Great presentation on the Pros and Cons of Roth conversions. It is done in a very organized way. As he says, once you get a basic understanding of Roth conversions, to save the most in taxes you really have to "Run the Numbers" with a professional like him.
Great job. Adding you to the financial sites I subscribe to. I was always a little skeptical of the non-stop cheerleading for conversions and this video confirmed my thinking.
Have been doing large chunks of ROTH conversions for several years so that now my ROTH is >50% of total Retirement Funds. Problem is the IRMMA expense. Highly recommend anyone with substantial tax deferred retirement funds to convert before age 63 so that they avoid IRMMA. My plan is to reduce my IRAs/401ks to a target of 1MM just before RMDs are required as our SS benefits will be adequate for the 2 of us. The reasons for my ROTH conversions are to avoid the "widows penalty" and provide a Tax Free Roth Inheritance for my children and grandchildren. Not your typical client/investor.
@@Paka6267 Don't worry. If they keep fudging the inflation numbers so that they don't have to adjust the IRMAA brackets with inflation adjustments instead of actual numbers you'll experience IRMAA. Before my mom passed in 2022 between inflation, food, her medical expenses (heart and leg) and expensive prescription drugs and two other unplanned financial expenses she drew $240k out of her 401k pre-tax plus in addition to her pension and social security to address her expenses. I'm pretty certain that 401k amount included the 20% withholding I didn't ask her CPA. She was filing single so 85% of her social security was taxable and if she had lived she would have have experienced IRMAA premium penalties in 2024. She had no Roth accounts and this was a sizeable portion. Had she had some or all Roth her income taxes would have been lower and she wouldn't have needed to withdraw an extra $24k+ for income taxes. She was 67 and about 2 years into her retirement and the COLA from Social Security wouldn't have caught up and the timing with the market dip was bad as well. Had she lived the sequence of returns risk would have been a challenge to overcome and could have forced her to possibly go back to a riskier portfolio, part-time work when she had fully recovered or sell her home, live with me and my wife for a small time until she could move into a smaller apartment or condo. This was an extreme example and it didn't happen because she didn't survive. I'm just saying if she did and had a Roth she would have had the extra $24k in her retirement and a lower 2022 tax bill and her Medicare premiums would be lower because she wouldn't have jumped into higher IRMAA premiums. You could easily experience a medical event, a damaged roof, septic system replacement and not have the credit score for a decent loan or worse get a loan then have something which still causes you to draw more than you need to from your assets during retirement.
Thanks, Justin, for the excellent video! One can certainly get caught up in the momentum of RUclips videos touting the benefits of the Roth conversions but stepping back and looking at what your level of tax diversification already is can slow that roll.😀 I am doing small conversions until we are done with the A.C.A. Advanced Premium Tax Credits then reevaluate the decision each year, considering breakevens based on I.R.A. holdings. Thanks again; I look forward to my RUclips alerts letting me know you have produced another great video of essential financial learning points. 🎯
Thank You so much for the education you provide. I am 63 and I have been converting funds into Roth to avoid having to pay high taxes later if the tax rates do change when I get older. is it wise to convert knowing that Irma tax may affect me soon when I file for Medi care at 65? Ur help is very appreciated, thank u n blessings to u.
Thank you, and great question. That’s one that you’d want to look at with the big picture in mind, and I don’t have a simple blanket answer, unfortunately. Consider things like how much you might pay on assumed higher taxes vs. premiums, and for how long. Also, see how your cash flow is looking and other aspects of your taxes and overall plan. You could also look at dialing down the conversions at this stage and see if that makes sense.
