I really like your presentation method, lack of intro, music, and execution. You just get straight to it. I also appreciate your deep dives and analysis of the interrelated effects of RMDs on the whole of retirement tax planning. Do you know my buddy Josh at Heritage Wealth Planning? I appreciate specifically your addressing the widows tax trap. Well done!
IRMA is in the noise range for those in higher tax brackets with large traditional IRA’s, taxable accounts and 401K’s who only have a few years to convert before taking RMD’s. In addition, your analysis excludes the challenges facing high net-worth retiree’s that live in high tax states like California.
I can’t imagine a 32% conversion makes sense for most. Even an income over $1m can have an effective tax rate of less than 30%. The RMD on a $5m IRA is $200k so you would need a whole lot of other income before even considering converting at 32%.
How do you account for the inflation factor of paying taxes in todays dollars vrs gradually thru RMD's over next 20-25 yrs? Future dollars are worth less than todays dollars, so savings is reduced. Another factor may be recent history of the stock market, like 2022. Converting after the market has dipped is more favorable as when the market rebounds you get the gains tax free in your roth.
Always good information - I really enjoy the Roth conversion presentations even though I'm in the (current) 12% tax bracket. I've done a couple small conversions already and will try to get a couple more done before collecting Social Security at 67 in 5 years.
Hey, great analysis of all the details but it come in to play when you’re dealing with taxes and Erma, Medicare, part THE, etc. but when you talk about the state taxes, why don’t you guys ever bring up ways to get out of that like trust put everything into a trustbypass probate, no estate taxes, etc. tell me if I’m wrong
Is there a way to estimate what the 12 and 24 percent bracket threshold might be in 20 years? Can we just assume a 2.5 percent inflation and adjust acordinging for the time frame ($*1.025^20)?
I was confused by the graph at 3:24 showing a drop in income threshold in 2026 for the 32/33 percent brackets, until I realized the drop only applies to joint filers. For single filers I believe it does the opposite, as the 33/32 threshold dropped from $191,650 to $157,500 in 2018, and therefore should jump back up when the TCJA expires. So the yellow line jags in the opposite direction for single filers.
They should do a lot more than jump back up to the 2017 number. Doing that throws away 9 years of inflation adjustments, including 9% for 2022. If the 2026 sunset really does that it's a freaking huge windfall for the government. Unfortunately my Google-fu can't find anything about what happens to the inflation adjustments, nobody talks about that at all. They only talk about the percentages reverting.
I think there is more than just tax rate to look at. What about avoiding IRMA ans extra medicare premiums. I have the money now so why not make retirement tax free?
I've talked about this before in other videos. IRMAA should be translated to a tax rate and then tax rate comparison should be made. So maybe rather than 'tax rate' it should be called 'expense rate'
My considerations Paying a premium now for a known future tax rate (0%) The reduction of Medicare costs after conversion When one spouse passes well before the second, a long time of filing single The likelihood of higher taxes in the future (lower, not so much) A stock market downturn is an excellent time to convert (do not try to "time" the market).
@@_-Karl-_ but another thing to consider is that if a decent amount of money was left to heirs then they would possibly change their earning income situation. Instead of both full time work one may stop working and it’s a perfect time to raise the kids. Or one may work part time. The income tax bracket doesn’t necessarily change. People worry too much about taxes for their heirs. That’s their problem to deal with. You enable them too much and they will develop bad lazy and even destructive behavior. I only mention the above if one finds themselves in this position. It doesn’t really make sense to pay more taxes now and overall pay more just to pay lesser taxes down the road. So even if a couple finds themselves with too much tax infested accounts then take a hit for just one year at a higher tax bracket then do all the rest at a lower tax bracket. It’s all gravy. Whatever is left over just pay RMD. Whatever is left should be at the lower marginal tax bracket. Nobody can predict it perfectly.
