I'm 63 And Retired With $2,000,000 In My 401(k) Should I Convert To A Roth IRA
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- Опубликовано: 14 фев 2023
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Would a Roth Conversion improve my tax efficiency? What happens if I run out of income before I run out of life? Will my spouse be ok? In this study, we'll take a look at being 63 and retired with $2,000,000 in your 401(k). Should you convert to a Roth IRA?
0:15 Introduction
0:45 Disclaimer
1:20 Case Study
1:45 Plan for Everything
2:16 Current Situation
3:26 Roth Conversions
5:24 401(k) vs Roth IRA
9:45 Tax Brackets
11:37 Impact of RMDs
12:52 Starting Distribution Tax
14:27 How Much to Convert?
15:28 Medicare Part B
17:06 Conclusion
A successful retirement plan means having a clear and achievable plan for your taxes, income, investment, healthcare, and legacy. If you are missing a piece of your financial puzzle or just want a second opinion, contact us at 865-392-4260 or visit bluetube.timetap.com.
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#incomeplanning #retirementplanning #retirementincome #retirewith2M #retirementat63 #retiredandmarried
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Investment advisory services offered through Blue Ridge Wealth Planners, an SEC Registered Investment Advisor. This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance does not guarantee future results.
Blue Ridge Wealth Planners does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstance.
Hypothetical example(s) are for illustrative purposes only and are not intended to represent the past or future performance of any specific investment. Actual results will fluctuate with market conditions and will vary over time.
Converting an employer plan account or Traditional IRA to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences including but not limited to, a need for additional tax withholding or estimated tax payments, the loss of certain tax deductions and credits, and higher taxes on Social Security benefits and higher Medicare premiums. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA.
Blue Ridge Wealth Planners is an investment advisory firm, and not an accounting firm. Viewers are encouraged to consult with a tax professional to assist them with their specific tax situation. This video is for informational purposes only and should not be considered as tailored financial or tax advice. Viewers should consult with a financial services professional to assist them with their investment and financial planning questions.
UPDATE: After this video was recorded, The SECURE 2.0 Act passed, raising the RMD age from 72 to 73 years. This means this plan would benefit from an additional year of growth before required distributions begin.
75 for people born in 1960 or later
@@brianbaker5140 dag....born in 59
Is it better to delay SS if you don’t need the income to do these conversions
@@rodrigok1220yes,definitely.
It's recommended to save at least 15% of your income in a 401k. You can use online calculators to estimate how much you should save based on your age and income. Saving at least 15% of your income in a 401(k) can help ensure that you have enough money to retire comfortably. By saving this much, you can take advantage of compound interest and potentially grow your retirement savings over time.
People don't really know this, You need to create your own process, manage risk and stick to the plan, through thick or thin while also continuously learning from mistakes and improving.
I totally agree; I am 66 years old, recently retired, with approximately $1.2 million in external retirement funds. I am debt free and have very little money in retirement funds compared to the total value of my portfolio over the past three years. To be honest, I didn't do all this alone, but with the help of a financial advisor. Having one is currently the best way to trade in the stock market, especially for people nearing retirement.
I just looked her up on the web and I would say she really has an impressive background in investing. I will write her an email shortly.
Great video. We are all seeking for financial independence and a better way of life. This is not difficult to achieve with savvy investing, a frugal lifestyle, and cautious budgeting. I'm glad I learned early on to work hard for financial independence. As Warren Buffet said, he has seen this happen many times in his life. Not an investor, My husband and i never earned more than a middle class salary. We plan to get retired at 58 with a stock portfolio worth $1.7M. We have never sold so much as one share of stock.
I am 57 and still working with 1.6 Million, My house is paid off and I have very little debt, just enough to maintain my credit score of 830. I have three more years until retirement and will receive 101,000 in pension payments. Should I convert to a roth?
My stock portfolio was in the red. I have been losing money due to inflation. The world will fall, like Rome, into the hands of corrupt rulers. If you're thinking about retirement and are concerned that your pension won't be enough to meet the rising cost of living, I'm sorry. Bad foreign policy abounds, bad regulatory policy, bad fiscal policy, bad energy policy
@@user-dk7lt8cg8sYour stock portfolio was in the red? That makes no sense.
@@silverbacknubian6366Absolutely not. Instead, please send All of your hard earned money to me asap. I will help you!
@@user-dk7lt8cg8sSuch sage commentary. Thank you Chicken Little!
I used 401k to get the match, then increased it every time I got a raise. I also saved any spare money on the side.Drove used cars lived below my means, bought a couple of modest rentals and retired at 56. I lived on savings and rental income, and a few years fell into the "poverty bracket" for taxes purposes.. I converted to 401k to roth during the "low income" years. Reached FRA this year and started SS . 95% of my funds are now in roth..... The key to success is keep your butt out of debt and know the difference between wants and needs.
I put the max into my 401k starting at 26, got the co match too. Once I hit 43, I did not have to put any more money into it because its growth will be much more than I could add to it each year. Now I have 10 years before full retirement and the 401k is at $2.8 mil. Now I am in a better position than the 55% of the US population that has nothing saved for retirement. With growth, what I put in at 26 will double about 6 time before I retire....
Great job! Way to take advantage of the opportunities you have and be willing to do with less now for the benefit of the future.
I'd rather live it up when I'm young and be broke when I'm old.
That’s awesome. Money grew my itself at a young age of 43.
@@JA-gx4hb
Sadly, that’s how most people think
Great info! When Roth IRA's were 1st available (1997) we had 400k in Traditional IRA's and 401K's. Wanted to do a conversion of the whole amount, had cash to pay the tax. Neither our CPA or the IRS could tell me what my tax would be, chased that for 2 years, Nobody knew, frustration! All Roth from that point except the 401K, employer wouldn't offer it. Now we're retired and have been using this same theory converting 50k a year for 6 years to Roth at a 20% tax rate. It just make sense. If you can do it, don't hesitate!
