Excellent video. I've been doing annual Roth conversions, to the limit of the 22% bracket, in order to reduce impact of future RMD. Once 2026 arrives, and taxes are raised, the conversions will be reduced to fill only the lowest bracket. We are living on the Roth accounts and SSI. So glad to see the potential tax savings of up to 2M using this strategy. Thanks for a very enlightening video.
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.
I agree-having an advisor manage my investments has been invaluable since my work schedule doesn't allow time for in-depth analysis. Thankfully, my portfolio has grown fivefold in just four years, reaching nearly $1 million today.
I consistently recommend Rebecca Lynne Buie as my top choice. She is well-known for her expertise in financial markets and has an impressive track record. I highly endorse her services.
I find those analysis about Roth conversion always a bit oversimplified. For example, they are assuming the tax bracket can be filled up with the Roth conversion. But during the year of Roth conversion, need to leave on some revenu, which also most likely will be taxable in some way ( unless it is seating in a checking account bringing close to 0% interest). Another risk is being obsessed with the Roth conversion and target lowering the tax bracket, which means not enjoying the Gogo years.. for getting more money at age 85..
Agreed. To get the most bang out of Roth conversions is to have an influx of tax free money, or nearly tax free money (withdrawals from a taxable account are partially taxable; just the capital gain is taxed at 0% or 15%, usually). I had an influx of tax free money (inheritance & cash-out refinanced mortgage money), which allowed me to maximize the benefit of Roth conversions. I've convinced no one to do a cash-out refinance, but it was key for my plan. I started my Roth conversions in 2015, and I'll finish up in 2026. My future avoided federal, state, IRMAA & NIIT totals $2,300,000. My conversions are being done in a no state income tax state (Texas), while my Roth withdrawals will be in a high income tax state (California).
I would like an analysis on pre-tax vs roth contributions. I would love to go all in with the roth, but the tax savings at tax time with the pre-tax route keeps me from making that jump.
Great video.. Retire a year ago at 61. Wife is retiring in couple months so have been moving cash into Roths while we still have wages. Next is to start some smaller Roth conversions and this video really helps get me thinking more deeply about the best taxing strategy. Thanks john
I'm not sure I agree with your example at 8:12. In 2049, it shows tax of 37,063 on 215,153 of income. This approximates 2024 tax tables, however 2049 is 25 years from now and the brackets will have changed. What I do is use the current tables, calc the tax of the PV of the income, then calc the FV of the tax. Something liike FV(Tax(PV(215153))). This gives me a tax of $26,617 in 2049 dollars, assuming a 3% inflation rate. Granted this is a major assumption but so is assuming the brackets will not change.. This one change convinced me not do do rollovers at my stage in life. Good video.
It's a savings, but not such a huge savings. You need to show the results using real rather than nominal dollars. That $1+ million savings is inflated future tax dollars vs current dollars. A better measure is ending net worth.
I'm retiring in 2-3 years at age 62-63. It makes sense to me to start the Roth conversions now, doing a partial over the next 3 years while I'm still working and have the extra money to pay for the extra taxes, being mindful not to cross into the next tax bracket. This is what I'm doing, I'm not waiting until I actually retire to start the conversations. Plus, the better 2017 tax brackets are expiring starting 2026 tax year.
I'm doing the same, largely because in retirement health care costs (ACA or Medicare) increase with income. So, one has protection from this hidden cost of Roth conversions while health benefits are covered through company benefits. It's important to note that for Medicare, cost uses a 2-year look back. So, the income you show at age 63 will drive your Medicare cost at age 65. Here it helps if one was born closer to year's end instead of near the beginning of the year because increase Medicare cost would be limited based on the number of age-65 months is the first year it is taken.
If your increase occurs because work and conver sion but expected income is expected to change because of life changes (retirement) you can file notice of expected change and avoid extra Medicare charges for that past income because working.
As someone who maxed pretax limits for about the last 12-15 years of my career, I wish I'd known more about RMDs and the IRMAA surcharges back then. I was totally focused on building the retirement balance while minimizing taxes. Did a Roth too for most of the last 20 years. Now I'm doing Roth conversions and pretax distributions for spending. The goal is to take taxable income to the edge of the edge of the lower IRMAA threshold to reduce the pretax balance in the golden years post-ACA until SS starts at 70, with limited conversions at age 70&71. It's a PITA to run all these calculations.
I managed to watch a few of your videos in the last few days. Your videos are very informative, and I appreciate your method of teaching and sharing your knowledge. I tried your tool and must say I’m very impressed, I particularly like the simple vs the more detailed approach you offer. Thank you for sharing your story and knowledge on RUclips.
I have not yet filled out the tool but am looking forward to it. Sounds promising. One very important thing this video made me realize is that I can save even more tax money by not converting the amount in my IRA that I want to donate to charity upon my death. To be more precise, since I can donate IRA money to non-profits without paying taxes on gains of what I donate, I would actually pay more taxes if I convert what I plan to donate. If I learned just that from this short video, I can only imagine what more I will learn from the rest of your videos. I've been watching a lot of Roth Conversion videos - some good, some bad - and this is the BEST!!! Thank you!
I am contributing 100% to the Roth 401K. I am 42 and started to do In Plan Roth rollovers. The main reason I am doing this is because currently my effective tax rate is 18.5%. That is for the state and federal combined. I guess anything is possible. But I highly doubt it that my effective tax rate will be this low in the future!
Don’t forget there are several states that have zero income tax. Personally, I’m considering a move to a warmer state and the fact there is zero state income tax is a big bonus.
You want to make your decision on whether to do Roth conversions on your marginal tax rate, not your effective tax rate. If your marginal tax rate on your conversion is lower than your predicted future tax rate avoided on your Roth withdrawals, then that's advantageous. You may also need to factor in IRMAA & NIIT taxes.
one problem with roth conversions early before social security kicks in is it increases your income level and can eat into any price subsidies on healthcare through the ADA
@@Terry-cg7ktif you get healthcare for the ADA you can get a subsidy based on your income. The lower your income the cheaper healthcare is. But if the year prior you did Roth conversions, it increases your income. Posted us saying this will potentially decrease your ACA subsidy.
Thanks Kevin. I actively manage a taxable brokerage acct. and have taxable capital gains and dividend income, in addition to a large IRA. I am not taking social security yet but I am past full retirement age. I pay very high IRMA on the Medicare premiums for my wife and I which really pisses me off given the high taxes I have had to may in my life time. Roth conversion would just put me in a higher bracket now for many years up to RMDs. I guess I just let it grow till then.
I am in the same situation with IRMA. I found that out the hard way after my first year of Medicare (had to pay double the norm). I am not taking SS (67 yrs old) either in gap years trying to burn down some 401k early on. Retired just living on tax paid savings and 401k. Now trying to strategize, but looks like all efforts will lead me to the first tier IRMA increase. Yes this IRMA crap is hard to swallow and I don't think that it is fair. Noted in Kevin's sample, I think they were in IRMA territory for stealth tax too for some years.
Please do consider that the dividends and interest in your taxable accounts will be taxed as ordinary income EVEN IF they are invested back automatically without taking a distribution. When determining what your income bracket would be while determining how much Roth Conversion you can afford to take in a given year while staying within a target tax rate.
You mention "stealth taxes" but I think they deserve more attention. The "Inflation Reduction Act" limits heathcare premiums to 8.5% of income and is effective through 2025, this includes Roth conversions. Someone who early retired with $100k in income might have $20k in insurance premiums so that's 8.5% additional on income over $100k up to $235k. It's significant. For someone in this situation I'd say wait until 2026 for any Roth conversions.
Glad I stumbled onto your videos. Truly kicking myself for neglecting this topic, along with other issues the last 10 years … work distractions, gun shy from very poor advice 40 years ago, laser focused on paying off the house mortgage as fast as possible ( 6 years rather than the 30 year mortgage we took out @3.0% … a house is a roof over your head, not ant investment). Thank you.