@@_-Karl-_ not sure I would consider it a game but more about do the best planning possible. Did you know you would receive the inheritance? I might be getting some and I don’t even really want to ask how much. In the mean time I’m doing what I can for Roth. I’m 56. In the end, would you rather not have the inheritance? I don’t vote for the side which always wants more taxes and put tax burdens on the people but it is what it is. I do not know how much you earn annual and you don’t have to disclose but perhaps you can take a big portion now and bite the bullet on taxes. Another strategy is to take an unpaid leave of absence to cut down income and then go back to work if possible. Good luck.
@@_-Karl-_ all good but even if the person was not single and a couple you probably were in no position anyhow to say hey how about you do some Roth conversions so I won’t have to pay taxes later. 😂 I can joke around with my dad but if I said this he would say you’re not getting anything anyways. 😂🤣. He wouldn’t say this to my brother or sister. We really can’t plan for it too much. It is what it is. I come from background where my father always penny pinched. Rarely went on vacations or always trying to save. Not complaining….especially now. I’m lucky I did well enough where I can enjoy the ownership of Ferrari but I still try to save. What really helped though is that I don’t have to worry about my parents. They saved enough. More than enough. I scratch my head with people having 2-3 million in tax deferred accounts. Why save so much. The scenarios really don’t make sense. If somebody is in the 22-24% bracket now they really shouldn’t be going up to some 35% bracket consistently each year in order or perform Roth conversions to save taxes for their kids. Why defer this much. They should have deferred less and just saved some outside or spent in some rental income property. What they allowed to happen was let the tax deferred accounts grow and then crash right now. I’m seeing this issue now at mid 50’s so I started to defer less and do more Roth. I have some catching up but I plan to do some bigger conversions at 62-66 before SS. I may get an inheritance too they may somewhat derail my plan but I could postpone SS until 70.
I’m making the assumption that tax rates will go up in 2026, not a big reach. So iI will make the TCJA permanent. With that in mind I am doing aggressive Roth conversions up through the 24% tax bracket married filing jointly, which you get about 100,000 more to convert in that 24% bracket for the next 4 years. 100,000 of that 24% bracket will be at 32% in 2026. Not to mention the tax torpedo (when one spouse passes), Irma, no RMD‘s, The current market downturn is giving us a gift of Roth conversions right now.
On a state specific example, New York State has senior school tax discounts for people over 65 and have lower incomes. The RMD at 72 could push some people above the limit for property tax relief on school tax. I am below that amount and have a cheap house so I pay nothing in school taxes. My income after 72 is not an issue as I have a lot of tax flexibility. I stopped my IRA contributions in 1998 and switched to Roth even not fully understanding the ramifications. I just knew "something". :)
I switched my IRA contributions to Roth IRA contributions in 1998, as well. I paid 32% tax on those Roth contributions. At the time, I had no idea that I would be avoiding a 42% tax (including IRMAA & NIIT) on withdrawals from my Roth.
@@larryjones9773 I don't think the entire story of the IRA was told or understood back then. I was always a pay as you go type of guy, so going Roth wasn't even a question with me. After putting in enough money to make the match, most would be better off going Roth, Back Door Roth or a brokerage account. But I understand that most people live for the moment and want to pay the lowest tax now. Happy that you made the right move.
@@_-Karl-_ Yes, there is kind of a singles penalty, Karl, but the peace and quiet is worth it. :) I would think of another way. If the person would become spouseless, this would lower the tax brackets a lot. This is something that usually isn't planned for. Then there are the insurances needed to protect the one spouse incase the other lingers around in a care home. Too much work for my pretty little head to figure out.
@@daveschmarder-1950 I forgot to mention that my IRA contributions were no longer going to be deductible (if I remember correctly). Thus, my only option was to contribute to a Roth IRA, or none at all. I was already maxing out my 401K contributions. Even though I had already paid a 32% tax on my Roth contributions, I figured I would gain by being able to invest more in a tax deferred/free retirement account (Roth). I do, however, remember being depleted of cash a few days before each paycheck, which was not fun.
Very good information! What about converting so that your spouse will have less taxes when he/she is the sole survivor? She will have to file as single and pay higher tax rates at much lower income levels. Since the female outlasts the male by an average 7 years, and there isn't a firm death date for the male, faster conversions in late 60's, early 70's at married filing joint rates seem to be the way to go. Thoughts?
