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.
And of course, since you would be a year older, your RMDs would be a larger percentage of a slightly larger account, resulting in higher taxes due on that and all future RMDs. Secure Act does nobody any favors.
Retirement becomes truly rewarding when you have two key components: a solid financial foundation and a clear sense of purpose. Making wise investment decisions is crucial to achieving strong returns and enjoying a secure retirement.
Rising costs have impacted my original plan to retire at 62, work part-time, and grow my savings. I can't help but wonder if those who navigated the 2008 financial crisis had an easier time compared to the challenges I’m currently facing. Market volatility, combined with a lower income, has me concerned about having enough for a comfortable retirement.
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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?
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....
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.
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 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!
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.
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
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
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!
A simple way to look at it is to figure what your 401k is projected to be at your RMD date to get the amount you will be forced to take and what tax bracket you will be in. Then see what amount you need to eliminate from that amount to get you into a better tax bracket and convert that amount yearly prior to your RMD age as long as it doesn't put you in a higher bracket. Of course that is guessing as to what the actual tax brackets will be in the next 30 years but any calculation requires some guessing.
No, I disagree. If I’m lucky enough to have the returns that I project (and they aren’t conservatively low), I won’t hit the point where the income that i need is lower than the RMD until I’m 90. AND, if i have that much when I’m 90, I will be gifting money away and avoiding taxes that way on any excess RMD. It’s about when the RMD overtakes the amount you need to live, NOT when RMDs kick in.
@@josephlabrie5984 Yes, of course it depends on what your 401k is worth and what you will need to withdraw to maintain the income level you need/want. I was just addressing avoiding moving into a higher tax bracket any time a person makes a conversion. I'm 63 and considering converting some every year now but I have to consider affecting my Medicare cost in 2 years.
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
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.
This couple should be the standard we aim for. A self-sustainable retirement income vs expense and plus a way more than enough of saving and IRA / Roth to work with and potentially passing that to next generation.
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… 🤔🤔🤔
Well done analysis, but I think a few important points were overlooked. What happens if at RMD age one or both need to go into assisted living costing over 100k per year? If they have to pay out of pocket any medical expense over 10% of AGI is a tax write off. In that case they could use the sizable RMD to pay the assisted living bill virtually tax free. This is something iLTC insurance brokers probably don’t want the public to know about. RMD funds can be used to pay medical bills. If you roll everything over early to Roth the medical bills will still have to be paid…your choice if you want to pay them with before or after tax dollars
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.
@@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.
Excellent! I am not financially seasoned, but have done the basic 7:55 math many times to know that the blanket advise by some to convert all 401k funds to Roth doesn't make sense. On the other hand, I know that the presumption of a lower tax bracket after retirement was simplistic and does not paint an accurate picture of the tax implications. I knew the right answer was somewhere between the extreme. Thanks for explaining with this example.
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.
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.
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.
@@markkrull556 correct! You’re 62 and no need to hit a Roth which is sound good but keep your IRA growing end enjoyable when you start distributing at your 73 pay a little tax or nothing depend on your SSA and other asset
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
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.
I'm 63, having retired three years ago. I recently rolled over my employer 401K to an IRA. (Main reasons for the roll over are the fees are lower, I received a $1,000 signing bonus, and there are more choices on what to invest in.) I have no interest in drawing Social Security at this time (why take a voluntary reduction in benefits for life? All of my "how long will my money last" spreadsheets indicate my portfolio will last longer when I _delay_ taking SS. In fact, the longer I delay, the longer it lasts), nor do I have any interest or need to withdraw any of my IRA funds. I currently have a passive income (rental property, and interest from CDs) that are enough to cover my monthly expenses. My plan is to slowly roll over the IRA funds to a Roth IRA... even if it takes 10-12 years or so. (The advantages of a Roth are appealing to me.) I will do this a little at a time, each year rolling over just enough to keep my income in the 10-12% tax rate. Since I will have to pay a tax on the IRA money at some point, it will be good to know I'm paying as little as possible. Is this a good plan?
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…. 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….🤔🤔🤔
I have an IRA/401-K (mostly Roth) and an Air Force pension (approximately 72K a year). I won't take SS till 66 yrs/9 months (full retirement). Two years from now. I work part time to qualify for an IRA (nothing more). My "spendable" income will be my pension and approximately 24K from the IRA. Once SS begins I'll spend only the pension/SS till I'm 70. It seems to be working.
This also ignores a very important factor in our increasingly litigious society. 401k plans have far more protection against lawsuit liability than do IRAs. Rolling money out of a 401k can greatly increase your exposures to liability related money loss.
That’s true, but for most people the lack of options in a 401k is a more likely hindrance than someone suing them. Plus if you invest in annuities and insurance some states will protect those dollars from creditors.
