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If doing some Roth Conversions is good, does that mean doing larger Roth Conversions is better?
Should you convert all of your IRAs?
How aggressive should you be on a conversion in a given year?
These are common questions that we receive after many retirees find that Roth Conversions are necessary to optimize their retirement tax situation.
As with most tax planning, the answer is… “It depends.”
In this video, we guide viewers through the key variables that determine how much you convert.
We talk through who will benefit from converting everything and who will be better off leaving some tax deferred accounts to fill in lower brackets later in retirement.
#RothConversion #RetirementIncomePlanning #MinimizeRMDs
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only makes sense not to convert to Roth if there was a guarantee that TAXES weren’t going to increase.
I know it sounds illogical but doing conversions WHEN you are working and have disposable income to pay the taxes is a viable strategy. Its basically suggesting to pay the taxes when you can afford to pay them regardless of the break-even analysis.
Eric – love your presentations, I have watched 1-2 a day on and off for several months. All great stuff, I of course can see the themes you hammer on, rightly so. Thanks
I have a question, if you might. I have run many analyses on converting my tIRAs. (I have been maxing the 24% range lately). For all the reasons you have pointed out, the scenarios where I push big now and completely wipe them out while TCJA is still breathing I get the biggest bang/benefit from reduction of lifetime taxes paid. This leaves me with a large taxable account and about $2MM in Roth IRAs. My tax rate for the rest of my life (actually, my wife and I) then is very low for the rest of our lives. My question – it seems going 'too low' on taxes isn't necessarily seen positively – why is that? It seems to me whatever I do that results in the biggest tax reduction in the big scheme of things is worthwhile regardless of where my tax rate ends up in life. Would you agree or share any thoughts?
In any case, many thanks for your presentations. I can go on at some length explaining how helpful they have been.
I am an h1b immigrant from India, learning from you and other good YouTuber channels.
Recently came to know that taxation for non-resident aliens is completely different.
I was shocked to say the least.
For people like me 401k would be taxed flat at 30%.
Should have converted as much as I could in 2020 downturn.
I have a regular IRA with about $35k in it and a similar amount in a Roth IRA. I was thinking for converting the entire IRA into the ROTH. I'm 43 years old so I have a bit until retirement. I plan on contributing to my Roth going forward as the money in my IRA was from a rollover from a prior employer 401k. I don't have any other retirement accounts. Based on your video it seems maybe the 35K is too low of an amount to convert because of the tier tax brackets? Thanks
Seeing concurrent pension and social security payouts also raises the question of the government windfall provision effecting reduction in social security for those on public agency pensions, in turn affecting the actual total income one may anticipate.
What if 10% of your 401k is already in ROTH? How can it be used to advantage for a draw down plan?
What about the five year rule?
Great video and information -thank you! You didn’t mention how QCDs can save taxes on RMDs. Rather than convert all IRAs to Roth, I plan on leaving just enough money in my IRA to make the annual RMD equal to an annual QCD when I turn 70.5 years old. That way, I don’t have to pay taxes on RMDs.
You might mention sometime what the options are for non spousal beneficiaries of both Roth and pretax IRAs.
I think having it simple as I get older will be worth a lot . If almost everything gets converted, I don’t need to pay a financial advisor 1% of my account yearly to manage it. Pulling $ out of a Roth is simple.
Doesn't the combination of social security and RMD income make it smart to convert all of a traditional Ira over to a roth?
If you use money to pay tax now (Roth conversion) while market is down, your conversion strategy fails miserably.
Great informative video. I find myself in exactly this situation with 'forced income' filling up my lower tax brackets. Worse yet, since I'm single, the brackets shift 'left' on your graph such that I hit those higher brackets sooner. So I'm seriously considering even going into the higher brackets (and IRMAA) payments for the next 5 years. Turns out if I pay a lot of tax/IRMAA now, I can avoid higher taxes for many years after age 72.
So, as with a lot of planning, it depends if I live long enough. lol Pay high taxes on RMDs for 15-20 years, or pay taxes on conversions for just 5 years. Of course if I do the conversions and die at 73, I'll have paid the taxes and not ever enjoyed the lower taxes later.
