Retired finance guy here… Outstanding video! Roth conversions can be a very difficult topic to understand, and you did an outstanding job with the pros and cons.
Super great video! I’ve been doing yearly Roth conversions since 2018 and have studied it to death. This is one of the very best videos I’ve seen on the topic! One additional point is the advantage of paying the Roth Conversion tax with funds outside of the retirement accounts. This effectively transfers funds being taxed yearly into your Roth IRA.
Really very good, Ari. You've convinced me to do "all of the above." We need to do Roth conversions to fill the current bracket into Roth Money Market accounts and then spend it from there as needed. That allows the interest income to be tax free thereby allowing for even a little more of Roth conversions. (Note: we are both over 59 1/2)
another quality Roth Conversion video, Ari. 👏 my situation is relatively simple, so conversions will probably make sense starting as soon as early retirement. maybe not as early as 55, but maybe at 59.5 when I turn on the Roth "dividend spigot."
Another great piece of content. I was a little bummed to hear that it was going to be awhile for you to can get back to me as well as other potential clients. But having watched many videos of yours, I will take comfort in knowing the best is worth waiting for.
Great video. Personally I just went with a Roth IRA and Roth 401k (and a brokerage account) when I started working and never looked back. It may not be optimal but I like the idea of never having to worry about taxes when I retire in ~18 years (assuming the 0% capital gains tax bracket sticks around anyway). I plan to live off of only long term capital gains, qualified dividends, and Roth withdrawals when the time comes. The employer match part of my 401k is traditional but I plan to Roth convert all of that between 60 and 62, maybe 60 and 70 depending on what IRMAA looks like. Probably not optimal, but my goal is simplicity, not maximum dollar amount.
12% bracket and have never made over 100K, ever. Still plan on some conversions though before Medicare. I think IRMAA, impact on taxes while collecting Social Security, and/or ACA Credits while making Conversions should have been addressed more in detail.
You're absolutely right-those factors can significantly impact the effectiveness of Roth conversions. It’s great that you’re considering conversions before Medicare. How are you planning to navigate the potential tax implications as you approach these milestones?
Thanks for the excellent summary Ari?. Question: with the understanding that everyone’s situation is different, what do you consider a “healthy” amount in pre-tax where conversions would be recommended? For example, is $700k in an IRA at the age of 57, in 50/50 stock/bond allocation, considered a good candidate for Roth converting? Thanks in advance.
I think that assuming straight line gains to compare conversions and not converting is inaccurate. I’m looking at conversions close to retirement age, which is when my investments are the most conservative. (Over half the portfolio is VMFXX and BRK.b.) Later, as I move away from this high-risk period, I will change the portfolio to include more real estate syndications and sector ETFs. I think now is definitely the time to go ahead and eat my little bit of cauliflower, as Ari would put it.
Your approach to adjusting your portfolio and timing conversions sounds well thought out. Balancing risk and opportunity is key. How are you planning to adapt your strategy as your investment focus shifts to real estate and sector ETFs?
@@StressLessFinancial Fortunately, we have rental real estate for steady income, so it’s not like there are seven figures of IRAs to convert. I’ll fill the tax rate bracket that makes sense each year. I was trying to figure out whether I should wait until after I retire, but thanks to the rentals I don’t think the rate would be different, just the amount of space in the bracket (if that makes sense?). I’ve been trying to work with a CFP, but my rental real estate, syndications, appreciation for PHYS, as well as my lack of fear about over concentration or being out of the market make me a difficult client. 🤷♂️
For most in most circumstances, can’t we boil it down to this? Invest in, and convert to Roth IRAs when you feel you’re in a lower tax liability than you’ll be in the future. This is unlikely the case for most working and earning multiple hundred thousand per year. It’ll likely become true when they retire, especially early and living off of their “superhero” account funds.
Ran different strategies: convert vs do nothing (let rmd, medicare expense) the convert in early 4 years retirement win. Little money left for my kids/grandkids are tax free (they will have tax braket at least 20%)
Thanks, Ari, for another Roth conversion video. The topic is complicated so having multiple videos and examples is helpful, imo. In your converting $10k example with $2k in taxes, if you take the $2k for taxes from the $10k being converted, isn’t that $2k now also subject to the 10% early withdrawal penalty?
Thanks for confirming that’s the case, mostly. I understand that Rules of 55 and 72(t) offer special circumstances. I want to do some conversions but need to account for the taxes using after tax money from elsewhere which brings up the life balance point you mention often.
His partner James Conole did one similar, and their presentations, speech, and background are somewhat similar - maybe that’s why it looks like you’ve seen it!
Ari - I am an Academy member. I am 51 and have been maxing out my 401k,currently $23000, for the past few years. Would reducing the 401k amount to say $16000 and maxing out a Roth IRA, currently $7000, be the equivilent of doing a Roth conversion. I'm thinking that plan is the equivalent of a $7000 Roth conversion each year. Does that make sense?