Forgot another major issue. A spouse dies and now the surviving spouse is paying taxes at a higher single rate will increase their taxes significantly.
This guy doesn’t forget those kinds of things. The intent of this particular video was just to illustrate how to find the right target for conversion. There are other videos on the changes that occur if one spouse passes away or for single filers.
How are you calculating the Marginal Tax Increase percentages in the table that you show beginning at 5:20 in the video. For example, how do you calculate the +4.2% value for the second row in the table. I assume that you divide the annual extra Medicare Part B premium amount ($816 for that row) by some value but I can't figure out what that value is. You don't seem to mention what the denominator is in the video. If anyone can inform me (us) in reply to this comment it would be greatly appreciated. I will check back.
Yes, divide the added Medicare expenses by the space within the that given IRMAA threshold. With the table in the video, it just shows Part B premiums. There is also a Part D premium increase that is calculated in the background giving the 4.2% value.
I guess I don’t really understand the reason for this unless you’re high income. For me, I should be able to convert some $ at 12%. Doing so at 22% doesn’t seem to make sense. I mean you have an initial 22% “loss” if you have to pay the taxes. Also RMDs don’t start until 72 now, so many years of small conversions should keep my IRA small enough to avoid taxes higher than the 22 (later 25) % bracket. Besides, IRAs are the place to make charitable contributions, which can allow you to avoid all taxes.
Basically, the minute you stop working, your ability to pay taxes on RMDs, drops dramatically at exactly the most vulnerable time of your life. If you are a retired federal worker or military, getting a pension + IRA distributions + SS at 67 yrs of age, then you will get totally slammed, and you will spend your golden worrying about finances. You are better off rolling over to Roth the amount of $100 to $150 thousand ( assuming you have $1 million + in the IRA) and using it incrementally to get you RMDs just under the 34% bracket in the future.. Think of this expense as you would buying a new car, and aggressively paying it off via cash reserves + aggressive extra payments each month. It's not ideal, but I do not want to be left without tax relief at 72.
Good points. I turbo charged my 10 years of Roth conversions with a cash-out refinance mortgage. I do not have a pension (a benefit; sort of, in this case). This allowed me to keep a low income and thus, convert at an average federal tax rate of 13.5% & 0% state tax rate as I live in Texas. My cash-out money helped pay my living expenses and taxes on my conversions. I could have done my Roth conversion without the cash-out refinance, but my conversion tax rate would have been much higher. Converting at high tax rates, minimizes the whole purpose of Roth conversions. My cash-out refinance was the key to my lucrative Roth conversions. I converted $600,000 over 10 years. I'm just sharing what helped me.
So (What if) the government decides to keep these tax brackets in place for an extended period of time OR even improve them further to help provide some relief given the current state of the economy if it continues? In that case rushing to convert now might COST MORE rather than holding off. This all makes sense but isn't it really a gamble either way? Just like those that were Roth converting years ago, only to learn that the TAX CUT & JOBS ACT came along and positively impacted tax brackets, likely hurting those that were converting years ago living by the theory that "taxes will always be higher in the future" when the TC&JA negated that theory at least for the moment.
I see at 14:35 you basically validated my concern. (I commented above while watching the vid). I think that is the best approach. Decisions on current factual data.
@@hoss6981 I don't disagree. But tell that to the individuals that were Roth converting prior to the Tax Cut and Jobs Act that likely could have saved money waiting to covert had they known that was coming. They were saying the same thing back then.
I did Roth conversions back during the financial crisis 2006-2008. My CPA thought it was a good move provided I stayed within the 15% bracket in effect at that time and didn’t go into the 25% bracket. Even though I paid a bit more in tax due to the 15% bracket in effect at the time instead of 12% now, the depressed market value that the tax was based on in 2006-08 and the post conversion tax-free capital appreciation of the last 15 years has more than made up for the higher tax paid.