Is it a good idea to transfer 401K / 457 to convert into different CDs & also to keep some money in money market account for monthly expenses while retiring?… this question is because; instead of taking any risk in this market; better to save whatever you have; IF ITS ONLY THE SAVINGS YOU HAVE TO SURVIVE THE REST OF YOUR LIFE
It can certainly be prudent to keep some money in a safe place during (and leading up to) retirement. The question is always how much. It often makes sense to keep some assets invested for long-term growth so you can offset inflation and maintain your purchasing power over the decades to come, although you don't necessarily need to be aggressive with those investments. For example, you might have some cash reserves for bad times and some money invested for longer-term growth (whether those investments are conservative, middle-of-the-road, or something else). That said, if a catastrophic crash occurs, you can potentially suffer steep losses, and moving everything into cash would have been better-only time will tell. As you note, these savings need to last for the rest of your life. One way to think about that problem is the question of withdrawal rates. While I don't love the concept because it's not always realistic, you can learn more about withdrawal rates here: ruclips.net/video/Z6znOGTduME/видео.html. I should also mention that you might already have some relatively safe options within your existing 401(k)/457/etc. For example, money market funds and stable value funds tend to have less risk than stock funds. They're not entirely free of risk, and an FDIC- or NCUSIF-backed CD is safer from default risk, so you'll need to evaluate how much safety is right for you.
By the way, "buckets" are another (imperfect) way of looking at this, and you can learn more about retirement buckets here: ruclips.net/video/UZYVUn6V_34/видео.html
@@JustinOnRetirement Thanks for the information. I think; it should be enough withdrawal linked to SS & pension to survive & rest contributions (of 401K / 457) should be kept in CDs for one year & to change the required amount considering the inflation.
I think it is better to get into the lowest retirement tax situation, avoid IRMAA as well as the SAA tax torpedo. I would rather pay a bit more now while I have the cash flow and am working.
That is the million-dollar question, and unfortunately, there's no perfect answer. If we could predict how much you'll earn on investments, future tax rates, what inflation will do (and resulting inflation adjustments), and other factors, it would be a straightforward calculation. But without that knowledge, we can only make some educated guesses. This video goes over some of the things to look at as you pick the amount (ruclips.net/video/xWt7QGw9toI/видео.html ), but it's focusing on a different problem-you're withdrawing to pay off a loan instead of paying the taxes to convert. For instance, it probably ignores future RMDs, but it's reasonably close to what you'd look at when figuring out how much to convert.
Actually the math is a wash if Roth and pretax are invested the same. The only thing that matters is what your tax rates are. Secondary effects like ACA, IRMAA, and SS taxation effects are more complicated. All my research shows that Roth Conversions have little value if your portfolio is less than $500k. From there to $1 million it depends. Over $1m it can be useful. This also applies to drawing down your portfolio before RMDs. Also Roth CONTRIBUTIONS make a lot of sense if your tax brackets are low.
Just a few points contrary to the advice in the video. 1) You will have to wait 5 yrs before you can touch a Roth conversion, and 2) time is against you, in terms of the number of active years left to enjoy tax-free spending! All this talk of waiting till 70, for lower taxes (not for me). I'm 61, and still earning at my peak earning years. Logically, now is the time I should be swallowing the bitter pill of paying for taxes on Roth conversions. Because I can tighten spending, while still earning at peak salary. This year I forked over $43k, from my emergency fund, to pay taxes on $130k, in my Vanguard IRA. Next year I will probably convert $170k, but put aside $50k of that to pay taxes. There is also the matter of your new Roth account accruing gains, making back some/all of the taxes you paid. I refuse to wait till I'm superannuated before drawing on Roth accounts.
@@Borat_Kazakh You can take any contributions you made out of a Roth IRA without a penalty and with no age restriction. It's the growth of the fund that is subject to the penalties.
If you have over $1M in a traditional IRA, and don't convert to a Roth, want you eventually have to pay all of the IRMMA, Social Security and Medicare taxes and premiums once RMDs start?
Good question, and it depends. As you withdraw money from pre-tax accounts, you generally increase your taxable income. But whether or not it will affect your Social Security taxation, cause IRMAA to kick in, put you into high tax brackets, etc. depends on how high your income gets. With $1MM, there's a decent chance you could face higher costs somewhere, especially if you wait as long as possible-until RMDs-to withdraw from those accounts (assuming you have resources elsewhere to fund all of your spending until then). But I can't say for certain what the consequences would look like without knowing details.
I hate IRMAA, also the SS Tax Torpedo. If one saves early in life, does well, they get penalized more. Folks: some pay about 40% taxes on SS, did you know that? Remember: "Money Doesn't Grow on Fees".