It's not equivalent. Most people would agree conversions are best done by taking after tax money from other accounts say savings to pay the tax on the amount converted. So if I take you example $7000 and ask how much could I convert with that amount of money and I assume you are paying 20% tax biased on a number I just pulled out of thin air then you could convert $35000. 35000 X 20 % = 7000. So when all is said and done I now have $35,000 in my roth account and I send the IRS $7000 to pay the tax.
what does your taxable income look like in "retirement"? do you anticipate being in a lower or higher tax bracket? likely you are in a higher tax bracket now than you will be later - if so, the better strategy (without knowing your specifics) is often to utilize the tax benefits now with the tax deduction and then look into converting later when you are in a lower tax bracket.
Not the same , But if you do not have the extra funds to do a conversion the next thing to do is future contributions to Roth . My opinion and I am not a FA . In a similar situation and that is what my research has lead me to.
Your strategy makes a lot of sense as a way to build up your Roth IRA. It’s a smart move to consider both immediate and long-term tax benefits. How do you plan to balance contributions between your 401(k) and Roth IRA as you approach retirement?
If you are in a situation where you have both a large 401K AND a significant salary that puts you in the top bracket is it possible that you might make more money by retiring early and doing roth conversions than working until 65 and limiting the number of zero income opportunities to do a roth conversion?
@@earlyretirementari Thank you! - that's what I figured. It would be great to see a hypothetical example of how that situation might play out. By the way - You and James are great!
Great question! Early retirement could indeed offer unique opportunities for Roth conversions and potentially lower your overall tax burden. How are you evaluating the trade-offs between early retirement and the long-term benefits of continued work?
Retired finance guy here… Outstanding video!
Roth conversions can be a very difficult topic to understand, and you did an outstanding job with the pros and cons.
Thank you!!
Super great video! I’ve been doing yearly Roth conversions since 2018 and have studied it to death. This is one of the very best videos I’ve seen on the topic!
One additional point is the advantage of paying the Roth Conversion tax with funds outside of the retirement accounts. This effectively transfers funds being taxed yearly into your Roth IRA.
Thank you and pleased to hear it!
Really very good, Ari. You've convinced me to do "all of the above." We need to do Roth conversions to fill the current bracket into Roth Money Market accounts and then spend it from there as needed. That allows the interest income to be tax free thereby allowing for even a little more of Roth conversions. (Note: we are both over 59 1/2)
another quality Roth Conversion video, Ari. 👏 my situation is relatively simple, so conversions will probably make sense starting as soon as early retirement. maybe not as early as 55, but maybe at 59.5 when I turn on the Roth "dividend spigot."
Another great piece of content. I was a little bummed to hear that it was going to be awhile for you to can get back to me as well as other potential clients. But having watched many videos of yours, I will take comfort in knowing the best is worth waiting for.
I recommend the academy in the meantime!
@@earlyretirementari solid advice but I like to go right to the source
Thanks Ari for another very informative video!
Great video. Personally I just went with a Roth IRA and Roth 401k (and a brokerage account) when I started working and never looked back. It may not be optimal but I like the idea of never having to worry about taxes when I retire in ~18 years (assuming the 0% capital gains tax bracket sticks around anyway). I plan to live off of only long term capital gains, qualified dividends, and Roth withdrawals when the time comes. The employer match part of my 401k is traditional but I plan to Roth convert all of that between 60 and 62, maybe 60 and 70 depending on what IRMAA looks like. Probably not optimal, but my goal is simplicity, not maximum dollar amount.
I have clients who took the same approach and they’re very happy. I like it!
You need to make a cauliflower Root Financial shirt!
12% bracket and have never made over 100K, ever. Still plan on some conversions though before Medicare. I think IRMAA, impact on taxes while collecting Social Security, and/or ACA Credits while making Conversions should have been addressed more in detail.
ruclips.net/video/SsZUdBfUYok/видео.htmlsi=hbxFSLCn5htLLNB1
You're absolutely right-those factors can significantly impact the effectiveness of Roth conversions. It’s great that you’re considering conversions before Medicare. How are you planning to navigate the potential tax implications as you approach these milestones?
Thanks for the excellent summary Ari?. Question: with the understanding that everyone’s situation is different, what do you consider a “healthy” amount in pre-tax where conversions would be recommended? For example, is $700k in an IRA at the age of 57, in 50/50 stock/bond allocation, considered a good candidate for Roth converting? Thanks in advance.
‘Teletubby’… I spit out my drink…😂😂😂
HA!