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%).
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.
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
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!
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.
2 million... put it in a traditional IRA .. Live off the 5 percent interest or invest in stocks that pay in dividend. You would be able to live comfortably without taking out anything from your IRA
You have to take money out of your IRA starting at age 73. It's called a Required Minimum Distribution, and it gets bigger every year. You have to pay tax on the distribution. This whole video is about reducing the amount of tax you have to pay.
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.
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).
Another example of someone who isn't looking at the whole story. He takes out $200,000 in one lump sum and then removes the same amount from the IRA401K in a couple of years. You 401K or IRA grows tax free until you withdraw it. You have to live on this money and you take money out as you need it, not a large sum in one withdrawal. Also left out is the 5 year waiting period for Roth profits.
If your MAGI exceeds roughly $200k (married filing jointly), your IRMAA will go up 2 years later. Try to do Roth Conversion during the working years until Retirement Yr - 2 yrs.
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. :)
I recently adjusted my Roth IRA to 50% in SCHD, 25% in SCHX, and 25% in SCHG. For my Roth 401k, I went with 70% in Vanguard's S&P 500 Index, 20% in the Vanguard Growth Index, and 10% in the Vanguard International Index. My goal is to grow my $350k to over $1 million within the next three years.
80% equities 20% cash. I plan to take advantage of the s&p 500 as leading indicators predict above 10% rise by this year, my only issue is how to properly allocate a large stock/bond portfolio for substantial gains at minimum risk.
Tell me about it. My 401k? Practically useless right now. I’ve got over $500k in there, but with everything going on, I’m wondering if I should just cash out and figure something else out. I’m getting closer to retirement, and the idea of relying on that fund is stressing me out.
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.
That's quite remarkable! I'm genuinely interested in benefiting from the guidance of such experienced advisors, especially considering the current state of my struggling portfolio. May I know the names of the advisors who has been assisting you in navigating these financial challenges?
Certainly, there are a handful of experts in the field. I've experimented with a few over the past years,but I've stuck with *MONICA AYAKO VOS* for about four years now, and her performance has been consistently impressive.
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.
Great video and very helpful. The only thing I don’t understand is the 2017 and 1981 tax comparison. I didn’t quite understand the point of that. Is it just to highlight how tax code changes? Current RMDs certainly can’t be subject to those old rates.
When considering the impact of RMDs, it's very important to consider your life expectancy. If you won't live to RMD age (75 for me), or if you don't expect to have many years where you need to take RMDs, then paying a lot of taxes now, to avoid RMDs later, doesn't make sense. Also, you can help to limit the impact of RMDs by putting a larger proportion of your growth assets in non-RMD accounts, and a larger proportion of your income assets in your RMD accounts. In this way, you can still achieve your desired asset allocation for your entire portfolio, while limiting the amount of the portfolio subject to RMDs.
Bill, thanks for the feedback. I agree 100% on your 2nd paragraph. On your first, you may not have to pay the taxes but someone will. You can definitely pass the burden onto your kids or whoever receives these funds. If you are trying to pay the lowest dollar possible on these funds that is the push to act now.
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,
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
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.
@@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.
Oh my, where to start? There are so many issues which make his analysis difficult to justify. Number 1, what couple who worked and accumulated $2 mil in 401ks and then has $500k in just cash, only receive $1200/month each in SS even taking it early at 62? This scenario is highly unlikely. They would receive probably double that. However, using a realistic amount causes his thesis to crumble from the start. A second point to consider is that the $320k of conversion cost (taxes) is a 10 year loss of that money as they are 63 and they must take RMDs at 73. Given a realistic return of 7%, this means that the $320k if left in his non Roth retirement account would be worth about $650k in the year he has to start taking RMDs. Given the growth of the rest of his account along with the growth of this now retained conversion cost, his RMD could easily be $200k. The tax on that RMD given expected tax hikes, could be $70k (?). However, the couple would still have the growth or return on that $650k to defer these taxes by nearly $50k. In reality, their tax bill on this RMD would only be $20k or 10%. Giving the government money before you have to (i.e., the Roth conversion), is a “safe” model as you know what the taxes will be. But allowing the money to grow (but assuming the risk that it may not) allows you to keep more of your own money and defer taxes as long as possible. Finally, if taxes don’t go up as much as I postulated they might, or if you returns are better than 7%, you can reduce the tax bill by even a greater percent (0%?). This is my plan with the caveat that I am transferring from my traditional IRA to my Roth an amount to max out the 12% bracket. I am 64, not taking SS until 70. Like his example couple, I have multiple millions in my IRA and a good amount outside my retirement account. I will be able to move close to $700k into my Roth before I have to start taking RMDs at 73 and pay 12% tax on that (unless the tax rates change)
agree, if they have a nice pension, it usually means that they will less opportunity for 401K. And in order to fund an have an IRA grow into 2M, the contribution needs to be high. Unless they are discipline and leave the IRA at aggressive investment through out the past 35 years.