I hammered a low interest home loan to almost paid off, for me it was a mistake. The cash using to pay off a 3% home loan can get a safe 5% CD, the cash from laddering CDs can be used to live on to have anemic taxable income, with a low taxable income 401K money can be rolled over to Roths at a low tax rates
Why would you pay down a 3% mortgage when you could put that money in a 401K S&P500, avoid state/fed tax, and reap 8% on average (last year 20%). (Also, if you itemize, you would be losing ‘some’ mortgage deduction). Or put it in a Roth IRA? As the guy above said, even banks are offering 5% CDs. If you have enough to max out on a 401K AND pay down the house and have emergency money, then great, pay off the house early.
wise! good peace of mind sleeping at night! once it's paid off, it's paid off! everything else (investments) will fluctuate over time. the price of a peaceful nights sleep (paid off house) is priceless!
@@1MinuteFlipDoc You're still paying property taxes and insurance on your house, which I assume will increase over time. Possible HOA, too. I didn't want to pay off my mortgage but I refinanced at 3% so my mortgage payment is just under the total of my property tax & insurance every month. That works well in my retirement cash flow without gutting my investments for it.
Good info, lots to consider here. I have a large IRA/401k, and small Roth accounts. We’re flirting with a 24% bracket, so it doesn’t make sense to do a conversion this year. But wife is planning to retire next year at 59. That will be a good time to start.
Social Security for me is taxed up to 85%. I am old enough to need to make an annual RMD. I don’t have a use for the $30,000 ish RMD. I use the RMD to pay the taxes for a $100,000 annual ROTH conversion. The tax bracket stays the same at 22%. If one spouse dies, then the tax bracket increases for the conversions. The ROTH conversion is an easy way to put surplus money into a ROTH at no change in taxes. Eventually, all the 401k will get converted.
Something for people to keep in mind is to actually do the math. Most people don't realize hitting a higher tax bracket isn't necessarily that bad. For instance married filing joint 24% bracket starts at $201,051. You DON'T pay 24% on the entire amount. If you go over by $1K you only pay 24% on that $1K NOT the entire $202,051. Most people don't seem to know how brakets work. You pay exactly the same takes on the first 100K that someone who only makes 100K total.
True, in general, but there are possible "tax cliffs" where deductions or benefits are no longer available because you exceeded income thresholds, or 1/2 of soc sec income can suddenly become taxable by crossing a threshold.
EXCELLENT! We are using a recent inheritance to pay the taxes on Roth Conversions each of 5 years before RMD starts at age 73. That reduces substantial tax brackets during RMDs and when we die our heirs inherit the Roth tax free.
One important thing to consider if you are going to do a Roth IRA conversion from an IRA with stocks is how high the stock market is. You might want to think twice about doing conversions when the market is at record highs (as it is right now), because you are getting much fewer shares transferred for the taxes you are paying. On the other hand, if the market takes a dump, it is a great time to do a big Roth conversion because you are getting more bang for your tax dollars. Another important factor is if you live in a high tax state and will retire to a low/no tax state. That also skews the analysis.
The account growth does not change the math unless it is negative in which case conversion is less attractive. Positive growth whether 5% or 15% per year if you pay the same % tax will not change the result.
great video. but also remember that not everyone has the money to pay the extra taxes from the roth conversion. .... and....speaking of roth, 401k, HSA and all that... please make a video for Freelancers. You live in LA, you know they exist.
Thank you for the offer to turn on the tools. I had previously tried with this site but found that the basic tools are too basic and the site wasn't very valuable from a planning perspective. It might give a good doomed / only mostly doomed thumbs-up thumbs-down fuzzy feelings, but the marginal tax graph is what I really wanted to sort this out and that is not a feature. Thank you!
I haven't crunched the numbers yet but if I don't need any of the money in the IRA's or my taxable brokerage accounts then paying extra capital gains tax by paying the conversion taxes from the brokerage account loses me money compared to paying them from the IRA. But if you get capital gain distributions which you already pay tax on, then using that to pay the tax on the conversion does make sense.
appreciate these videos a lot! Thank you. I too noticed the client age goes up to 106! Wonder this: if bring endpoint to "more usual" life expectancy of, say, 92, how do these final savings numbers change?
Wow, thanks for the walkthrough and the pointer to the tool. I’ve been working with my own spreadsheet trying to make these calculations. Interesting all the variables you can tweak to maximize the result.
Great content. Regarding the audio: your processing dramatically de-emphasizes high frequencies, and the consequence is that it sounds like you're mumbling. Most of the intelligence in language in in the high frequencies (hisses, pops, and other sounds that clarify consonants). Consider boosting the high frequencies in your processing.
In Roth gains compound with no tax ever. I can't follow the formulas but my intuition tells do it. I pay 30% State and Fed tax on the conversions. I pay with income money not the converted nor selling any investment to pay it just income money. I don't believe I'll ever be in a lower tax bracket especially when RMD's begin. Yes the 30% could be invested in taxable funds but I just won't worry about all of that I just 'feel' in the years to come it will be well rewarded.
Thanks for the excellent Video Kevin--just subscribed and also just setup an account at Right Capital. Looking forward to you activating the "Tax" tab so I can run through different conversion scenarios.
Ones anticipated longevity bears consideration. This question involves inheritance after a conversation. If I convert now, the converted funds are not to be withdrawn for 5 years so as to avoid taxes. Correct? Assume I die in 2 years and my beneficiary inherits the ROTH IRA, a portion of this was converted less than 5 years previous. Do they have to hold those funds until they are 5 years seasoned before they are exempt from taxes?
I'm 72, and must start takingRMDs this year (don't want to wait till 73, because then I'd have to take two RMDs in the same year, increasing my taxes.) I really wish I'd known to do conversions much earlier, but better late than never, I guess. I converted about $75K over the last 5 years, paying the taxes due from non-IRA sources. The conversion caused me to have to pay income taxes on 85% of my SS, but because my RMDs will only be about a third of my yearly previous conversion amounts, I'm betting that my SS taxable rate will drop to 50%. And I'm betting that federal income taxes will keep going up during the rest of my lifetime.
if you have a few million in tax deferred accounts and take out an extra $50K / year to convert before RMDs let's say 8-10 years, that's $400K to $500K total conversions that would have been taxed as ordinary income; but if you have a few million tax deferred and it's still growing for those 8-10 years, that $400K - $500K conversion isn't going to make a big impact on your future RMDs...this is my issue: I'd have to take out too much each year to convert, pushing my tax bracket higher during those early retirement years before RMD, for it to matter when RMDs hit. I'm unable to find a path where Roth IRA conversions make sense. If my combined SSI and withdrawals from deferred accounts keep me in the 24% tax bracket, my tax deferred accounts will continue to grow faster than my withdrawals, unless the markets drop for an extended period of time or I move up to a higher tax bracket and withdraw more.
Your videos are all really helpful. I also used the software to see if a Roth conversion would help me, but it won’t. However, the tool helped me to see that I should wait until 70 to take social security, and it also got me thinking about equity location, which I had never considered before.
Good video. Glad you mention that Roth Conversions are not always a good idea. So many think that a Roth leaves you more money no matter what, and that tax free growth is automatically better than pretax growth, which then causes those with smaller portfolios to over convert.
I think an easier, back of envelope, way to figure out if you want to do Roth conversion is to compute the breakeven, in terms of dollar amount. Let's say that you are in the 35% tax bracket and expect to drop down to the 24% tax bracket in retirement. Let's assume you have $100,000 in your 401K. The tax you would pay would be about $35,000. The breakeven point is the value of the account when you would have to pay the same amount from taking withdrawals from your 401K. In this case, you would need 35K X 100K / 24K = 146K. ie. You would pay the same taxes if you had 146K in your 401K account. ie. a 46% growth. If you paid for the taxes during the Roth conversion out of a taxable account, you would end up with $100,000 in your Roth IRA, so only need to make 46% gain to break even. Beyond that, all the compounding growth is tax free. If you paid with taxes from the 401K, you would end up with $65,000 in the Roth IRA, which would require 146/65 = 124% growth to break even. 46% seems reasonable. 124% is much harder. The growth of the market last year was such that people who did the conversion a year ago would almost have broken even. If someone is in the 24% tax bracket and would be in the 22% tax bracket in retirement, then the decision is a lot simpler as the amount of growth needed to break even is a lot less. The hard part is saving enough to pay the taxes out of a taxable account, so you can get maximum impact out of the Roth account.