Nice job! Way to put this into practice!
Very thorough, thank you for sharing!
Thank you, Dr. Schultz! We're pleased that you found this useful.
Amazing explanation! You are the best!
Great analysis
We are you in the same situation. Thank you so much for this video! It answered all my questions.❤
You're very welcome! We're glad we were able to provide your some answers. If you have any further questions or need a second opinion on your situation, you're more than welcome to meet with us at bluetube.timetap.com
Very good explanation!! Thanks
Thank you! We're glad it was helpful!
at 16:00 priceless information regarding Medicare premium wow thank you
Thanks for watching, glad this video helped!
When I was 60, I formed a Ranch, LLC, built a retirement home with a cattle business. Net business loss of $4 million USD and converted my IRA/401K and wife's to ROTH IRA using NET loss. Since the Ranch LLC is agriculture the depreciation of equipment and business expenses can be a paper loss while building a future business and retirement home.
Great job Ted! That’s how you use the tax code to your advantage
Great idea!
Excellent video
Thank you for the kind words! We're glad you enjoyed it!
Very good info
Thank you for the comment, Mike! We're glad you found this video useful.
Great Information very deatiled this help all of us to make sure our money guy is really doing his job
Thank you, we appreciate the kind words! Raising awareness and building your knowledge to ensure your financial future is being handled confidently is a top priority for us.
It would be interesting to know what the median balance in retirement accounts both Roth and traditional is in 2024? Next it would be interesting to know what the median withdrawal amount that was taken from those accounts last year? I would think that withdrawal amounts are not very large and would have small tax liability. The average 401k balance in 2022 was $112,572 dollars that tells me the median would be much lower. If you took the average and applied the 4% rule on withdrawal you would be taking out just over $4,500 dollars annually. Even if you doubled the average you’re still looking at under $10,000 in withdrawals… 🤔🤔🤔
This is very good information. My wife and I are in a similar financial situation and I put together the same conclusion as you. One additional thing, would NIT taxes be applied if one were to push the current 24% tax bracket limits?
They would apply to dividends and capital gains. Normally it’s better to try and not generate capital gains in a large conversion year if you can control it.
Move to a rollover IRA. You can then use it to control your investments as you see fit. If market crashes you can exit it and still have cash to live on. This is the best way to manage your money the way you see fit. Make sure you spend time studying and understanding all the investment options available to you. Also recommend simplifying and finding ways to cut down on your living expenses.
Great stuff, @harunrachman3143! We appreciate your thoughts.
Good for you!
Thanks, we hope this video was good for you too!
Thank you for this topic discussion. I have often found this to be true and have argued this with Roth supporters where the answer is not a solid one but rather 'it depends.' I am curious though if you talk about putting any of this money into a family foundation owned by the couple to write off or avoid taxation? And the impacts/options down the road for the beneficiary of a family foundation?
Any money that goes to a charitable cause or foundation and receives tax breaks will have to come out to the beneficiary of the foundation as taxable. There aren’t legal ways to have this money go to the next generation tax free although most people feel like that could be an option
An additional important factor is that if you are currently earning/living in a high tax state and anticipate moving to a low/zero tax state, it may make sense to wait with doing the Roth IRA conversion until you are domiciled in the low tax state. Plus, it gives you the added satisfaction of the high tax state never laying its greedy hands on your hard-earned money.
Very good point, I feel like every time I talk to someone in California I am trying to talk them into moving to Tennessee or a state like us who has 0% state income tax
@@blueridgewealth Absolutely. Just please make sure they come as a refugee, not a missionary.
No sir. @@brownwhale5518
Great presentation 👏 👏 Subscribed!
An additional option is to only do your charitable contributions via QCD UP TO 100 K PER YEAR IE DON'T PAY TITHING OUT OF A TAXABLE ACCT
Go live life while you can !!
As a retired CFP, this video does a good job of explaining why and when you would shift retirement savings to a Roth. For those with substantial income from SS and or Pension, and with a large sum in a deferred tax retirement account (IRA, 401K) moving money to a Roth IRA does make tax sense in most cases. Exactly what we are doing in our situation and happy to find this easy-to-understand explanation as to why.
I would add, the goal is not to move all the money out of your IRA, or 401k, to a Roth, but to move as much as you can that fits into the lower tax bracket than the tax rate you expect to pay when you reach 73 based on how much the additional income from RMD's will impact your tax rate.
One other point, for this couple, it makes sense to defer SS until later, use the money from their savings for expenses so they can shift as much of their 401k money into a Roth while still being under the 12%, and 20% brackets. Deferring SS also is the best hedge against inflation as it has an annual cola with between a 7 to 8% guaranteed annual growth rate. You can't find that in any other investment you might make.
Some folks think SS won't be there when they need it. But for those over 55, there is little worry that congress will pass a law significantly impacted what they will receive. The reason is, older people vote in a high pct. which makes it political suicide to cut this govt. program for those at or close to retirement.
Thanks for the feedback!
Isn't the COLA linked to the CPI or some other inflation metric? It's not going to be 7 to 8% a year unless inflation is that high forever.
Thank you. Your explanation is more in-depth.
Have you considered Tax brackets baseline is also increasing due to the inflation? We may stay at the same tax bracket with the income increase from RDM.
when you do the how much to convert don't forget to add in their social security and pension income etc. Also Irma and medicare premiums should be factored.
Your comparison between with and without Roth conversion on taxes is the most plain and clear presentation I've seen on RUclips. Taking taxes straight out of the Roth conversion principal is the right way as you did.
However, one important question: suppose you converted it while you were still working. Then, is this Roth conversion considered part of your active income? Or does the IRS treat this as passive income, separate from your income from employment? If not, then the Roth conversion shouldn't be done while still employed?
Great info but no one seems to talk about what happens if I don’t live that long? What will be the best for my kids, or whoever I leave my money to?
