I'm 67 And Working With $1,200,000 In My 401K Should I Convert To A Roth IRA
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- Опубликовано: 9 фев 2025
- Would a Roth Conversion improve my tax efficiency? What happens if I run out of income before I run out of life? Will my spouse be ok? In this study, we'll take a look at being 67 and working with $1,200,000 in your 401(k). Should you convert to a Roth IRA?
0:17 Intro
0:50 Case Study
1:15 Disclaimer
1:37 Plan for Everything
2:08 Current Situation
2:51 Roth Conversions
5:18 Tax Brackets
7:27 401(k) vs Roth IRA
12:42 Starting Distribution Tax
13:29 How Much to Convert?
14:39 Medicare Part B
16:22 Conclusion
#incomeplanning #retirementplanning #retirementincome #retirewith1.2million #workinginretirement #retirementat67 #workingandmarried
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Hypothetical example(s) are for illustrative purposes only and are not intended to represent the past or future performance of any specific investment. Actual results will fluctuate with market conditions and will vary over time.
Converting an employer plan account or Traditional IRA to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences including but not limited to, a need for additional tax withholding or estimated tax payments, the loss of certain tax deductions and credits, and higher taxes on Social Security benefits and higher Medicare premiums. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA.
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Thank you for the helpful content! 😃
You're very welcome, Cliff! Thanks for watching!
I believe the retirement crisis will get even worse. Many struggle to save due to low wages, rising prices, and exorbitant rents. With homeownership becoming unattainable for middle-class Americans, they may not have a home to rely on for retirement either.
I would say no. When you do a conversion, the amount of money you are going to convert has to pay tax. There is no guarantee your investments inside the Roth IRA is going to make money, although the gain is no tax but you have to wait for 5 years before you can touch the money.
There is no guarantee any investments make money, whether they are in an IRA or Roth doesn’t matter. The only thing that matters in the discussion of IRA vs. Roth is when can you pay the least percentage of tax.
My 401K has a Roth 401k option and after contributing to a traditional for a while, I changed it to a Roth and started contributing from there. I still have money in traditional accounts.
Congratulations on the change of contributions! Very high chance you will always have some traditional amounts of your company matches your contributions but that is something that you could choose to convert later as well as your current traditional amounts.
I agree that this couple needs to consider some conversions, but isn’t the first mistake that they were contributing to a 401k at the 12% bracket? They should have been and continue to contribute to a Roth IRA, and the everything else to a brokerage account at this age.
We can all agree that tax rates will never be lower, so any pretax contribution at 12% is wasted.
I don’t see tax rates above the teens for the first $100 k of income for a couple over the next decades, but they will quickly jump above that for higher earners.
You are correct if assuming they were at 12% during the contribution phase. From a practical standpoint, since we work with people retiring all the time the conversations we have with them will many times be the first time they have ever thought about contributions into their retirement accounts and the tax ramifications of them. One of the main reasons we are doing these videos is to get that conversation started with more people and if we are able to help some people earlier in the process that is a win also.
Also, I believe Roth distributions do not count as income when calculating whether or not your social security is taxed.
You are 100% correct, as long as the conversion took place more than 5 years ago no taxable amount for any distributions out of those funds.
@@blueridgewealth Is it the date of the individual conversion itself matters, or the length of time the account has been open? I thought once you are 59.5 and the account was 5 years old, all funds, earnings as well as contributions were available tax free.
Tom, good question. The big difference is between conversions and contributions. Contributions and growth are exactly the way you said. With conversions by definition it is supposed to be 5 years after each conversion that you are supposed to wait. After 59.5 the converted principal in the conversion is available but the growth isn’t until 5 years.
The reality is once you have multiple conversions happening in one account and different types of investments as well as contributions, I would highly doubt the IRS would attempt to tell what is growth vs. what is remaining principal that hasn’t waited the full 5 years unless you had separate accounts that you converted and never mixed those funds together.
That’s not me giving permission in anyway to not pay attention to the rules but your interpretation may be functionally what happens in both cases.
No, cash out, pay taxes over 3 years from loans on your brand new IUL which you will fund over the next 5 - 7 years. Now you have no government involvement, no taxes down the road either and no one to tell you when and how much money you must have distributed. You'll have a solid death benefit for your heirs and a no cost chronic and critical illness solution. Turn your income on anytime you want for a lifetime payout. Oh, almost forgot, your cash is tied to a chosen index(es). You can only participate in the gains of the market and NEVER the losses. All gains are locked in and never subjected to loss. IUL's are NOT for everyone, but there isn't a more tax efficient financial vehicle available.
Yes IULs can be used as a Roth alternative depending on the situation. You brought out a lot of good points and we use both with our clients.
You have to pay a lot of interest to borrow against IUL.
You probably, at the very least, should convert out of your 401k and into an IRA whether traditional, Roth, or some combination. These 401k groups have you as a captive audience, and you typically can't put your money where you want. The sooner you can move your money out of the high expense ratio and under performing 401k positions, the better.