Maybe for a basic estimate, but really need to comprehend full picture of income/expenses, taxes social security, conversions, widow tax on spouse, etc
This ALMOST made sense to me, but not quite. If I convert my entire trad IRA of $450,000 and pay 35% tax from my taxable account, how does that work out? Not sure I understood the early paragraph’s calculation.
@@candecarro The breakeven would be about paying the same amount of tax now, versus in the future. If you are at 35% and have $100,000, you would pay $35,000. To break even, it means you have to figure out how much your would need the IRA to grow to also have to pay $35,000 if you take it out later. 24% of $146,000 would be $35,000. ie. The same tax paid now to convert as what would have to be paid in the future. This assumes that you are paying all the tax out of your taxable account. The difficulty is in saving up enough in your taxable account in order to pay the taxes. This means doing the conversion over a number of years as you save up cash. If your retirement tax bracket will be very low (e.g. 12%), the breakeven would be $100,000 X 35 / 12 = $291,000. That is a lot of growth required.
@@candecarro If all your total tax deferred accounts is 450k, i wouldn't do roth conversions at all. I would just withdraw what I needed annually and try to stay in lower marginal tax brackets. And also figure how not to run out of money if 450k is the total of all savings.
Thanks for the video. One thing to touch on is the comparison of paying for the Taxes out of Converted Funds or pay the taxes from Brokerage Accounts or Savings. If you don't have a Brokerage Account, it will come from savings. If not enough savings, it will have to come from the 401K account which will impact future earnings after the conversion. For those already retired...... If you are receiving ACA subsidies it could wipe those out also. Insurance is not getting cheaper. Lots to unpack if you are considering a conversion and just like SS decisions, everyone has a different scenario. There is a limit to how much most of these Financial Videos can share.
Very informative. However, you are missing one important piece of the puzzle. HEALTHCARE. I just retired at 61 1/2. For the next 3 1/2 yrs i need healthcare. Cobra way to expensive @ $900/month. Obama care is the way to go, But.... Subsidies to make the policy palatable come at a cost. With my wife who is 65 and on SSDI we have yearly income. We set a income level at $50,000/yr so our obama care subsidy would be fairly good. The more money you make, the lower the subsidy, the higher the monthly cost. This will all but alleviate any roth conversions for the next 3 1/2 yrs. Which are probably our best years to do conversions. Now i plan to wait to collect ss so i can have 2 yrs of conversions before collecting at 67. Will also have to deal with IRMA at that time. So many in's and out's to deal with.
Yes, there are many conflicting options. In some instances, it may be better to take less ACA subsidies in some years and convert some each year. You have to model the numbers, and include RMDs, etc.
Wouldn’t your wife be on Medicare? Then your ACA subsidy is going to be about $10k max per year for you. That is 20% of $50k if you don’t take it, which bumps your effective tax rate up to about 30%. A tough call. The effective tax rate on $100k of income for a couple is still less than 10% including SS discounts.
Is it better to just tell your kids to invest in all ROTH IRAs and 401Ks from the beginning, while their income falls in the lower tax brackets? And to max an HSA if available?
Thanks for the video and the understandable presentation of an often complex topic. I just retired at 67 and I’m considering moving to Spain where Roth IRA and Roth 401(k) are not recognized. So, Roth is not a panacea. Roth income would be considered as ordinary income and taxed as such. Although you’d be exempt from US federal income taxes, Spain will ask for its share of taxes as you did not pay taxes to them. Effectively raising your taxes in retirement. There is also no benefit in the double taxation treaty between US and Spain on this. Some European countries do recognize Roth generated income like the UK, France and Belgium but Spain and Portugal, two popular retirement destinations do not. I haven’t done my 2023 tax return yet but I expect to be in the 32% tax bracket. I’m not filing for social security benefits until I’m 70 and will take distributions from my 401(k) in the interim. My SSB will be substantial thus pushing me into the 85% (of SSB) taxable category. Between now and 70 I can control the withdrawal amount out of my 401(k) to lower the RMD when I reach 73. My calculations and projections on my 401(k) future growth and annual income generated there from will likely keep me in the same or slightly higher tax brackets. Since Roth is not an option for me, can you suggest other strategies to shelter future income from taxes?
My wife and I are in a very similar situation. We are planning to move to Spain this fall. I will soon be 62, and I intend to work another couple of years remotely on the DNV. I'm still doing Roth conversions now. We recently spoke with a Spainish tax lawyer. They will only tax the gains within the Roth, and only if you make withdrawals. I don't intend to even touch this Roth money for a long, long time, and who knows, may return to the states to live one day where it will be completely tax-free. We will live off of other income while residing in Spain. Also, move to Spain after July 1st, 2024, and you won't be paying any Spanish taxes until Apr 2026. Best wishes to you! Maybe we will run into each other there!
What I think is missing is what the amount you would have from leaving the money needed to pay the taxes on the conversion. It would far exceed the tax savings. Even after paying tax on the growth for the money that you didn’t use to pay for the taxes on the conversion.
Thank you for knowledgeable video. I have subscribed to your channel and also made an account with your software. I really like how it is laid out. I will be looking out for when you are able to activate the tax part so I can look at my options. Thanks again.
I don't understand your suggestion that instead of a Roth Conversion you may want to take a distribution from your Trad IRA and put it in savings. Savings accounts have virtually no growth, so why not convert to ROTH where presumably you are getting a higher return? You can withdraw funds from the Roth as needed and any growth will be tax free, whereas you'll pay tax on the interest from savings account. Of course this is assuming one is over 59.5 years old.
Hi, are you a RIA...Registered Investment Advisor, registered with SEC with a ADV form Part 2, disclosing all your fees and services? I was told by Eldermann if you talk to a advisor and they can not produced a ADV form, RUN away as fast as you can!
Hi Kevin, Just checking if you saw my recent question, as I cannot see in RC the edit button you show at 11:35 to limit the number of years you do the Roth conversions. Thanks
Why would you not convert the entire IRA in one year? 2/3s to the Roth 1/3 to pay the tax owed. IRMAA goes to max value in two years, but the Medicare surcharge only lasts one year and drops back when the income goes back to normal.
The conversion only counts as income if you deducted the money from your taxes for the year you contributed. If you leave it as a non deductible contribution you can convert to roth with no penalties. You have to leave it in for 5 years as well.
I'm not fully done with this video yet but if you didn't mention it; if your age is before 59 1/2 years old and you convert or roll over money from a retirement account do Not take out money from the account as you will be hit with the 5 year rule where then you will be subjected to the 10% Tax anyways.
The thing I do not understand is…. If someone is transferring $50,000 from 401K to Roth… in addition to that $50,000 being transferred, they have to pay Tax on it.. If 15% Tax Bracket that would be and additional $7500 I will have pay to do this deal. Less money to invest in my other accounts.
Many people worry about paying taxes out of pre tax Ira money, but the fact is that the balance you see on your statement is not all your money. In my case, 20 to 25% of that balance belongs to the Federal and State governments. You can pay it now or let it grow and pay it later, but unless you give it to charity, taxes will claim their share. Our son is in a higher bracket than us so we are annually converting to the top of our bracket to a Roth. If the market rewards you, I feel fine using some of that gain to pay taxes.
Big sequence of returns risk by pulling that much out in the early years (to pay the tax), would definitely be worth running Monte Carlo, not just assuming x% return every year.
How much would it cost to get additional or full access to the software? I subscribe to new retirement but find RC to be better suited for my needs. However, I don't believe the numbers are realistic. Inflation seems to be set at 2.5% for the first year and 1.5% for the remainder of the plan. Of course I've seen many training videos that show enhanced capabilities that are not present in the version I'm working with so I'm wondering if it's possible to gain more access to those capabilities.
You can't contribute without having earned income, but you can do a conversion. The conversion will be taxed. Example in 2024 if you convert 30k from traditional to roth, you could still minus out your standard deduction, you'd stay in the 10 percent bracket and you would have to pay approx 2k in taxes (you would need to pay the taxes from your saving account)
Have a 35000 per year pension. No matter how I slice it I appear to have to pay social security taxes. It kills my Roth conversion plans at lower tax brackets.