I think that assuming straight line gains to compare conversions and not converting is inaccurate. I’m looking at conversions close to retirement age, which is when my investments are the most conservative. (Over half the portfolio is VMFXX and BRK.b.) Later, as I move away from this high-risk period, I will change the portfolio to include more real estate syndications and sector ETFs. I think now is definitely the time to go ahead and eat my little bit of cauliflower, as Ari would put it.
Your approach to adjusting your portfolio and timing conversions sounds well thought out. Balancing risk and opportunity is key. How are you planning to adapt your strategy as your investment focus shifts to real estate and sector ETFs?
@@StressLessFinancial Fortunately, we have rental real estate for steady income, so it’s not like there are seven figures of IRAs to convert. I’ll fill the tax rate bracket that makes sense each year. I was trying to figure out whether I should wait until after I retire, but thanks to the rentals I don’t think the rate would be different, just the amount of space in the bracket (if that makes sense?). I’ve been trying to work with a CFP, but my rental real estate, syndications, appreciation for PHYS, as well as my lack of fear about over concentration or being out of the market make me a difficult client. 🤷♂️
Tax bracket arbitrage and the tax-free growth of Roth assets seem like main points here.
For most in most circumstances, can’t we boil it down to this?
Invest in, and convert to Roth IRAs when you feel you’re in a lower tax liability than you’ll be in the future.
This is unlikely the case for most working and earning multiple hundred thousand per year. It’ll likely become true when they retire, especially early and living off of their “superhero” account funds.
Ran different strategies: convert vs do nothing (let rmd, medicare expense) the convert in early 4 years retirement win. Little money left for my kids/grandkids are tax free (they will have tax braket at least 20%)
Did you use a software to help figure out different conversion strategies??
Hi Ari
Thanks, Ari, for another Roth conversion video. The topic is complicated so having multiple videos and examples is helpful, imo.
In your converting $10k example with $2k in taxes, if you take the $2k for taxes from the $10k being converted, isn’t that $2k now also subject to the 10% early withdrawal penalty?
You’re welcome. Yes. Just using basic example for math. without getting into nuance of Rule of 55, 72(T), etc.
Thanks for confirming that’s the case, mostly. I understand that Rules of 55 and 72(t) offer special circumstances.
I want to do some conversions but need to account for the taxes using after tax money from elsewhere which brings up the life balance point you mention often.
@@LSUtiger95 Paying the tax *out of the conversions* if you're
@@andre-l3j Right. Forgot to state under 59-1/2. The tax has to come from somewhere.
Why do I feel like I’ve seen this video before? Is this brand new video? 🤔
All videos are new.
His partner James Conole did one similar, and their presentations, speech, and background are somewhat similar - maybe that’s why it looks like you’ve seen it!
@@earlyretirementari I don’t doubt you Ari, I must had a deja-boo moment. Great video!
@@nrivera567 thank you!
Deja vu!!!!!!
Ari - I am an Academy member. I am 51 and have been maxing out my 401k,currently $23000, for the past few years.
Would reducing the 401k amount to say $16000 and maxing out a Roth IRA, currently $7000, be the equivilent
of doing a Roth conversion. I'm thinking that plan is the equivalent of a $7000 Roth conversion each year.
Does that make sense?
It's not equivalent. Most people would agree conversions are best done by taking after tax money from other accounts say savings to pay the tax on the amount converted. So if I take you example $7000 and ask how much could I convert with that amount of money and I assume you are paying 20% tax biased on a number I just pulled out of thin air then you could convert $35000. 35000 X 20 % = 7000. So when all is said and done I now have $35,000 in my roth account and I send the IRS $7000 to pay the tax.
what does your taxable income look like in "retirement"? do you anticipate being in a lower or higher tax bracket? likely you are in a higher tax bracket now than you will be later - if so, the better strategy (without knowing your specifics) is often to utilize the tax benefits now with the tax deduction and then look into converting later when you are in a lower tax bracket.
Not the same , But if you do not have the extra funds to do a conversion the next thing to do is future contributions to Roth . My opinion and I am not a FA . In a similar situation and that is what my research has lead me to.
Also check with your employer if they offer Roth 401k. More and more companies offer the roth 401k option.
Your strategy makes a lot of sense as a way to build up your Roth IRA. It’s a smart move to consider both immediate and long-term tax benefits. How do you plan to balance contributions between your 401(k) and Roth IRA as you approach retirement?
If you are in a situation where you have both a large 401K AND a significant salary that puts you in the top bracket is it possible that you might make more money by retiring early and doing roth conversions than working until 65 and limiting the number of zero income opportunities to do a roth conversion?
Yes.
@@earlyretirementari Thank you! - that's what I figured. It would be great to see a hypothetical example of how that situation might play out. By the way - You and James are great!
Great question! Early retirement could indeed offer unique opportunities for Roth conversions and potentially lower your overall tax burden. How are you evaluating the trade-offs between early retirement and the long-term benefits of continued work?