I'm very aware of the QCD option.
I’m being bombarded by Financial Salesmen to convert my 401k to Roth. I am not a believer that our tax code will significantly change for those of us not in the top quartile, so I ignore all these folks with their funny math. You did a great job here to explain all the considerations for this approach . . . . and now I will look at it a little bit harder to make sure I’m comfortable with my position going forward. Your balanced approach is the best version I’ve seen to truly consider Roth conversion.
We're really pleased to hear that Joseph! There is certainly a lot of nuance to consider when it comes to Roth conversion. As you know, there's no cookie cutter strategy! Thank you for the comment!
Good explanation! I'm looking at making the maximum conversions annually avoiding the medicare bump. I think balancing monies between roth and pre tax reduces RMD's, gives greater accessibility to cash without an instant tax hit. I don't think it's an all or none situation for conversion. I'm praying that our tax code doesn't doesn't take a giant step into the dark ages. :)
Said it in too complicated a way, but you did show the correct info. Key is tax rates. Dont complicate it with your opinions on what they will or wont be in the future. You are correct that taking distributions for this couple made sense
We appreciate the feedback! We hope you return and enjoy future videos from us as we get better at providing information for as many folks as possible!
Why would you do this? It would trigger a huge tax bill if you transferred the 401k
Definitely helps to have multiple buckets. My wife and I both do ROTH (403b, 401k).We max $22,500 each. My company also has an 8% match. In theory in retirement we will have (her pension), my 401k, her 403b, and two SS checks. Keeping a lot in Roth will also help in retirement if you wish to make a large purchase you can do so without moving your tax bracket.
Looking to have 3-4million in ROTH. 850k -1million in taxable, $4000each per month in SS, and her $8,000 a month pension.
Good job, I think you will be in great shape at retirement time
Question is what will be the use of these millions you frugally saved, for what?
@@achag9273 mostly charitable giving.
@@achag9273 what business is it of yours? Maybe blow it on hookers and booze !
@@achag9273 Firstly, they will have financial peace of mind. Secondly, they can retire early if they wish. They can travel first class and vacation pretty much wherever they want. They can finance their children’s/grandchildren’s education. They can afford nice senior care. When the time comes, they can donate it to charities, their beneficiaries, Alma mater.
Good info. In almost the exact same situation but still working and have a larger taxable pension. If I had to do it over again, would have put my retirement savings in real estate with after tax dollars. With depreciation and ultimately stepped up basis, can avoid/eliminate a lot of the income tax.
On another note, this video doesn’t address state income tax. In NJ, even though you do not deduct IRA/SEPP etc. contributions from state income tax, you still pay again when disbursed. Double taxation.
Thanks for the feedback. We chose to not cover state taxes since each state is different. If you would like to discuss any of these areas we would be happy to help.
Great talking 👍.Hopefully, Roth rule stays the same forever!
Thank you for the comment and kind words!
I’m proud of that guy having all that money. G I’m 62 and I have 300,000 in my IRA. I don’t think I should get a Roth it’s a little late for me because I don’t have that kind of money to throw around.
So good video overall. I didn’t see your firms cost in the figure to do the Roth conversion why is that? I’m sure you’re not working for free, kinda funny how you left that out!
So if I wanted to convert $500,000 into a Roth it would cost roughly $100,000 in taxes? Could the money be taken from the 401k (500k) to cover that?
You also mentioned that a Roth has to be in place for 5 years prior. So, if I have one 5 years before the Roth conversion can I withdraw from the Roth tax free?
Our cost is for a holistic plan not just taxes. It’s also not a flat fee.
Taxes could be taken from the 401k.
If you have an existing Roth and you are over 59.5 then yes
RMD's have now been dropped on Roth 401k's as of 2024, so that would make the conversion more beneficial
The content I've been looking for, thanks for the video.
Glad we could help Frank!
After a massive rally in stocks came and yields collapsed, bond yields and the major averages are higher on Wednesday. How do we deal with such market conditions? Typically my $2m worth of holdings go up 8% then lose 20% right after and the cycle continues.
Investors embracing the idea that abruptly cooling inflation will put interest rate hikes on ice. During recessions your dividend gains or income reduces. Speaking to a certified market strategist can help with navigating this downturn. A colleague proposed the idea of diversification to me, hopefully for positive results to offset any negative performance. At once, I backed it up using an advisor in order to avoid any fiasco. As of today, my portfolio has yielded over $450k in profits, from an initial $180k this year alone.
Looks like the biggest tax difference between an employment (active) income and the retired (passive) income is the lack of payroll taxes (social security and medicare taxes) for the latter. For the same $150k total income, the retired folks will keep $11,475 more from the lack of the payroll tax (6.2% SS Tax + 1.45% Medicare tax = 7.65%).
The IRMAA penalty you reference is per person. Thus, the penalty charge is per person.
After retirement, with the IRS tax rate table staying the same as now, what will be the kind of reasons why my tax rates would go up? Say until I am 73 years old (when the RMD in IRA kicks in), and after 73.
IRS Form 590-B Page 32 has a flowchart that shows that if either one of the couple aged 59-1/2 or better has ever contributed to any ROTH more than 5 ocalander years ago, then the entire ROTH conversion is qualified and even the gains
can be withdrawn without tax.
About 30% of the online sources claim that EACH conversion starts its own 5-year clock. This is not true once the taxpayer reaches 59-1/2.
Cool info where can we find Gilmore’s forgery counterfeit free NICER Arbiter Interdiction Trust by Christmas please.
If you think that’s important to manage a good retirement plan I bet your parties are a hoot
Unfortunately we can't only consider the rates now vs. later when considering conversions. You need to factor in the opportunity cost of paying tax now, when that money could've stayed in the market for X number of years. If the growth of the opportunity cost money more than compensates for the future tax rate increase, conversions won't make sense (which is normally the case). The caveat is that if your goal is to pass the lowest tax burden on to your heirs, conversions will reduce the overall tax burden (your income taxes now + income taxes for dependents on inherited IRA's) since they will have less withdrawal flexibility (of course depending on the circumstances), but the bulk of the benefit is going to your heirs, and not to you personally.