Question that you maybe able to answer for me. I am 63 now, and retired 7 years ago. Just started last year converting some of my 401K into a roth. My issue is that I was required to take SSDI to get my pension. This means I am on medicare part A and B. My AGI is approximately 65000 and I would like to convert as much of my 401K to a roth, as I ccan afford. Since I am on SSDI will the ERMA apply to me? If you don't know the answer would you know where I can possibly find the answer. Thanks.
If a person is pre 65 years old and receiving ACA tax subsidies on an ACA health insurance policy, it is worth it to do Roth conversions and forfeit the ACA tax subsidies? The Roth conversions would add to the person’s income and possibly not qualify for an ACA tax subsidy.
I'm completing my Roth conversions (tenth year of) in 2024. In 2025, I'll turn 64 and plan to apply for the ACA subsidies. I'm not happy about having to keep my income low, as there are opportunity costs with that. I've still got to do a bunch of calculations to determine my 'sweet spot' (optimum amount of MAGA - modified adjusted gross income for ACA subsidies). Choosing between ACA subsidies and Roth conversions, or a combination, thereof, requires an extensive calculation, as there's two competing priorities (a frustrating decision).
@@larryjones9773 This is the exact situation i expect to find myself in very soon. my assumption is that I will withdraw from Roth (NO conversions) until 65, then maybe conversions from 65 to 72 if I live that long. It is frustratingly complex, we really need a software to run scenarios that give us ballpark answers... and this does NOT seem like an unusual problem.
@@Speedospearo I like precision, so I've built a large Excel spreadsheet. Due to inflation, the numbers at the bottom (age 95) of my spreadsheet are quite large. Doing Roth conversions now will have huge impacts later in life (for the same reason). A small Roth conversion today can save big tax dollars in the future. Conversely, doing too many Roth conversions and depleting our tax deferred accounts too early, can be sub-optimal. I don't like depending on someone else's 'software' to make critical decisions like this. For example, I have large itemized deductions, and somebody else's 'software' may not include itemized deductions. Roth conversions are a lot of work, but the benefits can be worth it. Rather than withdrawing from your Roth until age 65, you may want to do a cash-out refinance. That's what I did, and it was critical to my ability to convert at a low tax rate of 13.5%. I invested my cash-out proceeds, and I've earned a higher rate of return on that money, compared to my refi mortgage rate, thus, my cash-out provided me a double bonus. A third bonus was the cash-out refi provided $ to pay taxes on my Roth conversions.
A key (math) point concerning Roth conversions: If the predicted tax rate that will be avoided on Roth withdrawals is higher than the tax rate paid on Roth conversions, then this will result in a GAIN. Conversely, If the predicted tax rate that will be avoided on Roth withdrawals is lower than the tax rate paid on Roth conversions, then this will result in a LOSS. If the predicted tax rate that will be avoided on Roth withdrawals is equal to the tax rate paid on Roth conversions, then this will result in NO GAIN, NO LOSS.
Exactly right Larry! The growth rate doesn't matter (assuming they would be the equal in the tax-free account as well as tax-deferred account). Its all about the tax rates
Appreciate this video. A comment regarding IRMAA considerations, it would be better to view the actual dollar amounts instead of percentages. Converting $50,000 more into IRA may result in $500-$1000 difference in Medical part B and IRMAA payments. This while savings many thousands of dollars of taxes down the road.
I really like your presentation method, lack of intro, music, and execution. You just get straight to it.
I also appreciate your deep dives and analysis of the interrelated effects of RMDs on the whole of retirement tax planning.
Do you know my buddy Josh at Heritage Wealth Planning? I appreciate specifically your addressing the widows tax trap.
Well done!
IRMA is in the noise range for those in higher tax brackets with large traditional IRA’s, taxable accounts and 401K’s who only have a few years to convert before taking RMD’s. In addition, your analysis excludes the challenges facing high net-worth retiree’s that live in high tax states like California.
What challenges outside the covered estate taxes and income taxes?
Watch out for IRMAA
Another great video. You have the most educational financial videos on youtube
Thank you so much!
