Are you planning on converting all of your IRA assets in one MEGA Conversion or do you plan to spread out your tax liability and optimize over a longer period of time? You can schedule an appointment with one of our Retirement Experts to look at your situation and help you plan for your future. Call us at (920) 544-0576 or go to
It’s no secret that the retirement tax system is quite complex. Between various tax hike zones like the Social Security Tax Torpedo and Capital Gain Bump Zones to penalties like IRMAA, navigating taxes in retirement is difficult.
Given this, many retirees wonder if they should simply perform all of their Roth Conversions at once, doing a massive Roth Conversion.
And this will be the simplest method, but is it the most optimal?
In this video, we compare a large, one-time Roth Conversion vs. spreading that Roth Conversion schedule out.
#RothConversion #OptimizeTaxes
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Does a MEGA Roth Conversion Make Sense? | Roth Conversion Optimization
A Roth conversion is a popular strategy employed by individuals who want to convert their traditional IRA or 401(k) accounts into Roth accounts. The main benefit of a Roth conversion is that it allows for tax-free growth and tax-free withdrawals in retirement. While Roth conversions can be a great tool for tax planning, not everyone may be eligible or find it advantageous. However, for those with higher incomes and substantial savings, a MEGA Roth conversion can potentially offer even greater benefits. Let’s explore whether a MEGA Roth conversion makes sense for you.
What is a MEGA Roth Conversion?
A MEGA Roth conversion refers to a larger-than-average conversion amount that enables taxpayers to take full advantage of their retirement accounts. Normally, individuals can only convert the balance of their traditional IRA or 401(k) accounts up to their taxable income for that year. However, the MEGA Roth conversion allows individuals to bypass this limitation by converting significantly larger amounts.
Who Should Consider a MEGA Roth Conversion?
A MEGA Roth conversion can be beneficial for individuals who have higher incomes, substantial retirement savings, and expect to be in a higher tax bracket during retirement. By converting a significant portion of their traditional IRA or 401(k) to a Roth account, they can take advantage of tax-free growth and withdrawals in retirement.
Additionally, individuals who anticipate leaving a sizable inheritance for their heirs may also benefit from a MEGA Roth conversion. Since Roth accounts are not subject to mandatory minimum distributions (RMDs) during the account owner’s lifetime, they can leave the funds to their heirs, who can then continue to enjoy tax-free growth and withdrawals.
Pros and Cons of a MEGA Roth Conversion
There are several advantages to undertaking a MEGA Roth conversion. Firstly, it allows individuals to accelerate their tax payments and avoid potentially higher tax brackets in the future. Additionally, it can help to diversify their tax liability in retirement and reduce the impact of future tax law changes.
Furthermore, by converting a larger amount, individuals can potentially maximize the benefits of tax-free growth. The longer the funds remain invested in a Roth account, the more opportunity they have to grow, leading to potentially greater retirement savings.
However, it’s important to consider the downsides as well. One significant drawback is the immediate tax liability associated with the conversion. Converting a larger amount will result in a higher tax bill for that year, which individuals must be prepared to pay. This consideration is particularly important for individuals who do not have sufficient funds outside of their retirement accounts to cover the tax bill.
Another consideration is the impact of the Secure Act, which has altered the distribution rules for inherited IRAs. While Roth accounts are still exempt from RMDs during the account owner’s lifetime, beneficiaries of inherited Roth accounts are now required to withdraw the funds within ten years of the account owner’s death. This change reduces the tax-free growth potential for beneficiaries considerably.
Conclusion
A MEGA Roth conversion can be a powerful strategy for individuals with higher incomes, substantial retirement savings, and long-term financial goals. By taking advantage of tax-free growth and withdrawals, they can potentially maximize their retirement savings and leave a tax-efficient legacy for their heirs. However, it’s crucial to carefully evaluate the immediate tax consequences and consider the impact of any changes in tax laws or distribution rules. Consulting with a financial advisor or tax professional can help determine whether a MEGA Roth conversion is the right option for your specific situation.
I really love your IRMAA Tax Surcharges analysis. However there is a very holistic simple decision helper for most of people considering to do Rollover to Roth Conversions or MEGA Conversions. If they have a family history of chronic desease such as expensive Hearts Desease, Diabetes and so on with Unaffordable Costly "maintenance for the rest of your life Medications" they should try to keep in mind unavoidable anticipated in the very near future in retirement need to either have enough money saved for more expensive IRMAA surcharges and out of pocket extra payments for most of UNCOVERED BY MEDICAID basic Vitamins, any considered OTC Medications, and expensive Unaffordable not part of MEDICARE Formulary or Supplemental MEDICARE Insurance Formulary medications (typically nothing preventive or diagnostcs is covered for example for Diabetics, Dental Health, Eye Health, Hearing Health)… So they might be better off consulting with MEDICARE Insurance Special Agents about different Plans and Eligibility Criteria especially if their older relatives have any chronic desease or died before age 65 for women and 57 for men… Only then it would be much easier to decide to Convert Rollover to Roth or not and how fast and how many years of projected life one might estimate they have before finishing their Conversions (as simple Mathematics are suddenly not so simple and much more complex especially when Taxes are only one of many factors to consider together with possibly buying a Long Term Care Insurance and other future Health and Dental Insurance related things and so many expenses designed to be uncovered deliberately by MEDICARE Insurance that only wealthy and well prepared in advance people could have anticipated years in advance while in relatively better health and at a younger age…
I think the methodology you're using to attach a percentage to the IRMAA value is flawed. The value calculated does reflect the marginal increase of this zone COMPARED TO THE PREVIOUS ZONE, but that number is really not of interest.