Two questions. At time stamp 13:26 you mention taking money out of pre-tax account and putting it into a taxable account to help drain the pre-tax bucket. When would that ever be better than a ROTH conversion even if the money will be spent in the next couple of years? We feel filling the 12% tax bracket with ROTH conversions is a no brainer. Even if we are going to spend the money in the next few years, if we need a large sum of money, it will keep us from taking a large tax hit, in a higher bracket, in the future. We will still have plenty of pre-tax money to fill the 0% tax bracket (standard deduction), 10% tax bracket, fund QCD's and pay deductible LTC expenses in the future. Does this make sense?
What about if I save a year of salary and quit my job and become a poor person meaning no pay check for a year and after a year on my 59.5 years old do a roll over to my roth IRA and be on the 0 tax bracket. Does that the defeat the system.
Hi Kevin, I've been enjoying learning about retirement planning over the past few weeks from your videos. I'm 62 and wish I had known all about these approaches and risks ten years ago. My question concerns the year after year conversions of tax deferred plans to ROTH plans. My understanding is that there is a penalty for withdrawing fund from a converted ROTH within five years from the date of the conversion. If I stagger the conversions over multiple years to keep the conversion tax in a lower bracket, does the five year date reset for each conversion? If so, do I need to create a new ROTH account for each year, so that the first conversion is available after year 5 and the second conversion is available the year after that, etc.? Thank you.
I’m like the Dunphy’s with what I have in my retirement accts but I’m widowed (2020) and I’m 76. My SS and other investments easilycover my living expenses. I want to convert all of my tax-deferred IRA now to get rid of RMDs and eliminate taxes for my kids when they inherit.
As an enthusiast, I would like to know the most effective strategy during this period of volatility with the rates? My portfolio is in (20% Index funds, 20% ISA/SIPP and other assets). Right now I want to explore different strategies to benefit from a potential bubble.
I am a CFP who LOVES Roth. Don’t get me wrong…. But the obsession on RMDs out of traditional has always been a little strange to me… you’re mid 70s. It likely makes sense to unwind traditional at that age anyways
That’s why you run the numbers and show clients various options. But, as you said, you’re forced to unwind at age 73/75. If you don’t control the withdrawal - it could create a larger tax bill for you and your heirs if you don’t plan properly. And trigger IRMAA and a higher tax rate.
Here is where I struggle. I currently at the top of the 22% bracket with a 7 figure IRA. Advice is often to convert to the top of the 24% bracket before 2026 when it turns into the 28% bracket. I would also have 5% state tax. If I do nothing and wait for RMDs and live off other money to draw it down so by RMD age all I have is SS plus my taxable IRA withdrawals. If my IRA grows to $5m the year one RMD will be about $200k and increase annually. Added to my SS that seems to be about what I project is needed to live on adjusting for 15 years of inflation and should be well below inflation adjusted IRMAA limit. That would put me in the 25% bracket adjusted for inflation. Assuming SS eats up the standard deduction, I will pay 10% and 15% on some of my RMD and only pay 25% on a portion. The average will be less than the 24% paid today to convert and I am paying with future dollars and avoided the potential disaster of a market drop soon after converting. Also if I move to a zero tax state in retirement I will save another 5% in state tax.
I’m in similar position. Think you’re going to find a very large portion of your social security is going to become taxable when your RMDs kick in. That creates zones of double taxation that can/will elevate your marginal tax rate well above 25%.
I would love to determine if a Roth like work for me but I just don’t see it. I just retired at 69 years of age. I never did Roth because I was already in the 34% tax bracket. In my first year if retirement, I plan on starting Social security this July and I will receive the maximum amount allowed, about $4,973 a month. I have a pension of about $76,000 which like social security, will behind t to a cola. I did work in January and also cashed in unused vacation and between pay and vacation, that adds in another $56,000. The bigger issue is that while I have private health and life insurance for life, I wanted to add Medicare part b as a wrap around and I’m already going to because to an Irmma so a Roth conversion will increase that irmma significantly. I will pay income tax on social security (85%) but no state tax on SS. I do have a 401k that after splitting it through divorce is still fairly large but since I have the pension and SS, it’s not clear I will need that money but will be hitting RMD in two years. If you know a way that a Roth IRA conversion makes sense, especially with the 5 year holding period, I’m all ears.
My daughter has a medical problem that will need life long assistance . I would like to financial , how can I put the Roth in a special needs to take advantage of the normal ten year period ? I realize you just cannot transfer to trust without cashing it out but I heard there is a way . Thx u
Excellent information! I look forward to reviewing the tax consequences page once turned on. How long will the free access to Right Capital be extended?
No point converting if the amount you’ll be withdrawing is below the standard deduction. Also if you want to utilize ACA subsidies you need to show some income otherwise you’ll be thrown in Medicaid
@@rickyaz8640 I don't think I have to worry about that I inherited 325,000 from a family member in 2020. Because of this only about 13% of my net worth is in Roth 401K Roth IRA.
Yes, but at the Capitol Gains tax levels (long or short term, depending on how long you had the investment), not the Income Tax levels. These CG tax rates are much lower than income tax rates, google them for your particular situation.
Im confused. This has nothing ro do with mega backdoor roth conversions? It is about taking your already 401k tax deferred and converting to roth ira earlier? This strategy is about getting tour money out of an already tax deferred 401k? Do i understand that correctly?
I am 69, retiring next spring. Will use a little out of the IRAs for living expenses. Should I do a Roth conversion? I already have some money In a Roth.
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Excellent video. I've been doing annual Roth conversions, to the limit of the 22% bracket, in order to reduce impact of future RMD. Once 2026 arrives, and taxes are raised, the conversions will be reduced to fill only the lowest bracket. We are living on the Roth accounts and SSI. So glad to see the potential tax savings of up to 2M using this strategy.
Thanks for a very enlightening video.
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.
It might be worth considering a financial advisor to avoid constant adjustments. Your selections are strong, especially for a $350k portfolio.
I agree-having an advisor manage my investments has been invaluable since my work schedule doesn't allow time for in-depth analysis. Thankfully, my portfolio has grown fivefold in just four years, reaching nearly $1 million today.
How can I find a trusted financial planner like yours?
I consistently recommend Rebecca Lynne Buie as my top choice. She is well-known for her expertise in financial markets and has an impressive track record. I highly endorse her services.
This video represents exactly how RUclips can democratize financial planning and freedom. Excellent content. Thank you!
Thank you!
I find those analysis about Roth conversion always a bit oversimplified. For example, they are assuming the tax bracket can be filled up with the Roth conversion. But during the year of Roth conversion, need to leave on some revenu, which also most likely will be taxable in some way ( unless it is seating in a checking account bringing close to 0% interest). Another risk is being obsessed with the Roth conversion and target lowering the tax bracket, which means not enjoying the Gogo years.. for getting more money at age 85..
totally agree...IMHO the only reason to worry about this is the viability of your retirement style...
Agreed. To get the most bang out of Roth conversions is to have an influx of tax free money, or nearly tax free money (withdrawals from a taxable account are partially taxable; just the capital gain is taxed at 0% or 15%, usually).
I had an influx of tax free money (inheritance & cash-out refinanced mortgage money), which allowed me to maximize the benefit of Roth conversions. I've convinced no one to do a cash-out refinance, but it was key for my plan.
I started my Roth conversions in 2015, and I'll finish up in 2026. My future avoided federal, state, IRMAA & NIIT totals $2,300,000. My conversions are being done in a no state income tax state (Texas), while my Roth withdrawals will be in a high income tax state (California).
I would like an analysis on pre-tax vs roth contributions. I would love to go all in with the roth, but the tax savings at tax time with the pre-tax route keeps me from making that jump.
Great video.. Retire a year ago at 61. Wife is retiring in couple months so have been moving cash into Roths while we still have wages. Next is to start some smaller Roth conversions and this video really helps get me thinking more deeply about the best taxing strategy. Thanks john
Thanks, John! Glad it was helpful.
