considering the psychological/emotional aspects) you all do such a great job explaining the broad picture in a simple way that is relatively easy to understand!
This may be too specific of a question, but can you offset the tax bill from doing a Roth conversion with a tax loss from selling a business (i.e. your cost basis in the business was higher than what you sold it for)?
Hey @bluecollarbudgets! You're right about the timing - it's tough but we do try to fit in as much as we can! This was one of our longer videos too. We're really glad you enjoyed this video, and your topic idea is a good one! We'll add it to the list. Thank you.
Screen letter coloring does not show well in the video. Perhaps a darker font?
Thanks for pointing that out, @mountainman986 - in the thumbnail or the general titles throughout the video?
It is in the data slides where you are showing examples (e.g. 6:00 minutes in) - On my computer, the background appears almost light blue; the headings are a darker blue and can be seen fairly well; the detailed data seems to be a "between" shade and just doesn't display well. It may just be my computer but thought I would share.
To add more complexity.. the figures may change on How you pay the Roth conversion taxes.. from IRA or from Taxable account?!
How does buying a QLAC help with the numbers.. say not starting the payout until age 78 or 80 ?
Taxes definitely make things more complex! Thanks for submitting your questions, @pware9643. These are great, and we'll add them to our list.
Your OCW one would do even better if all of your withdrawals were funneled through a Roth, since your first example was over 59.5 there would be no 5 year restriction on withdrawals assuming the original Roth account was 5 years old. If the conversions exceeded the yearly spending the leftover money is now sitting in a Roth.
Hi Jerry, thanks for watching and for sharing your ideas!
Sorry, Troy
I have followed you for a long time, and now that I am retired, I know for certain that no way, no way how that I am in a higher tax bracket.
And together we made over $150,000 a year.
I would be more than happy to send you my spreadsheet of what we do and how we do it maintaining in the 12% tax bracket rather than the 24%
If you would like me to send it to you or you just let me know
Just remember that all tax brackets are going up in 2026. Then, later on, that new tax bracket is doubling when the first person in a married couple passes away.
That always happens if someone dies and it doesn’t double just go to the single rate
Great content! Would love to see an analysis on a 50% Roth, 50% pretax, no taxable. Let’s say 1 million in Roth, 1 million in pretax. Married at 60, wife 56. Thinking of spending 100,000 in pretax per year for 10 years. Start SS at 70 years, wife takes SS at 67. 1 million Roth grows to 2 million in 10 years. All that’s left is Roth and SS at 70, little to no taxes plan
Hey Andrew! Thanks for the idea - we'll add it to the list of ideas for videos! We're glad you enjoyed this one.