Opportunity cost on investments only applies if you are changing what investment returns are for the different types of accounts. If you do the math with the same percentage of taxes coming out over time you will see that there is no dfiference in net of tax investment return. What matters is paying the lowest percentage when you exit the account. I have heard people talk about opportunity cost for years but from a purely tax perspective it isn’t true
In your example, would you rather pay the government $40,000 now, or $60,000 in 5 years with inflated dollars?@@blueridgewealth
I agree with you, the opportunity cost lost due to the Roth conversion is the tax paid upfront. Therefore , don’t pay withhold tax from th conversion. Pay it from savings.
Nice explanation. Medicare has a 2 year look back and then will adjust each year - IRMA.
Interesting! As you can see here, there are many factors to consider in order to answer this question specifically for anyone individually. If you’d like to schedule a phone call or zoom meeting to dig deeper into your personal information, we’d love to see how we can help. Schedule here: johntube.timetap.com
I didn't know about this as well. I need to look into this
What’s missed sometimes is that converting to Roth is paying taxes years in advance of having to, and reducing the amount of money in that 401k or IRA that could have continued growing. For most people the tax bracket change is 2% - so not a big deal. When withdrawing 4% a year, following the original 401k taxed when used scenario works just fine.
Watch the whole video, if the money is invested the same the only thing that matters over time is when can you pay the lowest percentile on tax brackets
For the 2023 tax rate, if a married couple makes $127,150, they will pay 12% for the first $117,150 and 22% for the excess $10,000?
You forget the tax burden upon death, inherited 401k, IRA and Roth accounts require the surviving beneficiary withdrawal the total amount in a 10 year period. This could significantly raise the tax rate for the recipient.
That is 100% true, thanks for watching and the great feedback
Tax brackets is the most important issue here. You don’t have to move all 100 k at one time. Move the amount where it will keep you in the lowest tax bracket you can get. Also it only makes sense to do this if you don’t need the money for many years.
Sure 100k is an easy thing to deal with.
But the couple has 2mil in taxable $.
Another example of where the employer was way late with Roth 401k options or the couple was ill informed.
I agree it’s a silly argument and very dependent on many variables. If they convert 2000000 they will get hit with a monster tax bill at the highest tax bracket. Like you said, if they kept it in the traditional and took it out as needed, they will get no where near that bracket.
I never understood this argument. The only part that I can get behind is if you assume the rates will be higher based on politics, deficit spending, geopolitics etc. but if I knew those answers I would buy a ton of leaps and YOLO the market to make billions.
I agree with you on all parts except the many years part. If you can pay the lowest rate possible, pay it. If the rates go up even by a few percentiles you are still better off to pay the lowest tax rate
@@SN-fl1qy yeah it's hard to imagine the 22% bracket jumping up to a 49% bracket. you can't just willy nilly decide to charge that person 30k more in taxes than they paid the year before, which if you compared his 2017 brackets with 1981 brackets is what would happen. nobody in congress would ever pass that, and no voter would ever support it. you could do a phased in deal but still it would have to be very gradual and there's no way to do it without severely hurting the voting population.
It looks like you missed the part that having money coming out of a Roth will also reduce the amount of Social Security that is taxed. That could make the Roth conversion much lower in terms of over all taxes paid.
It definitely can but won’t the year you convert. Anytime you add taxable income in a year that will make SS more taxable. Thats why for an apples to apples comparison I always use 85% as the taxable percentage of SS amounts just to be conservative
If they are 63, will the additional income from the conversion not affect IRMAA increases in the Medicare lookback? Do you have a model that includes tax increases like that?
Yes if you look at the end of the video we discuss IRMAA and its impacts
With only 2 million I would pick a good bridge to live under or move to Portland, San Francisco,New York Chicago LA or Good borer town
Only make the move if you don’t need the money for 5 plus years. Pull the money out slowly so you stay in the lowest tax bracket you can.
Does tax bracket base on the total of pension and 401k? Or pension and 40.1k have different tax bracket?
Taxes are based on your ordinary income which would include pensions, taxable portion of SS and any distributions from 401k or other tax deferred accounts.
Sorry bro you lost me at around the 14:30 mark. Idk what you mean when you talk about them maxing out the different tax brackets. How do you do separate conversions of different amounts at different tax brackets?
You cross into each bracket as you make more money or generate more taxable income (in this case Roth conversions)
Excellent presentation. I've not seen this topic explained in such detail. I'm not sure I understand it all but certainly more than I did. Thanks
great presentation. how the 401k money is taxed when you leave it to your kids?
It will be taxed at their income tax rates based on the amount of distribution they take
I recently moved $10K from my previous employer’s 401k account into a rollover IRA. I made no contributions neither I have invested. Would it make sense to open and move this amount to a Roth IRA? Should that be done by the end of the year?
That is a question that needs more examination I would recommend talking to someone about this further to see if this makes sense for your overall plan
You mentioned charitable giving only in passing, and I have a question. If your estate plan includes charitable organizations who will receive essentially all of your IRA account value how does that change the Roth conversion strategy? In my case we have meaningful assets outside of an IRA that will go to younger family members on a second-to-die basis. Our goal is that very little, if any, income tax will be due after we are gone. Is a Roth conversion advisable for any of the IRA account funds?
If you want to give to charities, doing so in the IRA is the best way as it avoids any taxes being paid on those dollars. Sometimes you can do that while you are living to lower the amount of taxes you pay while you are living depending on what you are wanting to do. Plus it’s a lot more fun to see the impact of those dollars instead of waiting until you are dead.
I'm doing QCD too. Maybe I should step that up in the future, but the tradeoff is a little lower RMD.