I’m converting approx $200k per year to the top of the 24% bracket. It really hurts to cut the $40-45k tax pmts out of my dwindling investment account each year. I’m playing the long game and hoping this makes for a much lesser tax burden for my wife as a single widow and then for my kids who inherit what’s left.
That "widow's penalty" is certainly something to consider: A surviving spouse can end up in single tax filing brackets with an income that suddenly seems high.
Wow, that is big tax drag and is what has me a bit apprehensive to do this even after 59.5. On the other hand, I’d rather endure the tax implications than to pass that off to my children once I bequeath what remains. With a pension, SS, dividend income…I anticipate my taxable income will still be pretty high into retirement so it’s gonna hit hard when those conversions are being made. I don’t love not being able to touch the Roth until 5yrs either which I believe is applicable for each conversion separately.
Being able to make Roth withdrawals in order to avoid the higher tax brackets is very motivating to me. I'm avoiding $2.3 million in future taxes. My goal is to deplete my savings by age 95, and I will always have a mortgage. If I live past 95, then I'll take out a reverse mortgage. My goal: Die broker; as you say, 'what is the point of dying with the most money?'
@@larryjones9773 I wonder what will happen people who retired at like 40 if in the next 55 years some invention comes along that allows people to easily live to 150, but they only planned for a max of 100
First Roth video I’ve seen that mentions how ACA punishes you if you move too much money from pretax to Roth. Thks
Great presentation on the Pros and Cons of Roth conversions. It is done in a very organized way. As he says, once you get a basic understanding of Roth conversions, to save the most in taxes you really have to "Run the Numbers" with a professional like him.
Great job. Adding you to the financial sites I subscribe to. I was always a little skeptical of the non-stop cheerleading for conversions and this video confirmed my thinking.
Have been doing large chunks of ROTH conversions for several years so that now my ROTH is >50% of total Retirement Funds. Problem is the IRMMA expense. Highly recommend anyone with substantial tax deferred retirement funds to convert before age 63 so that they avoid IRMMA. My plan is to reduce my IRAs/401ks to a target of 1MM just before RMDs are required as our SS benefits will be adequate for the 2 of us. The reasons for my ROTH conversions are to avoid the "widows penalty" and provide a Tax Free Roth Inheritance for my children and grandchildren. Not your typical client/investor.
IRMAA-Income Related Monthly Adjusted Amount. Just a minor correction. Great points, I wish I had your dilemma.
@@Paka6267 Don't worry. If they keep fudging the inflation numbers so that they don't have to adjust the IRMAA brackets with inflation adjustments instead of actual numbers you'll experience IRMAA.
Before my mom passed in 2022 between inflation, food, her medical expenses (heart and leg) and expensive prescription drugs and two other unplanned financial expenses she drew $240k out of her 401k pre-tax plus in addition to her pension and social security to address her expenses. I'm pretty certain that 401k amount included the 20% withholding I didn't ask her CPA. She was filing single so 85% of her social security was taxable and if she had lived she would have have experienced IRMAA premium penalties in 2024. She had no Roth accounts and this was a sizeable portion. Had she had some or all Roth her income taxes would have been lower and she wouldn't have needed to withdraw an extra $24k+ for income taxes.
She was 67 and about 2 years into her retirement and the COLA from Social Security wouldn't have caught up and the timing with the market dip was bad as well. Had she lived the sequence of returns risk would have been a challenge to overcome and could have forced her to possibly go back to a riskier portfolio, part-time work when she had fully recovered or sell her home, live with me and my wife for a small time until she could move into a smaller apartment or condo. This was an extreme example and it didn't happen because she didn't survive. I'm just saying if she did and had a Roth she would have had the extra $24k in her retirement and a lower 2022 tax bill and her Medicare premiums would be lower because she wouldn't have jumped into higher IRMAA premiums.
You could easily experience a medical event, a damaged roof, septic system replacement and not have the credit score for a decent loan or worse get a loan then have something which still causes you to draw more than you need to from your assets during retirement.