I can’t imagine a 32% conversion makes sense for most. Even an income over $1m can have an effective tax rate of less than 30%. The RMD on a $5m IRA is $200k so you would need a whole lot of other income before even considering converting at 32%.
Excellent content. I've been binge watching your videos.
We're about 10 years from retiring.
Thank you. I have been waiting to hear your insight in this area.
How do you account for the inflation factor of paying taxes in todays dollars vrs gradually thru RMD's over next 20-25 yrs? Future dollars are worth less than todays dollars, so savings is reduced. Another factor may be recent history of the stock market, like 2022. Converting after the market has dipped is more favorable as when the market rebounds you get the gains tax free in your roth.
Missing Reason #6: An inheritance increases your income during retirement.
Always good information - I really enjoy the Roth conversion presentations even though I'm in the (current) 12% tax bracket. I've done a couple small conversions already and will try to get a couple more done before collecting Social Security at 67 in 5 years.
Hello, Do you need to look at total NPV of expenses in order to find the optimal plan?
Yeah. Don't forget taxable Social Security payments that can kick in later such as at Full Retirement Age.
Hey, great analysis of all the details but it come in to play when you’re dealing with taxes and Erma, Medicare, part THE, etc. but when you talk about the state taxes, why don’t you guys ever bring up ways to get out of that like trust put everything into a trustbypass probate, no estate taxes, etc. tell me if I’m wrong
Is there a way to estimate what the 12 and 24 percent bracket threshold might be in 20 years? Can we just assume a 2.5 percent inflation and adjust acordinging for the time frame ($*1.025^20)?
I was confused by the graph at 3:24 showing a drop in income threshold in 2026 for the 32/33 percent brackets, until I realized the drop only applies to joint filers. For single filers I believe it does the opposite, as the 33/32 threshold dropped from $191,650 to $157,500 in 2018, and therefore should jump back up when the TCJA expires. So the yellow line jags in the opposite direction for single filers.
They should do a lot more than jump back up to the 2017 number. Doing that throws away 9 years of inflation adjustments, including 9% for 2022. If the 2026 sunset really does that it's a freaking huge windfall for the government. Unfortunately my Google-fu can't find anything about what happens to the inflation adjustments, nobody talks about that at all. They only talk about the percentages reverting.
@@headlibrarian1996 I wouldn't expect the inflation adjustments to go away. That would be major if it did though.
I think there is more than just tax rate to look at. What about avoiding IRMA ans extra medicare premiums. I have the money now so why not make retirement tax free?
I've talked about this before in other videos. IRMAA should be translated to a tax rate and then tax rate comparison should be made. So maybe rather than 'tax rate' it should be called 'expense rate'
My considerations
Paying a premium now for a known future tax rate (0%)
The reduction of Medicare costs after conversion
When one spouse passes well before the second, a long time of filing single
The likelihood of higher taxes in the future (lower, not so much)
A stock market downturn is an excellent time to convert (do not try to "time" the market).
@@_-Karl-_ but another thing to consider is that if a decent amount of money was left to heirs then they would possibly change their earning income situation. Instead of both full time work one may stop working and it’s a perfect time to raise the kids. Or one may work part time. The income tax bracket doesn’t necessarily change.
People worry too much about taxes for their heirs. That’s their problem to deal with. You enable them too much and they will develop bad lazy and even destructive behavior.
I only mention the above if one finds themselves in this position. It doesn’t really make sense to pay more taxes now and overall pay more just to pay lesser taxes down the road.
So even if a couple finds themselves with too much tax infested accounts then take a hit for just one year at a higher tax bracket then do all the rest at a lower tax bracket. It’s all gravy.
Whatever is left over just pay RMD. Whatever is left should be at the lower marginal tax bracket. Nobody can predict it perfectly.
@@_-Karl-_ not sure I would consider it a game but more about do the best planning possible.
Did you know you would receive the inheritance? I might be getting some and I don’t even really want to ask how much. In the mean time I’m doing what I can for Roth. I’m 56.
In the end, would you rather not have the inheritance?
I don’t vote for the side which always wants more taxes and put tax burdens on the people but it is what it is.