Thank you, Phil! I'm pleased to hear that. One of our primary goals with this channel to create educational content that is clear and digestible. Thanks for watching!
@@philwoodard5439 Hello again, Phil! We only use securities investments on a fee-basis. Depending on the client's situation, we may also recommend insurance products which are commission based, but our market accounts are solely fee based. If you want to talk more about what we do and whether or not we'd be a good fit to work together, here's a link to my calendar - bluetube.timetap.com. Thanks again and I hope you're having a great day!
I expected you to suggest paying the income tax on the Roth conversion from the $500K in after-tax savings. This would increase the balance in the Roth and essentially shift any int/div income from the taxable accounts into the tax exempt Roth. It would have also been interesting to see how much of the 401(k) you think should be laundered into the Roth.
@@datbio7302 - Tax management is a delicate balance of factors unique to each person, their situation, and personal priorities. Someone making a large Roth conversion will be subject to a certain amount of tax (paid with after-tax money) that has to come from SOMEWHERE. Paying that tax from a savings or brokerage account will increase the size of the conversion, and in effect move that money from the taxable account into a tax exempt one, saving all future taxes owed if those savings simply appreciated in a taxable account. There is more to this depending on where that tax money comes from. For example, if you have to sell some stock to pay the conversion taxes, the gains on that sale will be taxable (need to sell more stock!) and could trigger other taxes like NIIT, or the 20% cap gains rate kicking in. Another factor is whether you expect our elected leaders to raise tax rates in the future. Campaign speeches tell you more by what topics are avoided than what is said. We all have to ponder the numbers and our life's priorities to find our balance. I like simplicity and control. Roth conversions help me control my future taxable income by reducing RMDs, and this in turn puts me in control of how much IRMAA tax I have to pay in the future. But yes, it comes at a cost.
@@datbio7302 - Absolutely! The Roth account can be just like a savings account in accessibility (depending on how it's invested) but its earnings will grow tax free. Bank savings accounts (fully taxable = leaky bucket) don't earn much interest anyway.
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!
IMO It was helpful for him to show how high old brackets were - gives us a point of reference that with our debt problem, our current rates will go higher in the future.
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.
@@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?
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.
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.
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.
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. .
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.
It is important to make your large conversions before getting into Medicare as the Medicare penalties can be rather severe. This needs to be considered.
Thank you for the comment, we agree which is why if you watch to the end of the video we point out the impact of the Medicare costs when looking at the large conversions.
To avoid Medicare penalties, you need to make your contributions at least two years before starting Medicare because of the look-back. The exception is if you retire or have another life event the year after your conversions, in which case you can file for an adjustment based on estimated future income. Although I stumbled onto a curious hack. The year I retired I hadn't yet thought through my conversion strategy, and only converted up to the first IRMAA cutoff. This allowed me to get my IRMAA adjusted to zero. The following year I increased my conversions, but my IRMAA will remain at zero for two years because of the look back. If I had been more aggressive in my Roth conversions the first year of retirement, I would have had to pay through the nose for those two years.
---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.
No matter how long an individual lives, strategy suggested will help. Of course, the amounts involved do matter, and based on that decision matters. If you saved diligently into a pre-tax 401k, you almost certainly will need to do what is suggested.
@@SSSocialsI'm trying to follow what you are saying. Can you be more specific? What suggested strategy will help? How do amounts involved matter? Which suggestion would one almost certainly need to do?
@@blueridgewealth It is better to pay taxes at a lower rate, but no one knows what tax rates will be in the future including whether Roth 401ks will remain tax free for heirs... ...and there is no math that can figure this out. One can only plug multiple tax rates--some higher and some lower--into their math models and yield multiple scenarios. ---As I said above, if taxes are paid upfront that money is long gone and not available to invest. Also, you very likely will be paying taxes on money that you never withdraw during your lifetime. Also, no one can guarantee that Roth savings will remain tax free for heirs. For example, higher tax rates in the future could include taxing withdrawals by high income heirs from bequeathed Roth savings. ---In a traditional 401k you pay taxes only as you withdraw funds. The rest continues to grow tax deferred.
If they follow your suggestion and convert about 319k into a Roth and use that withdrawn ira money to pay taxes due, they would then only have about 260K in the Roth, true? Just checking that I am understanding using the IRA conversion amount to pay the taxes. Also, down the line, they might have to worry about estate taxes due if they also had other assets, such as a million-dollar home, with appreciation, etc. but if they used their IRA to pay taxes, it decreases their estate. Very informative, thanks.
