What are the benefits of Roth conversions in retirement planning? James addresses questions about when Roth conversions become worthwhile.
This episode explores key factors:
Changes in tax bracket
Spousal scenarios
Impact of portfolio size on tax savings
Potential tax savings tend to increase with a higher portfolio balance but be careful not to take unnecessary Roth conversions. James explains different strategies to optimize tax planning.
Questions answered:
Is there a specific portfolio value at which Roth conversions should be considered?
Why might one choose not to do a Roth conversion, and what are the alternatives?
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⏱Timestamps:⏱
0:00 Intro
3:14 Scenario
6:47 Tax bracket
11:15 Provisional income
14:27 Spousal scenario
16:45 Bottom line
20:29 Outro
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Roth conversions have become an increasingly popular strategy for individuals looking to minimize their tax burden in retirement. By converting traditional retirement accounts, such as 401(k)s and IRAs, into Roth accounts, individuals can potentially save on taxes in the long run. However, the decision to pursue Roth conversions is not always straightforward, and one important consideration is the size of your investment portfolio.
Many financial advisors and tax experts suggest that individuals with larger retirement portfolios stand to benefit the most from Roth conversions. This is because the tax implications of converting a substantial amount of money can be significant, and those with larger portfolios have more to gain from potential tax savings.
But how big does your portfolio need to be to benefit from Roth conversions? The answer will depend on several factors, including your current tax bracket, your expected tax bracket in retirement, and your overall financial goals. However, as a general rule of thumb, individuals with retirement accounts valued at approximately $500,000 or more may see the most substantial benefits from Roth conversions.
One of the primary advantages of Roth conversions for individuals with larger portfolios is the ability to spread out the tax liability over several years. By converting a portion of their retirement savings each year, individuals can mitigate the impact of higher tax bills and potentially keep themselves in a lower tax bracket. This can be particularly advantageous for those who anticipate being in a higher tax bracket in retirement than they are currently.
Furthermore, individuals with larger portfolios may have a longer time horizon and therefore more potential for tax-free growth within a Roth account. This can result in significant tax savings over the long term, especially if the funds are not needed for living expenses in the near future.
Of course, not everyone with a large portfolio will benefit from Roth conversions. It’s important to consider your overall financial situation and consult with a financial advisor or tax professional before making any decisions. Additionally, the tax laws and regulations surrounding Roth conversions can be complex and subject to change, so it’s important to stay informed about the latest developments in this area.
In conclusion, individuals with larger portfolios may stand to benefit the most from Roth conversions, thanks to the potential for significant tax savings and prolonged tax-free growth. However, it’s important to carefully consider your individual circumstances and consult with a financial professional before making any decisions. With the right strategy, Roth conversions can be a valuable tool for minimizing taxes in retirement and maximizing the benefits of your hard-earned savings.
Even if you expect your future effective tax rate to be the same or close to today, it can make sense to do Roth conversions. Particularly if one spouse is likely to die many years earlier, and the surviving spouse is less sophisticated, financially… simplifying your retirement funds to minimize the tax complexity can be a blessing for that surviving spouse when they have to decide where to pull money. Our father did this for our mother and she appreciates the simplicity.
Furthermore, if there is a fair chance your kids will be in higher income tax brackets when you both die, more of your precious, hard-earned funds are protected from those higher tax rates.
Something I've only ever heard in one place- traditional retirement accounts, IRA and 401k, are triple tax advantaged if you don't have a pension or something else filling your standard deduction. Tax free going in, tax free growth, and tax free withdrawal up to your remaining standard deduction. You almost always want some traditional retirement investments, particularly with the standard American who has an abysmal savings rate
That being said, the people watching these financial videos are more likely to have large retirement savings. In those cases, Roth does starts to make sense to avoid RMD's as the account sizes increase
Another thing to think about is that if your portfolio will be left to heirs, they won’t pay taxes on Roth, but will on traditional 401k accounts.
How does the percentage of the overall retirement portfolio in tax deferred accounts impact the Roth conversion strategy and significance, for example, if 80% is in taxable accounts, 3% already in Roth accounts and the rest in IRA and 401k accounts? We will have a seven year window between retiring and taking social security at age 70, but will still be in a fairly high tax bracket in those years due to dividends, interest and capital gains. Not sure how concerned I should be about the future impact of RMD’s in this scenario
Won't the standard deduction go back down to pre-Trump era after 2025? Something that can impact the calculations.
I wanted to do Roth Conv after retired before taking Soc Sec but many aHealthcare options are Income based? So if I make Roth Con or IRA Distributions it counts as income and wud raise my income too high for so.e or reduce or eliminate subsidies?
Hey James, along these same lines, I have a big pension coming, so taxable will be large. If I withdraw my traditional 401k, 457, and my wife's 401k, 457 within the bracket we are already in, is there really an advantage to roth. We are near the end of our earning years, so starting to do roth, or converting just seems like a pain. We are also believers that paying taxes, especially if you are well off is actually a good thing. Thoughts?
Roth conversions to protect from tax increases from RMDs and losing a spouse makes sense. Good explanation!
Thank you? I am less than the example and wonder if Roth Con are worth it for me?
I would say convert the most you can before bumping you to 10% more tax bracket (because in couple years all are taxes are going to get bump by 2%). benefit of a roth is no taxes for spouse or children inheritance.
I'm curious about your comment that a MFJ standard deduction can be even higher than $30,700 if both people are 65 or older. The SD for MFJ for 2023 is $27,700, and the 65-and-over increase is $1850 per person. So, for a couple who are each 65 or older, that's $27,700 + $1850 + $1850 = $31,400. Is that what you meant? Thanks James!
Great job but the biggest piece your missing is the goal of this money (are they planning on spending it and when)
Not your fault we just don't know by the question
Thanks James, great info