I'm not sure I agree with your example at 8:12. In 2049, it shows tax of 37,063 on 215,153 of income. This approximates 2024 tax tables, however 2049 is 25 years from now and the brackets will have changed. What I do is use the current tables, calc the tax of the PV of the income, then calc the FV of the tax. Something liike FV(Tax(PV(215153))). This gives me a tax of $26,617 in 2049 dollars, assuming a 3% inflation rate. Granted this is a major assumption but so is assuming the brackets will not change.. This one change convinced me not do do rollovers at my stage in life. Good video.
It's a savings, but not such a huge savings. You need to show the results using real rather than nominal dollars. That $1+ million savings is inflated future tax dollars vs current dollars. A better measure is ending net worth.
I'm retiring in 2-3 years at age 62-63. It makes sense to me to start the Roth conversions now, doing a partial over the next 3 years while I'm still working and have the extra money to pay for the extra taxes, being mindful not to cross into the next tax bracket. This is what I'm doing, I'm not waiting until I actually retire to start the conversations. Plus, the better 2017 tax brackets are expiring starting 2026 tax year.
That sounds like a smart plan.
@wdeemarwdeemar8739 Good point. I'm 4 yrs away from Medicare eligibility.
I'm doing the same, largely because in retirement health care costs (ACA or Medicare) increase with income. So, one has protection from this hidden cost of Roth conversions while health benefits are covered through company benefits. It's important to note that for Medicare, cost uses a 2-year look back. So, the income you show at age 63 will drive your Medicare cost at age 65. Here it helps if one was born closer to year's end instead of near the beginning of the year because increase Medicare cost would be limited based on the number of age-65 months is the first year it is taken.
Even though tax rates will go up in 2026, trust the numbers. For example 15% in 2026 is less than 22% now.
If your increase occurs because work and conver sion but expected income is expected to change because of life changes (retirement) you can file notice of expected change and avoid extra Medicare charges for that past income because working.
As someone who maxed pretax limits for about the last 12-15 years of my career, I wish I'd known more about RMDs and the IRMAA surcharges back then. I was totally focused on building the retirement balance while minimizing taxes. Did a Roth too for most of the last 20 years. Now I'm doing Roth conversions and pretax distributions for spending. The goal is to take taxable income to the edge of the edge of the lower IRMAA threshold to reduce the pretax balance in the golden years post-ACA until SS starts at 70, with limited conversions at age 70&71. It's a PITA to run all these calculations.
I managed to watch a few of your videos in the last few days. Your videos are very informative, and I appreciate your method of teaching and sharing your knowledge. I tried your tool and must say I’m very impressed, I particularly like the simple vs the more detailed approach you offer.
Thank you for sharing your story and knowledge on RUclips.
Thanks, Rick! I really appreciate it.
I have not yet filled out the tool but am looking forward to it. Sounds promising.
One very important thing this video made me realize is that I can save even more tax money by not converting the amount in my IRA that I want to donate to charity upon my death. To be more precise, since I can donate IRA money to non-profits without paying taxes on gains of what I donate, I would actually pay more taxes if I convert what I plan to donate.
If I learned just that from this short video, I can only imagine what more I will learn from the rest of your videos. I've been watching a lot of Roth Conversion videos - some good, some bad - and this is the BEST!!! Thank you!
I am contributing 100% to the Roth 401K. I am 42 and started to do In Plan Roth rollovers. The main reason I am doing this is because currently my effective tax rate is 18.5%. That is for the state and federal combined. I guess anything is possible. But I highly doubt it that my effective tax rate will be this low in the future!
Don’t forget there are several states that have zero income tax. Personally, I’m considering a move to a warmer state and the fact there is zero state income tax is a big bonus.
You want to make your decision on whether to do Roth conversions on your marginal tax rate, not your effective tax rate. If your marginal tax rate on your conversion is lower than your predicted future tax rate avoided on your Roth withdrawals, then that's advantageous. You may also need to factor in IRMAA & NIIT taxes.
one problem with roth conversions early before social security kicks in is it increases your income level and can eat into any price subsidies on healthcare through the ADA
Will you elaborate on this?
@@Terry-cg7ktif you get healthcare for the ADA you can get a subsidy based on your income. The lower your income the cheaper healthcare is. But if the year prior you did Roth conversions, it increases your income. Posted us saying this will potentially decrease your ACA subsidy.
If you’re already retired you can convert up to your standard dedeuction limit and pay no taxes.
Thanks Kevin. I actively manage a taxable brokerage acct. and have taxable capital gains and dividend income, in addition to a large IRA. I am not taking social security yet but I am past full retirement age. I pay very high IRMA on the Medicare premiums for my wife and I which really pisses me off given the high taxes I have had to may in my life time. Roth conversion would just put me in a higher bracket now for many years up to RMDs. I guess I just let it grow till then.
Sometimes there’s just nothing you can do.
I am in the same situation with IRMA. I found that out the hard way after my first year of Medicare (had to pay double the norm). I am not taking SS (67 yrs old) either in gap years trying to burn down some 401k early on. Retired just living on tax paid savings and 401k. Now trying to strategize, but looks like all efforts will lead me to the first tier IRMA increase. Yes this IRMA crap is hard to swallow and I don't think that it is fair. Noted in Kevin's sample, I think they were in IRMA territory for stealth tax too for some years.
At 10:25, the software generated a table showing 2026 taxable income of $98,811 and tax paid as $24,373. Doesn’t seem like a 15% bracket.
Please do consider that the dividends and interest in your taxable accounts will be taxed as ordinary income EVEN IF they are invested back automatically without taking a distribution. When determining what your income bracket would be while determining how much Roth Conversion you can afford to take in a given year while staying within a target tax rate.
You mention "stealth taxes" but I think they deserve more attention. The "Inflation Reduction Act" limits heathcare premiums to 8.5% of income and is effective through 2025, this includes Roth conversions. Someone who early retired with $100k in income might have $20k in insurance premiums so that's 8.5% additional on income over $100k up to $235k. It's significant. For someone in this situation I'd say wait until 2026 for any Roth conversions.
Glad I stumbled onto your videos. Truly kicking myself for neglecting this topic, along with other issues the last 10 years … work distractions, gun shy from very poor advice 40 years ago, laser focused on paying off the house mortgage as fast as possible ( 6 years rather than the 30 year mortgage we took out @3.0% … a house is a roof over your head, not ant investment). Thank you.
I hammered a low interest home loan to almost paid off, for me it was a mistake.
The cash using to pay off a 3% home loan can get a safe 5% CD, the cash from laddering CDs can be used to live on to have anemic taxable income, with a low taxable income 401K money can be rolled over to Roths at a low tax rates
Why would you pay down a 3% mortgage when you could put that money in a 401K S&P500, avoid state/fed tax, and reap 8% on average (last year 20%). (Also, if you itemize, you would be losing ‘some’ mortgage deduction). Or put it in a Roth IRA? As the guy above said, even banks are offering 5% CDs. If you have enough to max out on a 401K AND pay down the house and have emergency money, then great, pay off the house early.
wise! good peace of mind sleeping at night! once it's paid off, it's paid off! everything else (investments) will fluctuate over time. the price of a peaceful nights sleep (paid off house) is priceless!
@@1MinuteFlipDoc You're still paying property taxes and insurance on your house, which I assume will increase over time. Possible HOA, too. I didn't want to pay off my mortgage but I refinanced at 3% so my mortgage payment is just under the total of my property tax & insurance every month. That works well in my retirement cash flow without gutting my investments for it.
Good info, lots to consider here. I have a large IRA/401k, and small Roth accounts. We’re flirting with a 24% bracket, so it doesn’t make sense to do a conversion this year. But wife is planning to retire next year at 59. That will be a good time to start.
Thank you very much Kevin. The demo makes this topic a lot more relatable rather than simply explaining the components. Much appreciated.
My pleasure.
Social Security for me is taxed up to 85%. I am old enough to need to make an annual RMD. I don’t have a use for the $30,000 ish RMD. I use the RMD to pay the taxes for a $100,000 annual ROTH conversion. The tax bracket stays the same at 22%. If one spouse dies, then the tax bracket increases for the conversions. The ROTH conversion is an easy way to put surplus money into a ROTH at no change in taxes. Eventually, all the 401k will get converted.