There are few people that have super high pensions like that. I clicked off when they make soo much money from pensions and social security. We have SS and that’s it, we do have an IRA which is very helpful. Pitch that story, then you’ll have my attention. Oh yeah, converting to Roth, we still have to pay taxes, so no solution.
We appreciate your input Rudy! We understand that everyone's situation is different and this is just one example. That doesn't mean your situation wouldn't get the attention it might need. If you’d like to schedule a phone call or zoom meeting to dig deeper into your personal situation, we’d love to see how we can help. Schedule here: bluetube.timetap.com
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.
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.
For me the goal of retirement is to maximize living well, enjoy travel adventures while still physically able. That window closes very fast, often unexpectedly. My goal isn't to pay the least amount of taxes possible before dying.
I don’t think this is an either or decision. I fully support all of our clients enjoying their life but also viewing our role in this relationship as someone who helps you make good decisions. You can make good decisions while also enjoying life and paying less taxes than you will have to later sounds like a lot of fun to me,
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.
I don't understand why anyone who is retired would put any money at risk. 2 million invested in CDs returning 5% would gross 100k per year and never touch the principle.
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.
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.
you only factored in federal tax. In CA, we also need to pay 12% state tax in addition to 22% federal. so 1/3 is chopped off with this conversion. Not sure conversion is a good idea?
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.
I'd like to see this with the consideration of no heirs...does ROTH get taxed if going to other relatives such as cousins after your death? Advantage/disadvantage of conversion if all assets going to charity, taking SSI penalties with MAGI and IRMAA into consideration AND also if one spouse dies leaving all monies to other spouse what tax and other monetary penalties consequences occur.
Your comparison is ( $100K Pre-Tax ) vs. ( $80K Roth ), but this is not the correct comparison. The right way is to compare ( $100K Pre-Tax + $20K Non-Tax-Advantaged ) vs. ( $100K Roth ).
@@blueridgewealth Except they are not the same thing mathematically. The option I provided is actually more likely, since IRS has limits on contributions. So if you hit the contribution limit then it is the second case that you need to consider.
There is no limit on conversions. The math is different on your example because 100k with 20k of after tax is not the same as 100k net of conversion. If you were to make it the same you would have to compare 100k plus 25k of after tax. But if you don’t have after tax amounts you need to consider the option in the video.
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
you better do a rollover Roth IRA also to make sure your assets are protected from any future lawsuits. Moving money regardless of tax favor it is also important to protect yourself from liabilities. would like to point out the fact that In 1981 if you made above 700k you were more than well off and I don't know what complaints in life you really are having? But that's another conversation,
Should you do a Roth conversion? It's simple. The Roth conversion counts as income. Do you want to pay the tax hit and the increased Medicare IRMA, or leave the taxes on your remaining 401K to your heirs?
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.
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.
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?
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.
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.
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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.
And of course, since you would be a year older, your RMDs would be a larger percentage of a slightly larger account, resulting in higher taxes due on that and all future RMDs. Secure Act does nobody any favors.
Retirement becomes truly rewarding when you have two key components: a solid financial foundation and a clear sense of purpose. Making wise investment decisions is crucial to achieving strong returns and enjoying a secure retirement.
Rising costs have impacted my original plan to retire at 62, work part-time, and grow my savings. I can't help but wonder if those who navigated the 2008 financial crisis had an easier time compared to the challenges I’m currently facing. Market volatility, combined with a lower income, has me concerned about having enough for a comfortable retirement.
You’re absolutely correct-financial advisors have access to strategies and opportunities that aren’t always available to the general public. I earned £560k in 2022 with guidance from my fiduciary advisor. Am I cashing out? Definitely not. I’m taking a step back to watch how the market evolves.
I’ve been considering that path myself. I have a significant stock portfolio, but some holdings are starting to decline in value. I'm unsure whether to hold onto them or sell, and I think hiring your advisor could help me effectively restructure my portfolio.
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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?
@@Nicole-k7sYour 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!
@@Nicole-k7sSuch 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
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.
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!
genius!
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!
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.
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
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!
at 16:00 priceless information regarding Medicare premium wow thank you
Thanks for watching, glad this video helped!
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!
A simple way to look at it is to figure what your 401k is projected to be at your RMD date to get the amount you will be forced to take and what tax bracket you will be in. Then see what amount you need to eliminate from that amount to get you into a better tax bracket and convert that amount yearly prior to your RMD age as long as it doesn't put you in a higher bracket. Of course that is guessing as to what the actual tax brackets will be in the next 30 years but any calculation requires some guessing.
