Roth Conversions provide a unique opportunity to withdraw from your retirement savings tax-free, and have no required minimum distributions (RMDs), providing flexibility and potentially allowing the account to grow over time.
But are they right for most people?
Inspired by a comment from our viewer, Golden Griffon, Troy Sharpe examines real-life scenarios, comparing shorter versus longer life expectancies, single versus married couples, and varying IRA balances ($1 million vs. $2 million). He analyzes these variables and their profound implications for making informed decisions regarding Roth conversions.
00:34 Can we expect life expectancy to continue to increase?
02:46 Golden Griffon’s Comment: Why he believes Roth Conversions may not be right for most
03:34 Troy’s Response
04:46 Setting up the variables we’re going to analyze
05:53 The First scenario: Single male, 65 years old, $1 million in retirement accounts
10:33 Comparing Outcomes by Account Value Only
12:14 Will most people be in a lower tax bracket in retirement?
13:34 Which account composition would you rather leave to your kids?
16:21 Next Scenario: Changing life expectancy from 83 to 88
18:34 Unique considerations when it comes to doing or not doing Roth Conversions
21:25 The importance of monitoring, assessing and adjusting
22:33 Married Couple Examples
Thanks to @goldengriffon2423 for the great discussion!
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This video discusses fixed-income investing and utilizes the 10-year U.S. treasury as a general representative fixed-income investment. Conclusions reached, opinions stated, and downside risks and potential returns presented should not be construed as applying to other types of bonds or fixed-income assets. Other types of fixed-income products carry different levels of risk and return potential and should be evaluated as an element of a diversified portfolio with your specific risk tolerance, investment objectives, and timeline in mind. Nothing in this video is investment advice, an investment recommendation, or an offer to buy or sell any security. Investing involves risk.
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Watch This Before You Decide: Variables That Impact Whether a Roth IRA Conversion is Right For You
If you’re considering whether to convert your traditional IRA or 401(k) to a Roth IRA, it’s important to understand the variables that could impact your decision. While a Roth IRA conversion can provide numerous benefits, it’s not always the best option for everyone. This article will explore the key factors you should consider before making a decision.
1. Tax implications: One of the most significant variables to consider is the impact on your taxes. Roth IRA conversions are taxable events, meaning that you’ll have to pay income taxes on the amount you convert. However, once the money is in a Roth IRA, it grows tax-free, providing potential tax savings in the long run. Analyzing your current and future tax rates is crucial in determining whether a conversion will be beneficial.
2. Time horizon: Your time horizon until retirement plays a crucial role in evaluating the potential benefits of a Roth IRA conversion. The longer you have until retirement, the more time your money has to grow tax-free in the Roth IRA. If you’re close to retirement, the benefits of a conversion may be limited as there’s less time for your investments to accumulate tax-free earnings.
3. Available funds for taxes: To execute a successful Roth IRA conversion, you need to have funds available to pay the taxes on the amount being converted. If you have to dip into the converted amount to pay taxes, it could significantly reduce the potential benefits of the conversion. It’s essential to evaluate whether you have other sources to cover the tax liability without touching the converted funds.
4. Retirement income and goals: Consider your expected retirement income and goals when deciding on a Roth IRA conversion. If you anticipate being in a higher tax bracket during retirement or have the intention of leaving a tax-free inheritance to your heirs, a conversion can be advantageous. On the other hand, if you expect a significant reduction in income during retirement, sticking with a traditional IRA may be more beneficial.
5. Required minimum distributions (RMDs): Traditional IRAs and 401(k) plans necessitate taking required minimum distributions (RMDs) once you reach the age of 72. These distributions are taxable and can potentially increase your tax burden in retirement. By converting to a Roth IRA, you can avoid RMDs, providing you with more control over your tax liability in retirement.
6. Estate planning: If you have substantial assets and want to pass on a tax-free inheritance to your beneficiaries, a Roth IRA conversion can be a smart move. Roth IRAs do not have RMDs during your lifetime, and qualified withdrawals are tax-free for your heirs, making them an attractive vehicle for estate planning purposes.
Ultimately, deciding whether a Roth IRA conversion is right for you requires careful analysis of your unique financial situation and goals. Consulting with a financial advisor or tax professional can provide valuable insights and help you make an informed decision. Keep in mind that the variables mentioned above, combined with other personalized factors, will determine whether a conversion is advantageous or not.
Sorry, Troy
I have followed you for a long time, and now that I am retired, I know for certain that no way, no way how that I am in a higher tax bracket.
And together we made over $150,000 a year.
I would be more than happy to send you my spreadsheet of what we do and how we do it maintaining in the 12% tax bracket rather than the 24%
If you would like me to send it to you or you just let me know
Great content! Would love to see an analysis on a 50% Roth, 50% pretax, no taxable. Let’s say 1 million in Roth, 1 million in pretax. Married at 60, wife 56. Thinking of spending 100,000 in pretax per year for 10 years. Start SS at 70 years, wife takes SS at 67. 1 million Roth grows to 2 million in 10 years. All that’s left is Roth and SS at 70, little to no taxes plan
Excellent video, I wish you had spent a little more time going through the details on the married couple, but I understand trying to fit as much relevant content in as short a video as possible. Even though these are very complex topics mathematically (not even considering the psychological/emotional aspects) you all do such a great job explaining the broad picture in a simple way that is relatively easy to understand!
This may be too specific of a question, but can you offset the tax bill from doing a Roth conversion with a tax loss from selling a business (i.e. your cost basis in the business was higher than what you sold it for)?
Nice analysis. This is a complex issue. A lot of people don't want to do Roth conversions because they would have to pay taxes on those conversions and, everyone hates paying income taxes. However, in the long run, in most situations, it is better to bite the bullet now over a period of years, and get money into a tax-free Roth account (and let it grow tax free), even if you have to pay the taxes on the conversions spread over a number of years. So, if you have the time and are able to do the Roth conversions over a number of years and are able to stay within a reasonable percentage tax bracket, it would be more advantageous tax-wise. And with the TCJA expiring at the end of 2025, the increase in those taxes alone is a compelling reason to pay the taxes now instead of a higher rate later, but as you show, there are other reasons to do so. I think people look at their tax deferred (Traditional IRA, 401K, 403B) and think that money is all theirs and in reality, there is a built in tax liability. They are going to have to pay taxes on those tax deferred accounts sooner or later. It is just a matter of when. Pay now (through a partial Roth conversion over a number of years when you are in lower tax bracket) or pay later when you are in a higher tax bracket. Yes, it hurts having to pay taxes, but wouldn't most people want to pay less overall? Plus, as you point out, if it is a couple and one spouse passes away, now as a single, the surviving spouse will be in even a higher tax bracket, especially if most of that couple's money is in a tax deferred account. And your point about the 3.89%net investment income tax (NIIT), and taxes to your heirs after you pass away are all valid considerations, also. Like I said, this is a complex issue. Thanks much for the video and your explanations.
Your OCW one would do even better if all of your withdrawals were funneled through a Roth, since your first example was over 59.5 there would be no 5 year restriction on withdrawals assuming the original Roth account was 5 years old. If the conversions exceeded the yearly spending the leftover money is now sitting in a Roth.
Great video and a great question from Goldengriffon2423. Troy, you are really going to spoil us if you keep doing videos on our comments!