Something for people to keep in mind is to actually do the math. Most people don't realize hitting a higher tax bracket isn't necessarily that bad.
For instance married filing joint 24% bracket starts at $201,051. You DON'T pay 24% on the entire amount. If you go over by $1K you only pay 24% on that $1K NOT the entire $202,051. Most people don't seem to know how brakets work. You pay exactly the same takes on the first 100K that someone who only makes 100K total.
True, in general, but there are possible "tax cliffs" where deductions or benefits are no longer available because you exceeded income thresholds, or 1/2 of soc sec income can suddenly become taxable by crossing a threshold.
Agreed...there is a difference between the "tax bracket rate" and the "effective tax rate" (tax paid divided by taxable income)
Excellent video. Thoughtfully laid out and easy to understand.
Thanks, Troy!
EXCELLENT! We are using a recent inheritance to pay the taxes on Roth Conversions each of 5 years before RMD starts at age 73. That reduces substantial tax brackets during RMDs and when we die our heirs inherit the Roth tax free.
One important thing to consider if you are going to do a Roth IRA conversion from an IRA with stocks is how high the stock market is. You might want to think twice about doing conversions when the market is at record highs (as it is right now), because you are getting much fewer shares transferred for the taxes you are paying. On the other hand, if the market takes a dump, it is a great time to do a big Roth conversion because you are getting more bang for your tax dollars. Another important factor is if you live in a high tax state and will retire to a low/no tax state. That also skews the analysis.
The account growth does not change the math unless it is negative in which case conversion is less attractive. Positive growth whether 5% or 15% per year if you pay the same % tax will not change the result.
The software displays cumulative taxes paid, but what’s a better determinant of alternatives is to compare the net present value of each.
great video. but also remember that not everyone has the money to pay the extra taxes from the roth conversion. .... and....speaking of roth, 401k, HSA and all that... please make a video for Freelancers. You live in LA, you know they exist.
I already made enough profit in my Roth to cover the taxes I paid last year on my conversion. Yay!
Good content. I am looking forward to you activating the "Tax" tab so I can run through different conversion scenarios.
Should be live.
Thank you for the offer to turn on the tools. I had previously tried with this site but found that the basic tools are too basic and the site wasn't very valuable from a planning perspective. It might give a good doomed / only mostly doomed thumbs-up thumbs-down fuzzy feelings, but the marginal tax graph is what I really wanted to sort this out and that is not a feature. Thank you!
I haven't crunched the numbers yet but if I don't need any of the money in the IRA's or my taxable brokerage accounts then paying extra capital gains tax by paying the conversion taxes from the brokerage account loses me money compared to paying them from the IRA. But if you get capital gain distributions which you already pay tax on, then using that to pay the tax on the conversion does make sense.
Love how these analyses always show people living into their hundreds! Wow.
My mother is 98
appreciate these videos a lot! Thank you. I too noticed the client age goes up to 106!
Wonder this: if bring endpoint to "more usual" life expectancy of, say, 92, how do these final savings numbers change?
Wow, thanks for the walkthrough and the pointer to the tool. I’ve been working with my own spreadsheet trying to make these calculations.
Interesting all the variables you can tweak to maximize the result.
Great content. Regarding the audio: your processing dramatically de-emphasizes high frequencies, and the consequence is that it sounds like you're mumbling. Most of the intelligence in language in in the high frequencies (hisses, pops, and other sounds that clarify consonants). Consider boosting the high frequencies in your processing.
In Roth gains compound with no tax ever. I can't follow the formulas but my intuition tells do it. I pay 30% State and Fed tax on the conversions. I pay with income money not the converted nor selling any investment to pay it just income money. I don't believe I'll ever be in a lower tax bracket especially when RMD's begin. Yes the 30% could be invested in taxable funds but I just won't worry about all of that I just 'feel' in the years to come it will be well rewarded.
Great job of making me very complex topic extremely understandable!
Thanks!
Thanks for the excellent Video Kevin--just subscribed and also just setup an account at Right Capital. Looking forward to you activating the "Tax" tab so I can run through different conversion scenarios.
Thanks, Tony!
Ones anticipated longevity bears consideration. This question involves inheritance after a conversation. If I convert now, the converted funds are not to be withdrawn for 5 years so as to avoid taxes. Correct? Assume I die in 2 years and my beneficiary inherits the ROTH IRA, a portion of this was converted less than 5 years previous. Do they have to hold those funds until they are 5 years seasoned before they are exempt from taxes?
I'm 72, and must start takingRMDs this year (don't want to wait till 73, because then I'd have to take two RMDs in the same year, increasing my taxes.) I really wish I'd known to do conversions much earlier, but better late than never, I guess. I converted about $75K over the last 5 years, paying the taxes due from non-IRA sources. The conversion caused me to have to pay income taxes on 85% of my SS, but because my RMDs will only be about a third of my yearly previous conversion amounts, I'm betting that my SS taxable rate will drop to 50%. And I'm betting that federal income taxes will keep going up during the rest of my lifetime.
if you have a few million in tax deferred accounts and take out an extra $50K / year to convert before RMDs let's say 8-10 years, that's $400K to $500K total conversions that would have been taxed as ordinary income; but if you have a few million tax deferred and it's still growing for those 8-10 years, that $400K - $500K conversion isn't going to make a big impact on your future RMDs...this is my issue:
I'd have to take out too much each year to convert, pushing my tax bracket higher during those early retirement years before RMD, for it to matter when RMDs hit.
I'm unable to find a path where Roth IRA conversions make sense.
If my combined SSI and withdrawals from deferred accounts keep me in the 24% tax bracket, my tax deferred accounts will continue to grow faster than my withdrawals, unless the markets drop for an extended period of time or I move up to a higher tax bracket and withdraw more.
Your videos are all really helpful. I also used the software to see if a Roth conversion would help me, but it won’t. However, the tool helped me to see that I should wait until 70 to take social security, and it also got me thinking about equity location, which I had never considered before.
Kevin, thanks for the video. So many things to consider! I need an advisor to help me through this.
Good video.
Glad you mention that Roth Conversions are not always a good idea.
So many think that a Roth leaves you more money no matter what, and that tax free growth is automatically better than pretax growth, which then causes those with smaller portfolios to over convert.
If I'm retired and living off my savings (no income) and convert an amount equal to the standard deduction, the I would owe zero taxes?
I think an easier, back of envelope, way to figure out if you want to do Roth conversion is to compute the breakeven, in terms of dollar amount. Let's say that you are in the 35% tax bracket and expect to drop down to the 24% tax bracket in retirement. Let's assume you have $100,000 in your 401K. The tax you would pay would be about $35,000. The breakeven point is the value of the account when you would have to pay the same amount from taking withdrawals from your 401K. In this case, you would need 35K X 100K / 24K = 146K. ie. You would pay the same taxes if you had 146K in your 401K account. ie. a 46% growth. If you paid for the taxes during the Roth conversion out of a taxable account, you would end up with $100,000 in your Roth IRA, so only need to make 46% gain to break even. Beyond that, all the compounding growth is tax free. If you paid with taxes from the 401K, you would end up with $65,000 in the Roth IRA, which would require 146/65 = 124% growth to break even. 46% seems reasonable. 124% is much harder. The growth of the market last year was such that people who did the conversion a year ago would almost have broken even. If someone is in the 24% tax bracket and would be in the 22% tax bracket in retirement, then the decision is a lot simpler as the amount of growth needed to break even is a lot less. The hard part is saving enough to pay the taxes out of a taxable account, so you can get maximum impact out of the Roth account.
Maybe for a basic estimate, but really need to comprehend full picture of income/expenses, taxes social security, conversions, widow tax on spouse, etc
This ALMOST made sense to me, but not quite. If I convert my entire trad IRA of $450,000 and pay 35% tax from my taxable account, how does that work out? Not sure I understood the early paragraph’s calculation.