Maybe I missed it but did you account for the IRMAA charge for NOT doing the conversion? (I know you did for doing the Roth case). If you don't do it, the RMDs will be larger, pushing you into an even higher IRMAA bracket? So maybe the $8K "charge" for doing the conversion was unfair!
Possibly, the RMD may not push you into IRMAA brackets depending on how much they factor in for inflation on those numbers in the future. That is an interesting point though, thanks for the feedback!
The question I have is how many times can you convert to Roth or is there a limit of conversion? Thank you.
There is no limit to the amount of conversions you do so do all you want!
Couple things. How long will market returns take to not only replace taxed funds but show some appreciation. 63 might be the cutoff point agewise. Secondly, taxes are higher earlier in life when working, taxes are very lower later in life. Best practice is to do this at the beginning, not the end. Friend got scared last Sept and moved the bulk into a 5% Roth CD and missed the big bump. Owes $10,000 in taxes on top of quarterly payments converting to a Roth account.
Market returns are irrelevant if you can pay a lower percentage of tax. Not everyone has lower tax later thanks to RMDs
@@blueridgewealth if your 401k and rmd is so that you worry about taxes, you have no worries. The point is that most retirees living on 75,000 to 90,000 a year pay very little in taxes and even less in ‘24 as the tax brackets were raised even higher.
If you live off dividends, the conversion seems like a no brainer…
Question, let’s assume the hypothetical couple is over 65 and on Medicare. Wouldn’t the rollover also be considered income for Medicare and potentially increase Medicare part B and D premiums?
Yes, you have to be aware of the impact on IRMAA for any taxable income/gains you have so you have to include that impact as you decide how much to convert
Great video, Thanks
We have nearly $1M in a qualified pension and are looking to retire in 2028. Trying to get a good tax plan in place.
We are looking at doing Roth conversions for roughly $500,000 in pretax 401K accounts.
Hopefully, it's not too late for 2023, and we'd like to take advantage of the tax cuts before they expire in 2026.
That should give us 3 years at $60,000 each to move $180,000. Unsure how we should handle the rest.
Our taxable income is roughly $60,000 and we would like to stay in the 12% tax bracket, below the 22% tax bracket if possible. Will converting $30,000 in a fiscal year put us over the threshold into the higher tax bracket?
TYIA
It is too late for conversion in 2023. All of those moves had to be done by December 31, 2023. Contributions can still happen by tax time but any conversions now will belong to the 2024 tax year
The 2024 tax bracket for 12% ($23,201-$94,300) should give you a nice buffer to make sure you don’t go into the 22% bracket. I saw a great presentation on the long term financial advantage of making half your conversion at the beginning of the year and then wait for a downturn in the market (10% say) and doing the other half. If no downturn , then just do the other half before the end of the year. The additional profits over several decades was on the order of $100K or more.
My young wife & I file joint tax returns. We will receive $7,700/month SocSec, & have roughly 3 mil in 401Ks. 1. Is the value of my 55 year old wife's 401K included in my RMD calculation if we file jointly? Or is inclusion of her 401K value delayed until she reaches 75?Since I am 68 & still have a little time for Roth Conversion ; How much should we initially reduced my pre-tax 401K amount by ROTH conversion to minimize income tax & reduce amount of SocSec forced into higher tax brackets? Thanks
Albert, good questions. The RMD for you is based only on the tax deferred accounts in your name. Hers would add as you mentioned once she reaches 75. To help you the best ways possible we would need to see the breakdown of how much is in whose names as well as some other factors that could affect your taxes that you haven’t mentioned. I would be happy to sit down and discuss this with you whenever is convenient for you. Here is a link to my calendar where we can schedule a time: johntube.timetap.com
Always have a non taxable account along with your 401k or IRA etc. In fact, I have more saved in my regular account for these reasons stated. I think I will end up way ahead when I retire.
Tax diversification can be as important as investment diversification. Good job
I get so confused when it comes to retirement. I am closed to 50 and I will have approximately $10,000 a month pension when I turn 60. I don’t have 401 but have a Roth account with not so much in it. My friends are telling me 10,000 will not be enough. My house will be paid off so I dont understand why 10,000 won’t be enough.
10k with no debt should be enough but it depends on where you live and what your lifestyle looks like.
Whiteboard was helpful, but it felt that you swayed away from your example. Client has taxable money to pay taxes for conversion, and did not need the money at age 72, so converted assets had time to grow. Much better reason to do the conversion. Problem is that converting 300k from a $2m portfolio doesn’t really lower RMDs all that much, once market grows…but not a bad problem to have.
Very good information. But it seems focusing 2025 tax code expiration. Would you please explain the following case ? Both of 63 year old and will still working for another 4 years. Now the tax is 24% plus around 6.5% state tax. Regular 401K is 3M. Is it better to move to no income state after 4 years to convert to Roth IRA or convert now by taking 2025 code advantages? By the time when retired, the SS and Pension will be around $100,000/each year.
Another question is how you so sure that 2026 tax code will higher. Is any chance to get renew ?
The focus on the 2025 expiration is because that is the only clue we have of what the future holds with taxes. The truth is the government could change taxes before 2026 or they could extend. The main conversation is the same in either scenario, when can you pay the least tax on your savings? Based on your scenario, waiting 4 years will put you past 2026 into a likely different scenario and also another factor to consider is the impact to Medicare premiums starting the year you turn 63. Since you’re starting income in the future will be 100k at least, I’d say entertaining Roth conversions now could make sense but I’d be happy to hop on a call or Zoom meeting with you to look at this scenario further. johntube.timetap.com
I think there’s middle ground here. I’m taking enough out of my pretax investments into my Roth to get close to the Medicare Irmaa without going over and getting surcharged. Do this annually until 2026 and then re-evaluate. However, I can see how even paying the surcharge might be advantageous if the current rate goes above 25%.