I do not know how much you earn annual and you don’t have to disclose but perhaps you can take a big portion now and bite the bullet on taxes.
Another strategy is to take an unpaid leave of absence to cut down income and then go back to work if possible.
Good luck.
@@_-Karl-_ all good but even if the person was not single and a couple you probably were in no position anyhow to say hey how about you do some Roth conversions so I won’t have to pay taxes later. 😂
I can joke around with my dad but if I said this he would say you’re not getting anything anyways. 😂🤣. He wouldn’t say this to my brother or sister.
We really can’t plan for it too much. It is what it is.
I come from background where my father always penny pinched. Rarely went on vacations or always trying to save. Not complaining….especially now.
I’m lucky I did well enough where I can enjoy the ownership of Ferrari but I still try to save. What really helped though is that I don’t have to worry about my parents. They saved enough. More than enough.
I scratch my head with people having 2-3 million in tax deferred accounts. Why save so much.
The scenarios really don’t make sense. If somebody is in the 22-24% bracket now they really shouldn’t be going up to some 35% bracket consistently each year in order or perform Roth conversions to save taxes for their kids.
Why defer this much. They should have deferred less and just saved some outside or spent in some rental income property.
What they allowed to happen was let the tax deferred accounts grow and then crash right now.
I’m seeing this issue now at mid 50’s so I started to defer less and do more Roth. I have some catching up but I plan to do some bigger conversions at 62-66 before SS.
I may get an inheritance too they may somewhat derail my plan but I could postpone SS until 70.
I’m making the assumption that tax rates will go up in 2026, not a big reach. So iI will make the TCJA permanent. With that in mind I am doing aggressive Roth conversions up through the 24% tax bracket married filing jointly, which you get about 100,000 more to convert in that 24% bracket for the next 4 years. 100,000 of that 24% bracket will be at 32% in 2026. Not to mention the tax torpedo (when one spouse passes), Irma, no RMD‘s,
The current market downturn is giving us a gift of Roth conversions right now.
On a state specific example, New York State has senior school tax discounts for people over 65 and have lower incomes. The RMD at 72 could push some people above the limit for property tax relief on school tax. I am below that amount and have a cheap house so I pay nothing in school taxes. My income after 72 is not an issue as I have a lot of tax flexibility. I stopped my IRA contributions in 1998 and switched to Roth even not fully understanding the ramifications. I just knew "something". :)
I switched my IRA contributions to Roth IRA contributions in 1998, as well. I paid 32% tax on those Roth contributions. At the time, I had no idea that I would be avoiding a 42% tax (including IRMAA & NIIT) on withdrawals from my Roth.
@@larryjones9773 I don't think the entire story of the IRA was told or understood back then. I was always a pay as you go type of guy, so going Roth wasn't even a question with me.
After putting in enough money to make the match, most would be better off going Roth, Back Door Roth or a brokerage account.
But I understand that most people live for the moment and want to pay the lowest tax now. Happy that you made the right move.
@@_-Karl-_ Yes, there is kind of a singles penalty, Karl, but the peace and quiet is worth it. :)
I would think of another way. If the person would become spouseless, this would lower the tax brackets a lot. This is something that usually isn't planned for.
Then there are the insurances needed to protect the one spouse incase the other lingers around in a care home.
Too much work for my pretty little head to figure out.
@@daveschmarder-1950 I forgot to mention that my IRA contributions were no longer going to be deductible (if I remember correctly). Thus, my only option was to contribute to a Roth IRA, or none at all. I was already maxing out my 401K contributions. Even though I had already paid a 32% tax on my Roth contributions, I figured I would gain by being able to invest more in a tax deferred/free retirement account (Roth). I do, however, remember being depleted of cash a few days before each paycheck, which was not fun.
@@daveschmarder-1950 Good point on 'spouseless'. The chances of that are near 100%, for every couple, since the chance of death is always 100%.