Thanks, Justin, for the excellent video! One can certainly get caught up in the momentum of RUclips videos touting the benefits of the Roth conversions but stepping back and looking at what your level of tax diversification already is can slow that roll.😀 I am doing small conversions until we are done with the A.C.A. Advanced Premium Tax Credits then reevaluate the decision each year, considering breakevens based on I.R.A. holdings. Thanks again; I look forward to my RUclips alerts letting me know you have produced another great video of essential financial learning points. 🎯
Thanks David! Your plan sounds very reasonable, not surprisingly. And yes, there's nothing RUclips loves more than Roth conversions.
@Approach Financials - Justin, great presentation! Conversions can be complex decision. ThankU! Nice job.
Thank You so much for the education you provide. I am 63 and I have been converting funds into Roth to avoid having to pay high taxes later if the tax rates do change when I get older. is it wise to convert knowing that Irma tax may affect me soon when I file for Medi care at 65? Ur help is very appreciated, thank u n blessings to u.
Thank you, and great question. That’s one that you’d want to look at with the big picture in mind, and I don’t have a simple blanket answer, unfortunately. Consider things like how much you might pay on assumed higher taxes vs. premiums, and for how long. Also, see how your cash flow is looking and other aspects of your taxes and overall plan. You could also look at dialing down the conversions at this stage and see if that makes sense.
This was so helpful. Thank you!
Thanks for watching and letting me know!
I do think taxes will rise and I already paid enough.
Is it a good idea to transfer 401K / 457 to convert into different CDs & also to keep some money in money market account for monthly expenses while retiring?… this question is because; instead of taking any risk in this market; better to save whatever you have; IF ITS ONLY THE SAVINGS YOU HAVE TO SURVIVE THE REST OF YOUR LIFE
It can certainly be prudent to keep some money in a safe place during (and leading up to) retirement. The question is always how much.
It often makes sense to keep some assets invested for long-term growth so you can offset inflation and maintain your purchasing power over the decades to come, although you don't necessarily need to be aggressive with those investments. For example, you might have some cash reserves for bad times and some money invested for longer-term growth (whether those investments are conservative, middle-of-the-road, or something else). That said, if a catastrophic crash occurs, you can potentially suffer steep losses, and moving everything into cash would have been better-only time will tell.
As you note, these savings need to last for the rest of your life. One way to think about that problem is the question of withdrawal rates. While I don't love the concept because it's not always realistic, you can learn more about withdrawal rates here: ruclips.net/video/Z6znOGTduME/видео.html.
I should also mention that you might already have some relatively safe options within your existing 401(k)/457/etc. For example, money market funds and stable value funds tend to have less risk than stock funds. They're not entirely free of risk, and an FDIC- or NCUSIF-backed CD is safer from default risk, so you'll need to evaluate how much safety is right for you.
By the way, "buckets" are another (imperfect) way of looking at this, and you can learn more about retirement buckets here: ruclips.net/video/UZYVUn6V_34/видео.html
@@JustinOnRetirement
Thanks for the information. I think; it should be enough withdrawal linked to SS & pension to survive & rest contributions (of 401K / 457) should be kept in CDs for one year & to change the required amount considering the inflation.
I think it is better to get into the lowest retirement tax situation, avoid IRMAA as well as the SAA tax torpedo.
I would rather pay a bit more now while I have the cash flow and am working.
What is the break even amount for Roth conversions because you are taking money out of the market to pay taxes?
That is the million-dollar question, and unfortunately, there's no perfect answer. If we could predict how much you'll earn on investments, future tax rates, what inflation will do (and resulting inflation adjustments), and other factors, it would be a straightforward calculation. But without that knowledge, we can only make some educated guesses.
This video goes over some of the things to look at as you pick the amount (ruclips.net/video/xWt7QGw9toI/видео.html ), but it's focusing on a different problem-you're withdrawing to pay off a loan instead of paying the taxes to convert. For instance, it probably ignores future RMDs, but it's reasonably close to what you'd look at when figuring out how much to convert.
Actually the math is a wash if Roth and pretax are invested the same. The only thing that matters is what your tax rates are. Secondary effects like ACA, IRMAA, and SS taxation effects are more complicated.