I am currently retired (federal govt) for 3 years age 59. Only needing my/wife's pension(s) and SPS (which will end at age 62), and QDI, to meet my needs. I don't plan on claiming my SS until I turn 67-70. I have a large Traditional TSP, a large personal account whose value is mostly LTCG's, and a relatively small ROTH IRA. After listening to various speakers and groups talking about F.I.R.E and Roth Conversions, Retirement planning, forward-looking Tax planning etc for several months now this year, I have to say that Safeguard Wealth Management presents this subject in a clear, concise (as can be with such a complicated subject), and (much more importantly) very comprehensive way much better than others that speak on this subject.
My only regret that that I knew nothing about such things until this year/ I wish I knew about this 3 years ago.
Say at 70 you still have a balance of around 300k in your pretax IRA and then start SS, etc and don't need to tap that money – allowed to grow that money could be over 1m at the end of life which would steadily add to RMDs.
Still trying to understand the value of keeping assets in pretax if you can get it all converted
You always show the graphs and limits based on a married scenario. It would be helpful to show a single scenario for those of us who are widowed and single and have no secondary income of a spouse to cushion their situation. Living alone is stressful enough. Having to manage a financial future alone is very stressful.
Incorrect to state the only time it makes sense to convert is to catch a tax rate benefit. There are many benefits IN RETIREMENT that come from having as much as possible in Roth accounts because there are no RMDs and any distributions are tax free having zero affect on recognized income. Traditional withdrawals cause "income" that is recognized as such and can cause SS to be taxable….and for every dollar over the SS threshold limit, you will pay taxes based on $1.85 for every $1 of additional income over that threshold (this will continue until 85% of your SS is taxed). Additionally, if your SS income is low enough you may qualify for various low income subsidies. Roth disbursements won't affect these, however, traditional account withdrawals will likely knock you out of those programs based on the higher income now recognized.
Essentially, you should try and get as much retirement funds into Roth as possible to provide yourself with the most retirement flexibility. In retirement Roth is KING!! Optimal retirement buckets would be Roth largest balance, regular taxable brokerage account with index funds or growth stocks (non dividend paying) second largest, and your traditional retirement accounts (fully taxable as ordinary income) the smallest.
I failed to tell you that I have approximately 220,000 annual income between me and my wife that includes pension and rental property that includes my last RMD.
Is there any way you can help me decide how to do my RMD I am 76 with approximately 1.6 million and I think my tax bracket will continue going up should I take more than the minimum?
I like your presentations. Fast, accurate, knowledgeable and very helpful. As an accountant/enrolled agent in bus for 47 years, I seen and practiced most of what I've seen in you videos. But, I've also learned and that is what I like. Liked and subbed. Thanks for your explanation of quite complex issues.
What happens "IF" Congress raises taxes?
Even if we vote the Democats out this November,
our federal government is broke, and someone will need to bail them out and soon.
If you want to avoid high taxable RMD income you may always do QCDs.
Better to send your hard earned money where it will do the most good, then trusting
the current politicans to do anything worthwhile with our tax money.
Great video! you use the same graph each time you speak to tax planning. Can you do a video explaining each of the categories? Example: what is strategy income? I know you did it a little bit at the 8:30 mark, but more detail is appreciated. Thanks!
Also need to consider ACA if retire before 65 & the look back for Medicare. Also if you sell your home you could have capital gains in today’s housing market
Additional 1.35 taxed from $1.
It’s suffice to say taxes will never be at these rates again. Understand how much determines the breakeven amount. . I take distributions or convert up to 83k. Insane to take or convert at a marginal rate of 22 up from 12. That said, rates are going up and depending how much the market corrects itself, I may bite the bullet and convert more. My challenge is deciding when to take SS and spousal benefit. My wife is 4 years younger than I, so I would love to wait until 70 especially if I’m healthy. That would allow me to get deferred account to standard deduction.
Great video. I will subscribe.
It's a shame that older folks are forced to deal with such byzantine tax structures, exactly when their mental capacities decrease. It's akin to elder abuse. Truly a disgusting system.
Excellent video and explanation. I think I will need to convert a significant amount of my 401K but maybe not all of it.
Two points to consider: 1. The widow/widower penalty – if there is a large age difference in the couple, converting to Roth while you can still file jointly makes a lot of sense. 2. In previous videos, attention has been drawn to the benefit of moving money into the Roth environment so that the future growth is not subject to tax. This video seems to ignore the potential advantage of having tax free growth.