Yes, taxes may go up, but the government may also change the tax law and remove or reduce the Roth tax exemptions. With the government there is simply no guarantee and it can do whatever it wants. So, making decisions based on what the government may do is nearly impossible.
That is true but the same argument can be made for investing in stocks. Sometimes you have to decide what is the bigger risk and make decisions to avoid it.
@@blueridgewealth True. I trust private companies and Wall Street more than I trust Washington, DC. That is my risk choice.
@@blueridgewealth…. I tend to agree with the comment made above….. The government will need more money in the future… Guess where they will look to collect more revenue….. They will have all the Roth money gains that have never been taxed on one dime of the gains…… Peter Thiel comes to mind, but actually it’s everyone who has a Roth account….. They are already going to be taxing the initial investment into a traditional account plus any gains….🤔🤔🤔
As Yogi Berra said, “It’s tough to make predictions, especially about the future.” That includes predictions about future income tax law. Roth conversions make sense (to me) for a couple other future possibilities.
First, in any federal income tax scenarios I think is likely, widows who ends up filing “single” will see their tax brackets cut in about half…and same with IRMAA for Part B. So, a couple doing Roth conversions will benefit a surviving spouse perhaps significantly.
Second, if the couple has children, given SECURE Acts I and II and the ten-year rule, it’s way better for them to inherit Roth than Traditional IRAs.
Also, it’s PRINCIPAL for the dollar amount that’s converted to Roth, not PRINCIPLE.
And the odds Congress passes a tax law that returns us to 1981? Gotta be close to zero.
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I agree with many of the points you have made here. Especially principal vs principle as that has already been pointed out and corrected in future videos.
It is hard to predict the future which is why any tax decisions you make need to consider if this decision is reasonable compared to where the taxes are likely to be later.
As I point out in the video, we don’t know how bad taxes can get except to look backwards. Just because we have gotten used to a tax environment for 4 decades of relatively lower taxes does not mean that chances are close to zero that significant tax increase can’t happen.
A few questions I hope you can/will answer:
1. At 14:40 you mention to convert under 25% bracket. Why did you select 25%? Why not 30%, 35%?
2. Also at 14:40, you show:
$44,946 @ 12%
$101,300 @ 22%
$173,450 @ 24%
Based on the 12%, 22% and 24% brackets you show I assume you are using the 2023 tax brackets (shown at time 10:00). But none of the dollar amounts shown above actually match any of the dollar amounts of the 2023 tax bracket thresholds. So, where did you get those dollar amounts?
Thanks
25% is what brackets are returning to in 2026 if there are no changes.
The numbers we show are the top end of each bracket with the standard deduction (27,700) added to it
Since they have 500K in the bank. Why not pay the Roth conversion tax amount form the bank account bucket so the full amount of the 401K taken out can go into the ROTH account?
That would be the strategy, but to show how Roth’s benefit you for an example you have to look at it from the 401k so it’s a fair comparison
Plus for us, we do not want to leave our children money that has an immediate RMD. That is the clincher for us.
Thanks for the comment Phil. Depending on your intentions with your savings that could be the most important reason to act on these steps now.
This does need a careful study and this is only a partial study. If they don't need the 401K money, what do they plan to do with it-inheritance or donate to a charity (tax free)? I would probably start pulling 401K money now that keeps you in 22% bracket, for about 5 years. This is just to try and keep your RMDs in check Whether this goes into an after tax brokerage or Roth, that is a separate decision. They should not be on Social Security, they should have waited, then they could have pulled even more out the 401K at a low tax rate in their early 60s. Can't fix that...
There needs to be more to it than what’s covered in this video. When we meet with families it is a multiple meeting process to determine goals and planning strategies in all 5 areas of planning including taxes. The main point of the video is to begin the discussion. Thanks for watching!
My thought as well... They started SS to early. But everyone's situation is different. Maybe their expected life expectancy is short.
What happens if Congress decides to start taxing the Roth IRA? Or is that unthinkable?
Pretty unthinkable, what is more likely to happen than that would be Congress not allowing Roth’s in the future but extremely low chance they undo something you did while the rules at that time allowed it
And not to mention what happens when one of the spouses dies and the couple never converted or drew any money from their deferred 401k. As a single person, the tax rate doubles and IRMAA can't easily triple your cost of Medicare.
Excellent point. This should not be overlooked when a couple does retirement/tax planning!
At 8:58 you provide your opinion on the likelihood of tax rates increasing in the future (that they will rise), which is certainly one factor to consider before doing a Roth conversion. However, you don't back this hypothesis up with any historical statistics. You probably know that historically tax brackets have generally enlarged over time - meaning over time it generally takes more income to hit the same tax percentages. For example, in 2002 MFJ paid 27% over just $46.7K and today (2022) MFJ pays 24% over $178.15K and 32% over $431.9K! (Identical percentages are not maintained but you see the clear change in the income thresholds required over time.) I would call this tax bracket inflation which actually tilts the analysis toward deferred taxes (401K/IRA) vs paying taxes today for a Roth conversion. Accordingly, your hypothesis doesn't really hold up to the reality of historical tax brackets - in fact, the opposite should be expected for most people. (I haven't looked in detail but I would expect the same effect for all income threshold triggers like Medicare issue as well - we should expect thresholds to rise by the time we actually get to retirement.)
Bottom line is that a Roth conversion turns out to be the right move mostly only for those who end up with significantly more income in retirement than they had while working (enough to outpace even reasonably expected bracket inflation). Kudos to such people but they are rare by definition. Paying more taxes in this situation is a nice problem to have compared to the alternative scenario - a person who bets they will be definitely be in this much-more-income-in-retirement-scenario and does a Roth conversion today (paying taxes at higher marginal rates) and then actually ends up with lower marginal rates in retirement will really be hurting that much more.