All my research shows that Roth Conversions have little value if your portfolio is less than $500k. From there to $1 million it depends. Over $1m it can be useful. This also applies to drawing down your portfolio before RMDs. Also Roth CONTRIBUTIONS make a lot of sense if your tax brackets are low.
Just a few points contrary to the advice in the video. 1) You will have to wait 5 yrs before you can touch a Roth conversion, and 2) time is against you, in terms of the number of active years left to enjoy tax-free spending! All this talk of waiting till 70, for lower taxes (not for me). I'm 61, and still earning at my peak earning years. Logically, now is the time I should be swallowing the bitter pill of paying for taxes on Roth conversions. Because I can tighten spending, while still earning at peak salary. This year I forked over $43k, from my emergency fund, to pay taxes on $130k, in my Vanguard IRA. Next year I will probably convert $170k, but put aside $50k of that to pay taxes. There is also the matter of your new Roth account accruing gains, making back some/all of the taxes you paid. I refuse to wait till I'm superannuated before drawing on Roth accounts.
I don't think (1) is the case if you are over 59.5.
@@alphamale2363
No, you cannot touch your IRA/ 401k without a 10% penalty before 62. That's in addition to the huge tax cost.
@@Borat_Kazakh You can take any contributions you made out of a Roth IRA without a penalty and with no age restriction. It's the growth of the fund that is subject to the penalties.
@@Borat_KazakhWrong. Look up the 5-year withdrawal rule for withdrawing prior to 59 1/2.
I agree I am taking the same approach convert now while I have peak available money and salary
If you have over $1M in a traditional IRA, and don't convert to a Roth, want you eventually have to pay all of the IRMMA, Social Security and Medicare taxes and premiums once RMDs start?
Good question, and it depends. As you withdraw money from pre-tax accounts, you generally increase your taxable income. But whether or not it will affect your Social Security taxation, cause IRMAA to kick in, put you into high tax brackets, etc. depends on how high your income gets. With $1MM, there's a decent chance you could face higher costs somewhere, especially if you wait as long as possible-until RMDs-to withdraw from those accounts (assuming you have resources elsewhere to fund all of your spending until then). But I can't say for certain what the consequences would look like without knowing details.
@@JustinOnRetirement At least IRMAA won't be X2 for younger surviving spouse.
I hate IRMAA, also the SS Tax Torpedo. If one saves early in life, does well, they get penalized more. Folks: some pay about 40% taxes on SS, did you know that? Remember: "Money Doesn't Grow on Fees".
I’m converting approx $200k per year to the top of the 24% bracket. It really hurts to cut the $40-45k tax pmts out of my dwindling investment account each year. I’m playing the long game and hoping this makes for a much lesser tax burden for my wife as a single widow and then for my kids who inherit what’s left.
That "widow's penalty" is certainly something to consider: A surviving spouse can end up in single tax filing brackets with an income that suddenly seems high.
Are you getting hit with state tax, IRMAA & NIIT, in addition to federal tax, on your Roth conversions?
Wow, that is big tax drag and is what has me a bit apprehensive to do this even after 59.5. On the other hand, I’d rather endure the tax implications than to pass that off to my children once I bequeath what remains. With a pension, SS, dividend income…I anticipate my taxable income will still be pretty high into retirement so it’s gonna hit hard when those conversions are being made. I don’t love not being able to touch the Roth until 5yrs either which I believe is applicable for each conversion separately.
Psychologically, don't Roth accounts ecourage you to never withdraw and grow it as much as possible? What is the point of dying with the most money?
Your brain your thoughts to control 😅 it just gets taxes out of the way so retirement is tax free
Being able to make Roth withdrawals in order to avoid the higher tax brackets is very motivating to me. I'm avoiding $2.3 million in future taxes. My goal is to deplete my savings by age 95, and I will always have a mortgage. If I live past 95, then I'll take out a reverse mortgage. My goal: Die broker; as you say, 'what is the point of dying with the most money?'
If someone wants to create generational wealth, inheriting a Roth is a great way to help do that.
@@larryjones9773 I wonder what will happen people who retired at like 40 if in the next 55 years some invention comes along that allows people to easily live to 150, but they only planned for a max of 100