@@candecarro The breakeven would be about paying the same amount of tax now, versus in the future. If you are at 35% and have $100,000, you would pay $35,000. To break even, it means you have to figure out how much your would need the IRA to grow to also have to pay $35,000 if you take it out later. 24% of $146,000 would be $35,000. ie. The same tax paid now to convert as what would have to be paid in the future. This assumes that you are paying all the tax out of your taxable account. The difficulty is in saving up enough in your taxable account in order to pay the taxes. This means doing the conversion over a number of years as you save up cash. If your retirement tax bracket will be very low (e.g. 12%), the breakeven would be $100,000 X 35 / 12 = $291,000. That is a lot of growth required.
@@candecarro If all your total tax deferred accounts is 450k, i wouldn't do roth conversions at all. I would just withdraw what I needed annually and try to stay in lower marginal tax brackets. And also figure how not to run out of money if 450k is the total of all savings.
Where is the link to the software? Thanks
Thanks for the video.
One thing to touch on is the comparison of paying for the Taxes out of Converted Funds or pay the taxes from Brokerage Accounts or Savings. If you don't have a Brokerage Account, it will come from savings. If not enough savings, it will have to come from the 401K account which will impact future earnings after the conversion. For those already retired...... If you are receiving ACA subsidies it could wipe those out also. Insurance is not getting cheaper. Lots to unpack if you are considering a conversion and just like SS decisions, everyone has a different scenario. There is a limit to how much most of these Financial Videos can share.
Very informative. However, you are missing one important piece of the puzzle. HEALTHCARE. I just retired at 61 1/2. For the next 3 1/2 yrs i need healthcare. Cobra way to expensive @ $900/month. Obama care is the way to go, But.... Subsidies to make the policy palatable come at a cost. With my wife who is 65 and on SSDI we have yearly income. We set a income level at $50,000/yr so our obama care subsidy would be fairly good. The more money you make, the lower the subsidy, the higher the monthly cost. This will all but alleviate any roth conversions for the next 3 1/2 yrs. Which are probably our best years to do conversions.
Now i plan to wait to collect ss so i can have 2 yrs of conversions before collecting at 67. Will also have to deal with IRMA at that time. So many in's and out's to deal with.
Yes, there are many conflicting options. In some instances, it may be better to take less ACA subsidies in some years and convert some each year. You have to model the numbers, and include RMDs, etc.
Couldn't agree more with your frustrations and I'm also in this same boat. Uncle Sam always has a way to put the screws to us!
Wouldn’t your wife be on Medicare? Then your ACA subsidy is going to be about $10k max per year for you. That is 20% of $50k if you don’t take it, which bumps your effective tax rate up to about 30%. A tough call. The effective tax rate on $100k of income for a couple is still less than 10% including SS discounts.
Thanks for the great video!
Is it better to just tell your kids to invest in all ROTH IRAs and 401Ks from the beginning, while their income falls in the lower tax brackets? And to max an HSA if available?
Thanks for the video and the understandable presentation of an often complex topic.
I just retired at 67 and I’m considering moving to Spain where Roth IRA and Roth 401(k) are not recognized. So, Roth is not a panacea. Roth income would be considered as ordinary income and taxed as such. Although you’d be exempt from US federal income taxes, Spain will ask for its share of taxes as you did not pay taxes to them. Effectively raising your taxes in retirement. There is also no benefit in the double taxation treaty between US and Spain on this. Some European countries do recognize Roth generated income like the UK, France and Belgium but Spain and Portugal, two popular retirement destinations do not.
I haven’t done my 2023 tax return yet but I expect to be in the 32% tax bracket. I’m not filing for social security benefits until I’m 70 and will take distributions from my 401(k) in the interim. My SSB will be substantial thus pushing me into the 85% (of SSB) taxable category. Between now and 70 I can control the withdrawal amount out of my 401(k) to lower the RMD when I reach 73. My calculations and projections on my 401(k) future growth and annual income generated there from will likely keep me in the same or slightly higher tax brackets.
Since Roth is not an option for me, can you suggest other strategies to shelter future income from taxes?
My wife and I are in a very similar situation. We are planning to move to Spain this fall. I will soon be 62, and I intend to work another couple of years remotely on the DNV. I'm still doing Roth conversions now. We recently spoke with a Spainish tax lawyer. They will only tax the gains within the Roth, and only if you make withdrawals. I don't intend to even touch this Roth money for a long, long time, and who knows, may return to the states to live one day where it will be completely tax-free. We will live off of other income while residing in Spain. Also, move to Spain after July 1st, 2024, and you won't be paying any Spanish taxes until Apr 2026. Best wishes to you! Maybe we will run into each other there!
What I think is missing is what the amount you would have from leaving the money needed to pay the taxes on the conversion. It would far exceed the tax savings. Even after paying tax on the growth for the money that you didn’t use to pay for the taxes on the conversion.
Thank you for knowledgeable video. I have subscribed to your channel and also made an account with your software. I really like how it is laid out. I will be looking out for when you are able to activate the tax part so I can look at my options. Thanks again.
I don't understand your suggestion that instead of a Roth Conversion you may want to take a distribution from your Trad IRA and put it in savings. Savings accounts have virtually no growth, so why not convert to ROTH where presumably you are getting a higher return? You can withdraw funds from the Roth as needed and any growth will be tax free, whereas you'll pay tax on the interest from savings account. Of course this is assuming one is over 59.5 years old.
Maybe when he says savings he isn’t referring to a traditional bank savings account or mma that currently pays 3-5%?
Would be helpful to see the benefits offset by up front tax payments and the future benefits discounted back to today. Net present value calculation.
Hi, are you a RIA...Registered Investment Advisor, registered with SEC with a ADV form Part 2, disclosing all your fees and services? I was told by Eldermann if you talk to a advisor and they can not produced a ADV form, RUN away as fast as you can!
I am.
Hi Kevin, Just checking if you saw my recent question, as I cannot see in RC the edit button you show at 11:35 to limit the number of years you do the Roth conversions. Thanks
Investments are the roots of financial security; the deeper they grow, the stronger your future will be."
When you go to convert from a IRA to a ROTH IRA what IRS tax form do you use to pay them directly. Can you do a video on the process?
Why would you not convert the entire IRA in one year? 2/3s to the Roth 1/3 to pay the tax owed. IRMAA goes to max value in two years, but the Medicare surcharge only lasts one year and drops back when the income goes back to normal.
Tax brackets, NIIT, IRMAA, etc - can save a lot of money
Once again, great video. Can you explain how to determine Fill Up The Tax Bracket tax rate?
Thanks! We use software called Holistiplan to do those calculations each year for clients.
The conversion only counts as income if you deducted the money from your taxes for the year you contributed. If you leave it as a non deductible contribution you can convert to roth with no penalties. You have to leave it in for 5 years as well.
457 plan?
I'm not fully done with this video yet but if you didn't mention it; if your age is before 59 1/2 years old and you convert or roll over money from a retirement account do Not take out money from the account as you will be hit with the 5 year rule where then you will be subjected to the 10% Tax anyways.
The thing I do not understand is…. If someone is transferring $50,000 from 401K to Roth… in addition to that $50,000 being transferred, they have to pay Tax on it.. If 15% Tax Bracket that would be and additional $7500 I will have pay to do this deal. Less money to invest in my other accounts.
Many people worry about paying taxes out of pre tax Ira money, but the fact is that the balance you see on your statement is not all your money. In my case, 20 to 25% of that balance belongs to the Federal and State governments. You can pay it now or let it grow and pay it later, but unless you give it to charity, taxes will claim their share. Our son is in a higher bracket than us so we are annually converting to the top of our bracket to a Roth. If the market rewards you, I feel fine using some of that gain to pay taxes.
How charitable of you. 😂
Good points. 👍🏼
Big sequence of returns risk by pulling that much out in the early years (to pay the tax), would definitely be worth running Monte Carlo, not just assuming x% return every year.
I'm 65 and getting ready to retire. What advantage is it to me do do a Roth conversion?
Thank you very much, Kevin.
is there a link to the software?
Thanks - can you give me a link to your software to play with these tools?
How much would it cost to get additional or full access to the software?