B Lorax, you aren’t looking back far enough. The last 40ish years (back to 1981) have had relatively low tax brackets compared to when income taxes began in 1913. The average top tax bracket since then has been over 63% where we enjoy a top bracket of 37% today. While we have enjoyed these brackets being lower for a long time that has been one of the major catalysts in the massive amount of debt we have accrued over time (reducing the tax income while keeping the spending at a similar or increasing rate) with a large percentage of it coming in the last 20 years. If you see the last time we had a debt to gdp ratio over 100% the government raised the top rate to 94% and kept it at 70% or above for almost three decades. In case the argument is this only affects high income, during the 1950-1960s the lowest tax rate any American has was 20% compared to the bottom bracket of 10% now.
As I have mentioned in these videos, the key in these scenarios is trying to pay at the lowest tax percentage you can. If that is now then Roth’s make sense and if not then if makes sense to continue deferral.
@@blueridgewealth True enough - I didn't consider 1913 tax brackets as relevant for defining the trend. The trend certainly covers the last 40 years though - in 1981 for MJF 24% was passed at just $16K income. That's a 40 year trend of around $16K in '81 to $46.7K in '02 to $187.15K in '22 (with some percentage variation but the trend of "tax bracket inflation" is well defined).
I understand that your opinion regarding where you expect tax rates to go is based on your assumption that higher taxes will be necessary to bring down federal debt. I agree tax revenue will needed but it remains to be seen how it will apportioned across personal income brackets as well as from other sources. Hopefully, wealth inequality and corporate taxation will factor into those determinations (although I have no illusions about any "fair" outcome on that basis).
At least we agree the Roth conversion is a gamble. On that note, you didn't address my comparison of the two potential wrong decision scenarios, one from not making the Roth conversion and paying more taxes due to unexpected excess income (and/or higher marginal rates) in retirement (the "good problem" scenario) and another from making the Roth conversion and having unexpected low income (and/or lower marginal rates) in retirement and the savings spent in making the conversion previously (the really bad problem created out of fear of the "good problem").
B Lorax, Those brackets weren’t the 1913 brackets but that trend was what it took to reduce the debt from 1946 to the early 1980’s. And your theory of tax bracket inflation is really just the theory inflation as the buying power of those dollars decreases over time and the brackets increase as wage growth happens.
These videos address what you call the good problem as we look at why someone’s income would go up in retirement from a mix of income sources and your IRA/401k distributions being your highest taxed dollar. So if the tax brackets increase your starting point for tax on distributions increase.
The bad problem from the good problem as you call it is something to be aware of in making conversions and not making drastic decisions. It can be viewed like using past performance in the stock market, it isn’t a perfect science but history and common sense can help you make decisions moving forward. That’s why if we look at relatively similar situations (like 2017 brackets) and make decisions that would have made sense then you shouldn’t be too off the mark.
@@blueridgewealth We are talking about two distinct (although related) propositions for considering historical tax rates. My original point was for someone to assess the likely range of marginal tax rates (i.e. the "starting point" for taxes on RMDs vs the "starting point" for taxes for a Roth conversion) that one should expect in retirement based on the last 20 or even 40 years of taxes brackets. From this, the "starting point" for the taxes paid for the converting to a Roth are likely to be worse than the "starting point" for deferred taxes if no conversion was done. In contrast, it seems you were inviting a review of much earlier tax history to support your supposition that we should anticipate more severe taxes in the future in order to bring down the national debt. IMO that is a much greater speculation than mine but I appreciate the dialogue.
When you refer to capital, it is “principal”, not “principle”.
Thanks for the feedback, we have since changed that since posting this video almost a year ago.
Does the $8700 increase in Medicare part B cost apply for each person or is it a combined increase for the couple?
Total together
Why would they go through the tax pain in a conversion and then pay the $ 10:38 20k from the rollover that was just made tax free? Understood that it’s still gotta be paid out from assets….clarify that next time, thanks
The 20k is a withholding during conversion. Sorry for the confusion
If we can live off my pension and SSA ($120k yearly total), could I just let my $2 million ira grow and then when we need LTC, the distributions should be tax deductible as medical expenses, thus offsetting any taxes?
Doubtful the distributions would be very deductible. You also have to start taking mandatory withdrawals at age 73 or 75 if further than 9 years from now.
@@blueridgewealth I don't follow. If LTC is $120k per year then pretty close to the full $120k is deductable as a medical expense.
You need to also discuss the widows tax trap. Who ever survives will be destroyed with taxes, convert as much as possible to a Roth so it will tax free for the survivor,
They always forget this very important topic, but you are right!
Great point! As you can see here, there are many factors to consider in order to answer this question specifically for anyone individually. If you’d like to schedule a phone call or zoom meeting to dig deeper into your personal information, we’d love to see how we can help. Schedule here: johntube.timetap.com
Great stuff! Thanks.
15:27 - Regarding the 2-year Medicare Lookback, that’s a one-time thing, right? That is, if you increase your taxable income in 2024 to do a conversion just that one year, your 2026 Medicare premiums will be higher. However, will your Medicare Premiums go back down the following year (2027), right?
It occurs every year and resets based on the two year old tax information. Yes your premiums should go back down but I always recommend calling Social Security to make sure they are aware of the change.
@@blueridgewealth, gotcha. Thanks!
Is the recommendation in this clients scenario to do conversion for multiple years - how does one decide how much to leave as traditional IRA/401k?
Good question leeward, there are quite a few variables to juggle when it comes to conversions. In this scenario the goal would be to do conversions over several years, while tax rates still make sense. There could be a time where taxes are too high and you would want to keep dollars in tax deferred accounts, but for most of the people we are talking to now is a lower time for taxes.
The biggest driver for how much to convert will be your income and the brackets you would pay taxes in. That will dictate in most situations what is the right amount and how much makes sense.
I’d rather pay 20% tax once than 20% every year. I intend on living off dividends, interest, capital gains and proceeds from selling covered calls from within my Roth. All those proceeds will be tax free. I believe I can make 10% a year on 2 million in my Roth. (A lot more if selling CC goes as planed).