No, I disagree. If I’m lucky enough to have the returns that I project (and they aren’t conservatively low), I won’t hit the point where the income that i need is lower than the RMD until I’m 90. AND, if i have that much when I’m 90, I will be gifting money away and avoiding taxes that way on any excess RMD. It’s about when the RMD overtakes the amount you need to live, NOT when RMDs kick in.
@@josephlabrie5984 Yes, of course it depends on what your 401k is worth and what you will need to withdraw to maintain the income level you need/want. I was just addressing avoiding moving into a higher tax bracket any time a person makes a conversion. I'm 63 and considering converting some every year now but I have to consider affecting my Medicare cost in 2 years.
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
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
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.
This couple should be the standard we aim for. A self-sustainable retirement income vs expense and plus a way more than enough of saving and IRA / Roth to work with and potentially passing that to next generation.
Amazing explanation! You are the best!
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… 🤔🤔🤔
The statistics may make you feel better about yourself but worse about the shape of retirees in America as a whole
Well done analysis, but I think a few important points were overlooked. What happens if at RMD age one or both need to go into assisted living costing over 100k per year? If they have to pay out of pocket any medical expense over 10% of AGI is a tax write off. In that case they could use the sizable RMD to pay the assisted living bill virtually tax free. This is something iLTC insurance brokers probably don’t want the public to know about. RMD funds can be used to pay medical bills. If you roll everything over early to Roth the medical bills will still have to be paid…your choice if you want to pay them with before or after tax dollars
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.
Excellent! I am not financially seasoned, but have done the basic 7:55 math many times to know that the blanket advise by some to convert all 401k funds to Roth doesn't make sense. On the other hand, I know that the presumption of a lower tax bracket after retirement was simplistic and does not paint an accurate picture of the tax implications. I knew the right answer was somewhere between the extreme. Thanks for explaining with this example.
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.
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.
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.
@@markkrull556 correct! You’re 62 and no need to hit a Roth which is sound good but keep your IRA growing end enjoyable when you start distributing at your 73 pay a little tax or nothing depend on your SSA and other asset
Go live life while you can !!
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.
I'm 63, having retired three years ago. I recently rolled over my employer 401K to an IRA. (Main reasons for the roll over are the fees are lower, I received a $1,000 signing bonus, and there are more choices on what to invest in.)
I have no interest in drawing Social Security at this time (why take a voluntary reduction in benefits for life? All of my "how long will my money last" spreadsheets indicate my portfolio will last longer when I _delay_ taking SS. In fact, the longer I delay, the longer it lasts), nor do I have any interest or need to withdraw any of my IRA funds. I currently have a passive income (rental property, and interest from CDs) that are enough to cover my monthly expenses.
My plan is to slowly roll over the IRA funds to a Roth IRA... even if it takes 10-12 years or so. (The advantages of a Roth are appealing to me.) I will do this a little at a time, each year rolling over just enough to keep my income in the 10-12% tax rate. Since I will have to pay a tax on the IRA money at some point, it will be good to know I'm paying as little as possible.
Is this a good plan?
RMD's have now been dropped on Roth 401k's as of 2024, so that would make the conversion more beneficial
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….🤔🤔🤔
I have an IRA/401-K (mostly Roth) and an Air Force pension (approximately 72K a year). I won't take SS till 66 yrs/9 months (full retirement). Two years from now. I work part time to qualify for an IRA (nothing more). My "spendable" income will be my pension and approximately 24K from the IRA. Once SS begins I'll spend only the pension/SS till I'm 70. It seems to be working.
Would love to look a little deeper and see if there is an opportunity to help
Great talking 👍.Hopefully, Roth rule stays the same forever!
Thank you for the comment and kind words!
I understood until you brought up 1981 tax bracket and how that applied to the conversation.
This also ignores a very important factor in our increasingly litigious society. 401k plans have far more protection against lawsuit liability than do IRAs. Rolling money out of a 401k can greatly increase your exposures to liability related money loss.
That’s true, but for most people the lack of options in a 401k is a more likely hindrance than someone suing them. Plus if you invest in annuities and insurance some states will protect those dollars from creditors.
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%).
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.
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
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.
Great analysis
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
Very good explanation!! Thanks
Thank you! We're glad it was helpful!
2 million... put it in a traditional IRA .. Live off the 5 percent interest or invest in stocks that pay in dividend. You would be able to live comfortably without taking out anything from your IRA
You have to take money out of your IRA starting at age 73. It's called a Required Minimum Distribution, and it gets bigger every year. You have to pay tax on the distribution. This whole video is about reducing the amount of tax you have to pay.
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
Love that you used a whiteboard to explain, great level of detail.
Thank you! We're glad the detail of information provided was helpful!
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).
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.