To see this, imagine that, instead of a $122 increase in the zone used in the example, there was only a $.01 increase. Using your formula, this would generate a numerator of $.24. Dividing this by $56,000 yields a value close to 0. But, in fact, if one resided in this zone, the actual tax rate associated with doing so is not 0%. Instead, the actual tax rate associated with this zone is a bit lower than that associated with the previous zone, that's all, since one is now required to pay essentially the same premium as in the previous zone, for an extra $50K – $60K of coverage.
What should be calculated instead, for each zone, is the total premium required for that zone, divided by the MAGI dollar amount at the top of that zone. For example for the zone being used (the 3rd zone from 2022), the Part B cost, including IRMAA, is $340.20, and the Part D cost is $32.10. So the total premium for this zone is $340.20 + $32.10 = $372.30. Multiplying that by 12 and by 2 as shown in your example, one has $372.30 x 12 x 2 = $8,935.20. That number should be divided by the top MAGI dollar amount for the zone, which is $284,000 (which assumes the taxpayer can fully populate the zone to this amount). The resultant tax percentage is 3.15%. That is a value which it is reasonable to add to the base tax rate of 24% shown in your example, to arrive at an overall rate of 27.15%.
What guarantees the government won't tax Roth gains in the future? I'm doing conversions and limiting the tax rate to 24% but if they come after Roth gains in the future that would be brutal.
Good video. we have one last rung of seven Roth conversions to complete next yr then retire with the "rule of 55". We will live off 401k's until they are depleted by 61. Tax SS at ~65 and no taxes until about 72 …at lest thats what the software shows. Being "poor on paper" so in lowest bracket for IRMAA. We are huge believers in conversions over time and not in a lump sum!
Why don’t these projections EVER show paying the taxes due with cash outside the IRA? Is it because it will yield a much more convincing result to do ROTH conversions up to the 24% if IIRMA is not a factor? Would love to see this ! Great channel!
Thank you so much for your video! Great information in easy to understand fashion. I have been watching your videos as I am preparing for retirement at 62, in two years. So glad your videos showed up in my feed a few months ago!
I was told that each Roth conversion has its own 5-year clock. That means I have to keep track of each conversion as to when I can withdraw tax free and penalty free. Can you confirm that?
I like how you factor IRMAA premium as a tax rate % when considering Roth conversions. My question for you is whether there would be an advantage to convert more during your first year On Medicare if your bday falls in middle of year or later? Let’s say you turn 65 in September. If you do additional Roth conversions and are hit with higher IRMAA premium, you would only pay that higher premium for 4 months before it resets in January of following year, right?
The married brackets make spreading out conversions look artificially good because they give huge headroom. Single brackets are so much more compressed.
Thanks guys!! Mostly more of the same for me last week. Bought HD, CMCSA, PFFV, PDO, MAIN, VFC, JEPI, NNN and MDT with a $99 limit order.
If you want big subscribers and viewers, make your tube play with a smaller $$ amount. Your numbers simply out of reach for the vast majority.
TCJA are just 4 years to expiration 2026. Married filing jointly bracket 24% will become 33% in the last 100,000 of the 24% tax bracket. Planning on ripping bandaid off in mega Roth conversions in the next 4 years.
I feel the need to over convert in Roth conversions. If one us becomes widowed we move to single tax bracket. Then you need to be concerned about the secure act (for inheritance) which would make your children have RMDs in a 10 year span during there likely high earning tax bracket. I think of it as life insurance from taxes on future growth of investments.
Eric – Thank you for your informative and educational posts. I am a recent retiree age 60 with a sizable ($3M+) 401K balance and I am just now starting to think about Roth conversions. I would like to start to model various scenarios for my situation, do you happen to make any of your tax planning graphs/worksheets from this (2:11) and several of your other videos available for download? Thanks again for the great content.
Please explain why the tax rate paid is more important than the total amount paid in taxes. It seems like many years of tax-free growth will eventually cross a break-even point resulting in a profit.
Thank you for including single people in your examples. I'm 61 and plan on retiring sometime in the next 4 years and will start doing my ROTH conversions then. I'll have lower income and I should be done by the time I'm 72.
I really love your content. Thank you for clear, concise presentation without the clown show.
But for people with high amounts of deferred accounts and 3 years to reach RMD and SS as the only income, will big chunk of conversions make sense?
Good job Eric.
Thank you very informative!
Hedge your risk of tax rates going up by carefully considering Roth decisions.Thanks for another great video Erik.
Do you assume that that tax code (current number of brackets) will stay the same over those 10 yrs of Roth conversions? What if the tax rates go up over time and the number of brackets increase?