...the tax is only levied on MRD, not the whole 401k....and your historical data for tax brackets show decrease...
The tax is owed on the entire 401k at some point, either through RMDs or paid by your heirs. If you choose to only take RMDs then your heirs will have to pay the balance of the taxes either at your death or over 10 years based on current rules.
---Once taxes are paid that money is long gone, goodbye with no opportunity for further investment growth. The idea that a person should covert their entire traditional 401K to a Roth 401k and thus pay all of those upfront taxes presumes that during their retirement years they will draw down their entire traditional 401k and thus would have to pay taxes on the back end on all of their tax deferred contributions and investment gains.
----Only if a person draws down their entire traditional 401k during their remaining life will they be paying taxes on all of their tax deferred contributions and investment gains. Normally, they will not draw it down entirely but will leave some portion (perhaps a considerable portion) of their 401K to their heirs. That portion can stay invested and continue the tax deferred growth. Thus, the retiree during their remaining life, will never pay back all of the taxes that they deferred, and their heirs, like them, will pay taxes only on the portions they draw down.
As you do the math you have to reconcile that someone, whether depositor or heirs will have to pay taxes on these funds. If you can pay them at a lower percentage, doesn’t matter if it’s upfront or later, that is the best time.
Question: So, if I convert a 401K to Roth at 69, I still have to wait 5-years before I can use that money tax free? 69 plus 5 years = 74 years old?
You can access the converted principal after conversion if you are over 59.5 during the 5 years.
Oh to not live in an income tax state! Don't forget if you are taking an ACA subsidy prior to 65 this is a strong incentive to NOT doing ROTH conversions. Our subsidy is currently $1900/month which would go to $zero above 400% Federal poverty level.
Right, anything increasing your income is going to jack up your ACA.
What about the double tax on SS income? How does this change?
Gary, are you referring to SS benefits being taxable in your retirement if your income reaches a certain level?
I have a Roth account for more than 5 years and i'm 60. If i convert from the traditional IRA to the Roth every year from now on, do i have to wait 5 years for each conversion to be fully tax free?
No since you have checked the two boxes of 5 years and over 59.5 you don’t have to wait for each conversion to have 5 years. That rule only applies to under 59.5 for conversions.
I'm confused here. It's got to be tax because the traditional IRA has never been taxed?
If tax rates are expected to remain the same or lower when RMD time comes, the math will not support a conversion. Predicting tax rates is a fool's game. If the example shown was done in 2015, the tax rate used would have been 25%. A couple years later and the tax would be 5% less. Who would have guessed that tax rates would go down?
When RMD starts, the tax is on the RMD amount, not the conversion amount. Balance, less RMD would continue growing tax deferred (same with the Roth balance).
In Finance 101 we were taught that under a pay now or pay later scenario, the optimum choice in most cases is to pay later. Why pay Uncle Sam now and guess what tax and interest rates are going to be in the future? And, of course, like you indicate IRMA and ACA can skew the math.
Personal Finance 101 would probably teach that tax diversification is a very good thing. The IRMAA impact from RMDs can be huge on a large Traditional IRA, particularly for a surviving spouse being taxed at Single rates. The SECURE act(s) have made inheriting a Traditional IRA potentially very painful for a beneficiary in their peak earning years (or with their own forced income).
RK, if taxes are lower or the same it doesn’t make sense to do any Roth conversions now.
The RMD amount is what we are looking at annually but the starting tax rate for the RMD is on top of any other taxable income source you have that tax year. If you show good income from Social Security and pensions then you could have a high starting point for where taxes are owed on tax deferred accounts for the remainder of your life.
Good points Doug, thanks for the comment!
@@DougASAPI do not disagree with your statement. It all depends on the size of the RMD and if there is enough room to stay within the lower IRMAA bracket. Again, it does not belie the fact that future tax rates have to be predicted, that politicians do not keep messing around with the rules and speculating when the conversion from MFJ to Single may take place.
Personally, I would rather not pay taxes now and be forced to bet on what may happen in the future. As I indicated above if an individual had done a Roth conversion before 2015, the tax bill would in all likelihood have been at least 5% higher. But again, who knew?
@@texastanjore See my post about about McQuarrie's study. Dr. McQuarrie agrees with your analysis.
I need to look at the poorer version. I am 64 with 175,000 in my 401(k). I will have to draw about 800 a month to live on. I don’t know if I should roll to a IRA.
Depending On what other income you have, marital status....
Sorry for the dumb question. If I convert my 401into a ROTH (I am turning 60 shortly) can I deduct the taxes I paid on my income tax return?
Can I do this in small increments so the tax isn't bad?
No the taxes are not deductible, they are taxes charged for the amount you convert. You can do as little or as much as you want depending on the taxes you are willing to pay
“Roth grows tax free” is a short sighted perspective. As 63 yr old, liquidity and capital preservation are more important since you cannot take a taxable loss on Roth losses. So it might make more sense to cash out the deferred income and allocate it to cash rather than to reinvest into a converted Roth or leave in 401k
9:23 If the assumption is that tax rates will go up in the future as government gets more desperate for money, why wouldnt you also assume they'd take away tax free status from Roth IRAs? If the government gives tax free status they can also take it away.
The government can do anything but I don’t think that’s likely. We have had higher tax rates in the past. Our government has never retroactively taken away rules and benefits that our citizens have made decisions on.
What about the difference you can put away by not paying tax on it ealry reducing the take home pay especially in already lower tax brackets
Not sure I understand the question you are asking here
@@blueridgewealth so in a lower tax bracket say making less than 60k is there still an advantage to Roth if it means you can't save as much, with the 401k since it's tax sheltered you can put some of what would be taxable income into the 401k and allowing you to keep your take home pay in a lower tax bracket and save more. I would think there is a break over point between Roth vs 401k