Very good info
Thank you for the comment, Mike! We're glad you found this video useful.
Another example of someone who isn't looking at the whole story. He takes out $200,000 in one lump sum and then removes the same amount from the IRA401K in a couple of years. You 401K or IRA grows tax free until you withdraw it. You have to live on this money and you take money out as you need it, not a large sum in one withdrawal. Also left out is the 5 year waiting period for Roth profits.
The IRMAA penalty you reference is per person. Thus, the penalty charge is per person.
If it was on the married chart we combined the penalties together so that is the sum total of those penalty amounts.
If your MAGI exceeds roughly $200k (married filing jointly), your IRMAA will go up 2 years later.
Try to do Roth Conversion during the working years until Retirement Yr - 2 yrs.
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. :)
It definitely isn’t all or none but getting the ball rolling is key. Let me know if you need any help along the way
I recently adjusted my Roth IRA to 50% in SCHD, 25% in SCHX, and 25% in SCHG. For my Roth 401k, I went with 70% in Vanguard's S&P 500 Index, 20% in the Vanguard Growth Index, and 10% in the Vanguard International Index. My goal is to grow my $350k to over $1 million within the next three years.
80% equities 20% cash. I plan to take advantage of the s&p 500 as leading indicators predict above 10% rise by this year, my only issue is how to properly allocate a large stock/bond portfolio for substantial gains at minimum risk.
Tell me about it. My 401k? Practically useless right now. I’ve got over $500k in there, but with everything going on, I’m wondering if I should just cash out and figure something else out. I’m getting closer to retirement, and the idea of relying on that fund is stressing me out.
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.
That's quite remarkable! I'm genuinely interested in benefiting from the guidance of such experienced advisors, especially considering the current state of my struggling portfolio. May I know the names of the advisors who has been assisting you in navigating these financial challenges?
Certainly, there are a handful of experts in the field. I've experimented with a few over the past years,but I've stuck with *MONICA AYAKO VOS* for about four years now, and her performance has been consistently impressive.
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.
Great video and very helpful. The only thing I don’t understand is the 2017 and 1981 tax comparison. I didn’t quite understand the point of that. Is it just to highlight how tax code changes? Current RMDs certainly can’t be subject to those old rates.
When considering the impact of RMDs, it's very important to consider your life expectancy. If you won't live to RMD age (75 for me), or if you don't expect to have many years where you need to take RMDs, then paying a lot of taxes now, to avoid RMDs later, doesn't make sense.
Also, you can help to limit the impact of RMDs by putting a larger proportion of your growth assets in non-RMD accounts, and a larger proportion of your income assets in your RMD accounts. In this way, you can still achieve your desired asset allocation for your entire portfolio, while limiting the amount of the portfolio subject to RMDs.
Bill, thanks for the feedback. I agree 100% on your 2nd paragraph. On your first, you may not have to pay the taxes but someone will. You can definitely pass the burden onto your kids or whoever receives these funds. If you are trying to pay the lowest dollar possible on these funds that is the push to act now.
Hi Bill, may I ask what are some income generating assets that you recommend keeping in IRA? Is fixed income annuity a good candidate ?
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
Very thorough, thank you for sharing!
Thank you, Dr. Schultz! We're pleased that you found this useful.
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.
Oh my, where to start? There are so many issues which make his analysis difficult to justify. Number 1, what couple who worked and accumulated $2 mil in 401ks and then has $500k in just cash, only receive $1200/month each in SS even taking it early at 62? This scenario is highly unlikely. They would receive probably double that. However, using a realistic amount causes his thesis to crumble from the start. A second point to consider is that the $320k of conversion cost (taxes) is a 10 year loss of that money as they are 63 and they must take RMDs at 73. Given a realistic return of 7%, this means that the $320k if left in his non Roth retirement account would be worth about $650k in the year he has to start taking RMDs. Given the growth of the rest of his account along with the growth of this now retained conversion cost, his RMD could easily be $200k. The tax on that RMD given expected tax hikes, could be $70k (?). However, the couple would still have the growth or return on that $650k to defer these taxes by nearly $50k. In reality, their tax bill on this RMD would only be $20k or 10%. Giving the government money before you have to (i.e., the Roth conversion), is a “safe” model as you know what the taxes will be. But allowing the money to grow (but assuming the risk that it may not) allows you to keep more of your own money and defer taxes as long as possible. Finally, if taxes don’t go up as much as I postulated they might, or if you returns are better than 7%, you can reduce the tax bill by even a greater percent (0%?). This is my plan with the caveat that I am transferring from my traditional IRA to my Roth an amount to max out the 12% bracket. I am 64, not taking SS until 70. Like his example couple, I have multiple millions in my IRA and a good amount outside my retirement account. I will be able to move close to $700k into my Roth before I have to start taking RMDs at 73 and pay 12% tax on that (unless the tax rates change)
agree, if they have a nice pension, it usually means that they will less opportunity for 401K. And in order to fund an have an IRA grow into 2M, the contribution needs to be high. Unless they are discipline and leave the IRA at aggressive investment through out the past 35 years.