Very good information! What about converting so that your spouse will have less taxes when he/she is the sole survivor? She will have to file as single and pay higher tax rates at much lower income levels. Since the female outlasts the male by an average 7 years, and there isn't a firm death date for the male, faster conversions in late 60's, early 70's at married filing joint rates seem to be the way to go. Thoughts?
widow gets to claim married yr of spouse death + 2 more yrs
Forgot another major issue. A spouse dies and now the surviving spouse is paying taxes at a higher single rate will increase their taxes significantly.
Tax videos almost always ignore unmarried people. It's frustrating.
This guy doesn’t forget those kinds of things. The intent of this particular video was just to illustrate how to find the right target for conversion. There are other videos on the changes that occur if one spouse passes away or for single filers.
You are lucky to have such well heeled clients, your tax bracket charts must be for top 5-10% 3:06 ?
How are you calculating the Marginal Tax Increase percentages in the table that you show beginning at 5:20 in the video. For example, how do you calculate the +4.2% value for the second row in the table. I assume that you divide the annual extra Medicare Part B premium amount ($816 for that row) by some value but I can't figure out what that value is. You don't seem to mention what the denominator is in the video. If anyone can inform me (us) in reply to this comment it would be greatly appreciated. I will check back.
Yes, divide the added Medicare expenses by the space within the that given IRMAA threshold. With the table in the video, it just shows Part B premiums. There is also a Part D premium increase that is calculated in the background giving the 4.2% value.
@@SafeguardWealthManagement
Hi, Seems like you would divide by your MAGI, not the range of the MAGI?
I guess I don’t really understand the reason for this unless you’re high income. For me, I should be able to convert some $ at 12%. Doing so at 22% doesn’t seem to make sense. I mean you have an initial 22% “loss” if you have to pay the taxes. Also RMDs don’t start until 72 now, so many years of small conversions should keep my IRA small enough to avoid taxes higher than the 22 (later 25) % bracket. Besides, IRAs are the place to make charitable contributions, which can allow you to avoid all taxes.
Basically, the minute you stop working, your ability to pay taxes on RMDs, drops dramatically at exactly the most vulnerable time of your life. If you are a retired federal worker or military, getting a pension + IRA distributions + SS at 67 yrs of age, then you will get totally slammed, and you will spend your golden worrying about finances. You are better off rolling over to Roth the amount of $100 to $150 thousand ( assuming you have $1 million + in the IRA) and using it incrementally to get you RMDs just under the 34% bracket in the future.. Think of this expense as you would buying a new car, and aggressively paying it off via cash reserves + aggressive extra payments each month. It's not ideal, but I do not want to be left without tax relief at 72.
Good points. I turbo charged my 10 years of Roth conversions with a cash-out refinance mortgage. I do not have a pension (a benefit; sort of, in this case). This allowed me to keep a low income and thus, convert at an average federal tax rate of 13.5% & 0% state tax rate as I live in Texas. My cash-out money helped pay my living expenses and taxes on my conversions. I could have done my Roth conversion without the cash-out refinance, but my conversion tax rate would have been much higher. Converting at high tax rates, minimizes the whole purpose of Roth conversions. My cash-out refinance was the key to my lucrative Roth conversions. I converted $600,000 over 10 years. I'm just sharing what helped me.
So (What if) the government decides to keep these tax brackets in place for an extended period of time OR even improve them further to help provide some relief given the current state of the economy if it continues? In that case rushing to convert now might COST MORE rather than holding off. This all makes sense but isn't it really a gamble either way? Just like those that were Roth converting years ago, only to learn that the TAX CUT & JOBS ACT came along and positively impacted tax brackets, likely hurting those that were converting years ago living by the theory that "taxes will always be higher in the future" when the TC&JA negated that theory at least for the moment.
I see at 14:35 you basically validated my concern. (I commented above while watching the vid). I think that is the best approach. Decisions on current factual data.
If you don’t think taxes are going up your high
@@hoss6981 I don't disagree. But tell that to the individuals that were Roth converting prior to the Tax Cut and Jobs Act that likely could have saved money waiting to covert had they known that was coming. They were saying the same thing back then.