I subscribe to new retirement but find RC to be better suited for my needs.
However, I don't believe the numbers are realistic.
Inflation seems to be set at 2.5% for the first year and 1.5% for the remainder of the plan.
Of course I've seen many training videos that show enhanced capabilities that are not present in the version I'm working with so I'm wondering if it's possible to gain more access to those capabilities.
Thanks you Kevin - so helpful much appreciated
I was told if I'm not working, I can't put into a roth account and I can't convert.
You can't contribute without having earned income, but you can do a conversion. The conversion will be taxed. Example in 2024 if you convert 30k from traditional to roth, you could still minus out your standard deduction, you'd stay in the 10 percent bracket and you would have to pay approx 2k in taxes (you would need to pay the taxes from your saving account)
When would it make more sense to simply withdraw from the 401k first versus doing a Roth conversion?
Have a 35000 per year pension. No matter how I slice it I appear to have to pay social security taxes. It kills my Roth conversion plans at lower tax brackets.
I think, There can be conversions on the other side of the SS tax torpedo, where SS has already been taxed as much as it can be.
Two questions. At time stamp 13:26 you mention taking money out of pre-tax account and putting it into a taxable account to help drain the pre-tax bucket. When would that ever be better than a ROTH conversion even if the money will be spent in the next couple of years? We feel filling the 12% tax bracket with ROTH conversions is a no brainer. Even if we are going to spend the money in the next few years, if we need a large sum of money, it will keep us from taking a large tax hit, in a higher bracket, in the future. We will still have plenty of pre-tax money to fill the 0% tax bracket (standard deduction), 10% tax bracket, fund QCD's and pay deductible LTC expenses in the future. Does this make sense?
@@1-Wheel-Drive That was the point I was making. I am glad you agree.
What about if I save a year of salary and quit my job and become a poor person meaning no pay check for a year and after a year on my 59.5 years old do a roll over to my roth IRA and be on the 0 tax bracket. Does that the defeat the system.
Didnt notice a mention of medicare costs. Convert too much and your medicare costs go up. Two spaces both get the increase.
Did I not mention it? I thought I did. You’re right. I definitely mention it in the buckets video right before this one.
Hi Kevin,
I've been enjoying learning about retirement planning over the past few weeks from your videos. I'm 62 and wish I had known all about these approaches and risks ten years ago.
My question concerns the year after year conversions of tax deferred plans to ROTH plans. My understanding is that there is a penalty for withdrawing fund from a converted ROTH within five years from the date of the conversion. If I stagger the conversions over multiple years to keep the conversion tax in a lower bracket, does the five year date reset for each conversion? If so, do I need to create a new ROTH account for each year, so that the first conversion is available after year 5 and the second conversion is available the year after that, etc.?
Thank you.
I’m like the Dunphy’s with what I have in my retirement accts but I’m widowed (2020) and I’m 76. My SS and other investments easilycover my living expenses. I want to convert all of my tax-deferred IRA now to get rid of RMDs and eliminate taxes for my kids when they inherit.
Feel free to set-up an appointment if you’d like me to run the calculations.
Thank you, Kevin!
@@foundryfinancial -Do you charge an hourly rate?
Could you do the same scenario for the couple retired at 55?
As an enthusiast, I would like to know the most effective strategy during this period of volatility with the rates? My portfolio is in (20% Index funds, 20% ISA/SIPP and other assets). Right now I want to explore different strategies to benefit from a potential bubble.
I am a CFP who LOVES Roth. Don’t get me wrong…. But the obsession on RMDs out of traditional has always been a little strange to me… you’re mid 70s. It likely makes sense to unwind traditional at that age anyways
That’s why you run the numbers and show clients various options. But, as you said, you’re forced to unwind at age 73/75. If you don’t control the withdrawal - it could create a larger tax bill for you and your heirs if you don’t plan properly. And trigger IRMAA and a higher tax rate.
I’m 32 and have over $200k in my Roth IRAs. Good plan to convert in low income years.
You are in the good shape in your retirement life.
I don't see the link to the software?
Here is where I struggle. I currently at the top of the 22% bracket with a 7 figure IRA. Advice is often to convert to the top of the 24% bracket before 2026 when it turns into the 28% bracket. I would also have 5% state tax. If I do nothing and wait for RMDs and live off other money to draw it down so by RMD age all I have is SS plus my taxable IRA withdrawals. If my IRA grows to $5m the year one RMD will be about $200k and increase annually. Added to my SS that seems to be about what I project is needed to live on adjusting for 15 years of inflation and should be well below inflation adjusted IRMAA limit. That would put me in the 25% bracket adjusted for inflation. Assuming SS eats up the standard deduction, I will pay 10% and 15% on some of my RMD and only pay 25% on a portion. The average will be less than the 24% paid today to convert and I am paying with future dollars and avoided the potential disaster of a market drop soon after converting. Also if I move to a zero tax state in retirement I will save another 5% in state tax.
Year one RMD isn’t the problem. Look at year 5,10,15 etc. to see the broader picture.
I’m in similar position. Think you’re going to find a very large portion of your social security is going to become taxable when your RMDs kick in. That creates zones of double taxation that can/will elevate your marginal tax rate well above 25%.
Yes RMD’s increase but so do the inflation adjustments to tax brackets and the standard deduction.
If a Roth conversion is taxed as ordinary income, then can you lose your ACA subsidy by withdrawing too much?
Exactly my situation!
@@pinkmoonrisin Have you figured it out?
I would love to determine if a Roth like work for me but I just don’t see it. I just retired at 69 years of age. I never did Roth because I was already in the 34% tax bracket. In my first year if retirement, I plan on starting Social security this July and I will receive the maximum amount allowed, about $4,973 a month. I have a pension of about $76,000 which like social security, will behind t to a cola. I did work in January and also cashed in unused vacation and between pay and vacation, that adds in another $56,000.
The bigger issue is that while I have private health and life insurance for life, I wanted to add Medicare part b as a wrap around and I’m already going to because to an Irmma so a Roth conversion will increase that irmma significantly. I will pay income tax on social security (85%) but no state tax on SS. I do have a 401k that after splitting it through divorce is still fairly large but since I have the pension and SS, it’s not clear I will need that money but will be hitting RMD in two years.
If you know a way that a Roth IRA conversion makes sense, especially with the 5 year holding period, I’m all ears.
Depends on your needs, but I could definitely see it making sense to do a partial conversion.
My daughter has a medical problem that will need life long assistance . I would like to financial , how can I put the Roth in a special needs to take advantage of the normal ten year period ? I realize you just cannot transfer to trust without cashing it out but I heard there is a way . Thx u
Good video- Where can I download a spreadsheet to analyze
Excellent information! I look forward to reviewing the tax consequences page once turned on. How long will the free access to Right Capital be extended?
As long as possible. There may be a cap on how many people (not sure).
Glad that 100% of my retirement contributions are Roth IRA/Roth 401k. Only have to worry about converting my employer match in the future.
No point converting if the amount you’ll be withdrawing is below the standard deduction. Also if you want to utilize ACA subsidies you need to show some income otherwise you’ll be thrown in Medicaid
@@rickyaz8640 I don't think I have to worry about that I inherited 325,000 from a family member in 2020. Because of this only about 13% of my net worth is in Roth 401K Roth IRA.
I wonder if i can offset the conversion due to investment losses. Im thinking yes, but I cant be completely sure.
Yep.
Yes, but at the Capitol Gains tax levels (long or short term, depending on how long you had the investment), not the Income Tax levels. These CG tax rates are much lower than income tax rates, google them for your particular situation.
You mentioned that you put a link to the software we could download and play with it ourselves I cannot find the link can you please advise
Im confused. This has nothing ro do with mega backdoor roth conversions? It is about taking your already 401k tax deferred and converting to roth ira earlier? This strategy is about getting tour money out of an already tax deferred 401k? Do i understand that correctly?
I am 69, retiring next spring. Will use a little out of the IRAs for living expenses. Should I do a Roth conversion? I already have some money In a Roth.
How do I get access to the edit button where you can adjust how many years to convert?
It’s not available to non-advisors. Wish it was!