I agree in most cases. Moving out of a 401(k) when you separate from employment or in most plans when you reach the age of 59.5 gives you a lot more flexibility on the options you can invest in and also how you receive advice on your investment accounts.
Good point. Ten years ago, my 401 went from Vanguard (awesome, zero fees) to TIAA (average, higher fees) and, since I am over 59.5, it makes sense to roll over from the 401 to a Traditional IRA at a minimum.
At 63, it looks like the amount to convert is 194k minus your current income to avoid Medicares IRMA penalty. Those tax cuts will expire because this government wont cut spending.
That’s why it could make sense to pay some additional costs on Medicare to get the taxes behind you. Each situation is different but you have to factor that cost into what it costs to convert
can one do a partial conversion of the total 401k amount ?
Yes you can convert as much or as little as you choose each year.
How does your analysis change if you pay the taxes from a separate taxable savings account. Is it more or less favorable to convert. Using your same assumptions. Thank you.
Assuming you use after tax money to pay the taxes it is even more favorable for converting because you are allowing more of your money to have tax free benefits. This lets your positions in IRAs to potentially convert without being sold as well which could help if you convert aggressive positions in a down stock market.
Does the 3.8% Medicare tax for investment income and regular income from Soc Sec over $200K apply to Roth conversions?
The 3.8% tax does not get added to your Roth conversion. If your income exceeds the 200k for single and 250k for married filing jointly you would have to add that 3.8% to any investment income and long term capital gains generated that tax year.
Way too many what ifs. Here is another one, if they are going to raise taxes because of the current situation, what is stopping them from taxing the gains on Roth? I'm in a similar situation and if I convert I would have to be 90 before RMDs would mean paying any significant taxes and might never pay enough to offset the $300,000 it would cost to convert.
I’d say there are two big reasons I don’t think Roth gains will be taxed in the future:
1) Our politicians like to get re-elected and if they changed that rule it would almost serve as a death sentence to whoever voted for that law change to pass.
2) Typically the government is big on grandfathering people into systems based on the rules at the time. I could see a scenario where no new contributions could be made into Roth accounts before seeing them tax the gains inside of what was advertised as a tax free position.
Someone will have to pay the taxes on this money unless you donate it all to charity. The main thing we are looking at is if now is the lowest time it could make sense to start pulling money out.
Another thing to consider is the future annual required minimum distribution (RMD). After a certain age, people are required to take taxable funds from a traditional IRA or 401k so the Government gets their “share” of retirement savings. Roth conversions mean paying taxes now, but one may save on taxes in later years. Roth IRA funds are not taxed on withdrawal. You demonstrated the potential differences with the tax brackets forecast. Also, if one spouse dies, you lose the larger tax brackets for Married, Filing Jointly, compare to Single filing status.
You are correct and I like where you’re coming from. Based on your and others feedback we will look to do some videos highlighting the change when a spouse passes to see how that can impact this decision as well. Thanks for commenting!
@@blueridgewealth This was the first of your videos I viewed. I have watched some others since then and you do cover Roth in light of RMDs. I became a widow in 2022 and that may be the last year I will do a Roth conversion. I’ll do the calculations and may do some in the next few years because I believe tax rates will increase. I’ve done Roth conversions to lessen the tax effect on my childrens’ inheritance. I don’t foresee ever withdrawing Roth $$ myself.
I’m sorry to hear that Jeanne, if there is anything we can do to help you figure out those calculations this year or in the future please let me know. Here is the link to my calendar if you would like to schedule a time we could talk. johntube.timetap.com
I have a really big problem with people who have the diligence to accumulate $1.2 million, and NOT KNOWING ANYTHING about keeping that money from the governments greedy. dirty hands. YOU are too late for planning; you now have to pay more to keep some of this. Just a shame, really silly.
Keahi, it’s never too late for planning. The reality is that the financial world does a poor job of educating people about their options and what course of action to take. As a result most people miss out on opportunities simply because they aren’t aware that they should do anything different than the crowd.
And I have a really big problem with people who know nothing about when they got to 1.2 million and calling them silly. For all we know they could have just recently doubled their 401K and suddenly realized they are now on a different planet.
Pls clarify: 10% penalty applies if distribution within 5 years from Roth, which was converted from IRA, even if you are older than 59 1/2?
Shirish, the 10% penalty applies to a distribution during the 5 year period after conversion if the conversion happened under age 59.5
How old do you have to be to do a ROTH conversion, at least 59 1/2?
You can convert at anytime but under 59.5 you need to pay the taxes on the conversion with after tax dollars so that you avoid a 10% penalty for any tax withholding from the IRA.
Yup, either way you look at it he owes taxes somewhere in the $300K (+/-) range based on the fact that he's still working. Every day he doesn't convert his tax bill increases. He actually has around $900K in his 401K, US govt owns the other 300K. Best to get converted to Roth ASAP and begin enjoying this amazing market with all gains tax free. Also, as mentioned 1/1/26 brackets increase drastically.
Good points! We appreciate your input Rob!
stop working and startbuilding in your roth ira...being 67 you have until you are 75 do it now...
Yes conversion strategy between 67-75 could prove to make a huge difference to you and whoever inherits your money!