Great information and very logical methodology that is very easy to follow.
Thank you, Phil! I'm pleased to hear that. One of our primary goals with this channel to create educational content that is clear and digestible. Thanks for watching!
@@blueridgewealth Just to clarify - Blue Ridge Wealth is commission only based correct? That's a question and not an accusation :)
@@philwoodard5439 Hello again, Phil! We only use securities investments on a fee-basis. Depending on the client's situation, we may also recommend insurance products which are commission based, but our market accounts are solely fee based. If you want to talk more about what we do and whether or not we'd be a good fit to work together, here's a link to my calendar - bluetube.timetap.com. Thanks again and I hope you're having a great day!
@@blueridgewealth Great! Look forward to speaking with you.
I expected you to suggest paying the income tax on the Roth conversion from the $500K in after-tax savings. This would increase the balance in the Roth and essentially shift any int/div income from the taxable accounts into the tax exempt Roth. It would have also been interesting to see how much of the 401(k) you think should be laundered into the Roth.
that is a lot of tax to pay. They will see a dramatic dip to their saving accounts. If you were them, will you be comfortable with that?
@@datbio7302 - Tax management is a delicate balance of factors unique to each person, their situation, and personal priorities. Someone making a large Roth conversion will be subject to a certain amount of tax (paid with after-tax money) that has to come from SOMEWHERE. Paying that tax from a savings or brokerage account will increase the size of the conversion, and in effect move that money from the taxable account into a tax exempt one, saving all future taxes owed if those savings simply appreciated in a taxable account. There is more to this depending on where that tax money comes from. For example, if you have to sell some stock to pay the conversion taxes, the gains on that sale will be taxable (need to sell more stock!) and could trigger other taxes like NIIT, or the 20% cap gains rate kicking in. Another factor is whether you expect our elected leaders to raise tax rates in the future. Campaign speeches tell you more by what topics are avoided than what is said. We all have to ponder the numbers and our life's priorities to find our balance. I like simplicity and control. Roth conversions help me control my future taxable income by reducing RMDs, and this in turn puts me in control of how much IRMAA tax I have to pay in the future. But yes, it comes at a cost.
@@datbio7302 - Absolutely! The Roth account can be just like a savings account in accessibility (depending on how it's invested) but its earnings will grow tax free. Bank savings accounts (fully taxable = leaky bucket) don't earn much interest anyway.
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
IMO It was helpful for him to show how high old brackets were - gives us a point of reference that with our debt problem, our current rates will go higher in the future.
Example does not fit everyone.
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.
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.
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.
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!
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.
It is important to make your large conversions before getting into Medicare as the Medicare penalties can be rather severe. This needs to be considered.
Thank you for the comment, we agree which is why if you watch to the end of the video we point out the impact of the Medicare costs when looking at the large conversions.
To avoid Medicare penalties, you need to make your contributions at least two years before starting Medicare because of the look-back. The exception is if you retire or have another life event the year after your conversions, in which case you can file for an adjustment based on estimated future income.
Although I stumbled onto a curious hack. The year I retired I hadn't yet thought through my conversion strategy, and only converted up to the first IRMAA cutoff. This allowed me to get my IRMAA adjusted to zero. The following year I increased my conversions, but my IRMAA will remain at zero for two years because of the look back. If I had been more aggressive in my Roth conversions the first year of retirement, I would have had to pay through the nose for those two years.
Excellent analysis!
Thank you! We always appreciate the positive feedback and hope you learn something from our other videos. Thanks for watching!
---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.
No matter how long an individual lives, strategy suggested will help. Of course, the amounts involved do matter, and based on that decision matters. If you saved diligently into a pre-tax 401k, you almost certainly will need to do what is suggested.
@@SSSocialsI'm trying to follow what you are saying. Can you be more specific? What suggested strategy will help? How do amounts involved matter? Which suggestion would one almost certainly need to do?
@@blueridgewealth It is better to pay taxes at a lower rate, but no one knows what tax rates will be in the future including whether Roth 401ks will remain tax free for heirs... ...and there is no math that can figure this out. One can only plug multiple tax rates--some higher and some lower--into their math models and yield multiple scenarios.
---As I said above, if taxes are paid upfront that money is long gone and not available to invest. Also, you very likely will be paying taxes on money that you never withdraw during your lifetime. Also, no one can guarantee that Roth savings will remain tax free for heirs. For example, higher tax rates in the future could include taxing withdrawals by high income heirs from bequeathed Roth savings.