I did Roth conversions back during the financial crisis 2006-2008. My CPA thought it was a good move provided I stayed within the 15% bracket in effect at that time and didn’t go into the 25% bracket. Even though I paid a bit more in tax due to the 15% bracket in effect at the time instead of 12% now, the depressed market value that the tax was based on in 2006-08 and the post conversion tax-free capital appreciation of the last 15 years has more than made up for the higher tax paid.
@@paulstein916 Great news, but wouldn't you agree that was more a part of lucky happenstance vs CPA foresight?
Question that you maybe able to answer for me. I am 63 now, and retired 7 years ago. Just started last year converting some of my 401K into a roth. My issue is that I was required to take SSDI to get my pension. This means I am on medicare part A and B. My AGI is approximately 65000 and I would like to convert as much of my 401K to a roth, as I ccan afford. Since I am on SSDI will the ERMA apply to me? If you don't know the answer would you know where I can possibly find the answer. Thanks.
What if 100 percent of your retirement money is in a Roth?
If a person is pre 65 years old and receiving ACA tax subsidies on an ACA health insurance policy, it is worth it to do Roth conversions and forfeit the ACA tax subsidies? The Roth conversions would add to the person’s income and possibly not qualify for an ACA tax subsidy.
I'm completing my Roth conversions (tenth year of) in 2024. In 2025, I'll turn 64 and plan to apply for the ACA subsidies. I'm not happy about having to keep my income low, as there are opportunity costs with that. I've still got to do a bunch of calculations to determine my 'sweet spot' (optimum amount of MAGA - modified adjusted gross income for ACA subsidies). Choosing between ACA subsidies and Roth conversions, or a combination, thereof, requires an extensive calculation, as there's two competing priorities (a frustrating decision).
@@_-Karl-_ Yes.
@@larryjones9773 This is the exact situation i expect to find myself in very soon. my assumption is that I will withdraw from Roth (NO conversions) until 65, then maybe conversions from 65 to 72 if I live that long. It is frustratingly complex, we really need a software to run scenarios that give us ballpark answers... and this does NOT seem like an unusual problem.
@@Speedospearo I like precision, so I've built a large Excel spreadsheet. Due to inflation, the numbers at the bottom (age 95) of my spreadsheet are quite large. Doing Roth conversions now will have huge impacts later in life (for the same reason). A small Roth conversion today can save big tax dollars in the future. Conversely, doing too many Roth conversions and depleting our tax deferred accounts too early, can be sub-optimal. I don't like depending on someone else's 'software' to make critical decisions like this. For example, I have large itemized deductions, and somebody else's 'software' may not include itemized deductions. Roth conversions are a lot of work, but the benefits can be worth it.
Rather than withdrawing from your Roth until age 65, you may want to do a cash-out refinance. That's what I did, and it was critical to my ability to convert at a low tax rate of 13.5%. I invested my cash-out proceeds, and I've earned a higher rate of return on that money, compared to my refi mortgage rate, thus, my cash-out provided me a double bonus. A third bonus was the cash-out refi provided $ to pay taxes on my Roth conversions.
@@larryjones9773 wow, you must be a master with spreadsheets!
Good tax focused information, but does not include the tax free growth benefit associated with the Roth conversions
A key (math) point concerning Roth conversions: If the predicted tax rate that will be avoided on Roth withdrawals is higher than the tax rate paid on Roth conversions, then this will result in a GAIN. Conversely, If the predicted tax rate that will be avoided on Roth withdrawals is lower than the tax rate paid on Roth conversions, then this will result in a LOSS. If the predicted tax rate that will be avoided on Roth withdrawals is equal to the tax rate paid on Roth conversions, then this will result in NO GAIN, NO LOSS.
Exactly right Larry! The growth rate doesn't matter (assuming they would be the equal in the tax-free account as well as tax-deferred account). Its all about the tax rates
Appreciate this video. A comment regarding IRMAA considerations, it would be better to view the actual dollar amounts instead of percentages. Converting $50,000 more into IRA may result in $500-$1000 difference in Medical part B and IRMAA payments. This while savings many thousands of dollars of taxes down the road.