---In a traditional 401k you pay taxes only as you withdraw funds. The rest continues to grow tax deferred.
If they follow your suggestion and convert about 319k into a Roth and use that withdrawn ira money to pay taxes due, they would then only have about 260K in the Roth, true? Just checking that I am understanding using the IRA conversion amount to pay the taxes. Also, down the line, they might have to worry about estate taxes due if they also had other assets, such as a million-dollar home, with appreciation, etc. but if they used their IRA to pay taxes, it decreases their estate. Very informative, thanks.
If you live off dividends, the conversion seems like a no brainer…
There are few people that have super high pensions like that. I clicked off when they make soo much money from pensions and social security. We have SS and that’s it, we do have an IRA which is very helpful. Pitch that story, then you’ll have my attention. Oh yeah, converting to Roth, we still have to pay taxes, so no solution.
We appreciate your input Rudy! We understand that everyone's situation is different and this is just one example. That doesn't mean your situation wouldn't get the attention it might need. If you’d like to schedule a phone call or zoom meeting to dig deeper into your personal situation, we’d love to see how we can help. Schedule here: bluetube.timetap.com
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.
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.
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.
This was excellent - thank you!
Glad you enjoyed it! Let us know if there’s anything we can do to help!
For me the goal of retirement is to maximize living well, enjoy travel adventures while still physically able. That window closes very fast, often unexpectedly. My goal isn't to pay the least amount of taxes possible before dying.
I don’t think this is an either or decision. I fully support all of our clients enjoying their life but also viewing our role in this relationship as someone who helps you make good decisions. You can make good decisions while also enjoying life and paying less taxes than you will have to later sounds like a lot of fun to me,
@@blueridgewealthcorrect
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.
Any conversion helps no matter how small. Especially if you currently don’t have tax fee growth money
I don't understand why anyone who is retired would put any money at risk. 2 million invested in CDs returning 5% would gross 100k per year and never touch the principle.
Inflation messes with this plan.
So does the Fed when they bring interest rates down at some point
Covert that IRA to a CD or Money Market as fast as you can!!!
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.
...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.
I'm very aware of the QCD option.
Excellent video
Thank you for the kind words! We're glad you enjoyed it!
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.
10K per month? That is 120K per year in retirement. That is way more than enough. You will also have SS as well. You don't need anything else.
you only factored in federal tax. In CA, we also need to pay 12% state tax in addition to 22% federal. so 1/3 is chopped off with this conversion. Not sure conversion is a good idea?
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.
I'd like to see this with the consideration of no heirs...does ROTH get taxed if going to other relatives such as cousins after your death? Advantage/disadvantage of conversion if all assets going to charity, taking SSI penalties with MAGI and IRMAA into consideration AND also if one spouse dies leaving all monies to other spouse what tax and other monetary penalties consequences occur.
Any non spouse beneficiaries will have the same 10 year runway to pay taxes on inherited IRA positions.
Your comparison is ( $100K Pre-Tax ) vs. ( $80K Roth ), but this is not the correct comparison.
The right way is to compare ( $100K Pre-Tax + $20K Non-Tax-Advantaged ) vs. ( $100K Roth ).
Either comparison can happen. If you don’t have 20k non taxable funds then my example is correct
@@blueridgewealth Except they are not the same thing mathematically. The option I provided is actually more likely, since IRS has limits on contributions. So if you hit the contribution limit then it is the second case that you need to consider.
There is no limit on conversions. The math is different on your example because 100k with 20k of after tax is not the same as 100k net of conversion. If you were to make it the same you would have to compare 100k plus 25k of after tax. But if you don’t have after tax amounts you need to consider the option in the video.
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
you better do a rollover Roth IRA also to make sure your assets are protected from any future lawsuits. Moving money regardless of tax favor it is also important to protect yourself from liabilities. would like to point out the fact that In 1981 if you made above 700k you were more than well off and I don't know what complaints in life you really are having? But that's another conversation,
The 700k is in today’s money, and you would be paying essentially half of it to the government.
Should you do a Roth conversion? It's simple. The Roth conversion counts as income. Do you want to pay the tax hit and the increased Medicare IRMA, or leave the taxes on your remaining 401K to your heirs?
Simple proposition with many moving parts, thanks for watching
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.
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.
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
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.
Yes I noticed that too
Then look at the balance in your IRAs today and see the impact of RMDs plus any contributions between now and retirement
The non taxed money will hurt you if you wait longer.
Interesting, we appreciate the input!
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?
9:45 No. Some income is first taxed at 10% Federal Tax Bracket
And SS is impacted.
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.