There should be no question about converting. do it while you still can afford to during your earning years. Convert, convert, convert. You don't know what will happen in the future. Do it while you're young. Then all you earn is tax free and not even reportable. It won't even affect your combined social security income, or other incomes for the taxation formula. No RMD's which is great. If you own a business do SEP's IRA's to yourself, then convert that into ROTH. Before you know it, you'll be sitting on a million dollars all tax free. What's there to think about?
Good video. One question which I noticed have not been mentioned, would it be advantageous to first establish residence in a “no state-income-tax state before doing Roth conversions?
Roth conversions are taxed as income, then doesn't that contribute to a person's SS payment when drawing on retirement? For example if a $300k conversion occurred. True, it's averaged against 29 other years, however, won't SS bump up your payments some too as you would be in a higher income bracket. I don't see this being discussed?
I’m confused. If I convert $500k to Roth right now at 24% or even higher, let’s say 32% (I’m 57), that’s 32% of $500k ($160k) with 0% on any appreciation over that. So if I do nothing now and pay 22% on $1.5m over time when I’m in retirement that’s ($330k). So what difference does it make what my retirement rate is when I’ll have a much higher balance then? Hopefully. If I paid $160k on a $1.5M investment, that’s about 10%. What am I missing? Also I’m single so my tax brackets are much lower
Don't pay taxes tithe IRS there illegal
Do you use a Monte Carlo approach to identify optimum tax plans?
6:01 Down To Zero is an ideal, not an absolute requirement.
2:00 Forward Looking Tax Planning — that plan should commence with one’s very first contribution to pre-tax / traditional plan. Every single pre-tax dollar must be assigned a role downrange, at what point (when) will it be withdrawn or Roth converted (or charitably donated, etc.) and what will one’s individual tax environment be at that point.
0:48 It Depends(tm) is a strong platitude in any domain of planning, not just financial planning.
Well-presented. I’d appreciate a deeper discussion about conversions around the time when the first spouse passes. It would seem that the step increase in tax liability for single filers would easily drive a decision to convert ALL of any remaining Traditional IRA assets.
What if congress raises taxes…. Ha ha. That is a guarantee!
just did our last conversion from our T-IRA's. Will have enough money left in our 401k's to cover from 56 to 67 and military retirement. SS kicks in and covers everything. military retirement will go to investment account and our Roth's continue to grow. NO RMD's 🙂
I like the figure @ 1:25.
@ 4:00 it's not that simple as just 3%. It's always the opportunity cost of the taxes you'll have to pay right now instead of having it grow (either tax-free or even in a taxable). In order to convert a dollar at a 25% rate, you have to pay 25 cents in taxes. Where will this come from? What else could you have done with these funds? THIS is the vexing question in my view. I apologise if it gets addressed later and will edit my comment if that occurs.
I might add that if you are expecting very large gains from investments in your IRA or any other qualified bucket (such as in Bitcoin or other digital assets… or maybe the next Google or Amazon startup type returns for example) then Roth Conversions are really desirable to avoid huge tax bills in the future. If you do nothing and your IRA investment does a 10x in just a few years, it would be much better to see those gains in your Roth bucket(s) than in your qualified bucket.
At age 70-1/2 and above, you can donate directly from your IRA via a QCD. It doesn't hit your income line and satisfies your RMD. No need to convert and pay taxes on money you're planning to donate.
Not sure if this is another way of looking at it… I’m 7 yrs from retirement. I got a late start and about 50% of my retirement savings ($100k of my $200K total) are in traditional IRA. I have a pretty good income RIGHT NOW, but because of my late start, I’m saving like a mad man to have enough in retirement. I CAN AFFORD to pay extra taxes now, so I’m thinking of moving $20K a year or so starting now (tax at ~34% – state and federal combined) – so ~$6800 in taxes to move $20K into Roth. I REALLY LIKE the idea of paying $0 in taxes in retirement. I understand this might not be mathematically optimal, but I think the peace of mind would be worth it. Just as FYI, I’ll have $3K per month in Social Security, and need maybe another $2K per month from my retirement. I’m single. Hoping to grow my $200k now into $600K in 7 years by 1) doubling my current investment with growth & dividend portfolio and 2) saving ~$35K per year. What do you think?
Thank you, this answers my questions regarding my situation. I was waiting for this video!
Thanks for the discussion! I hate converting now, but if I do nothing I'll be in the 22% then 24% bracket when RMD's hit. Retiring in 4 years. Pensions and SS will be around $120k to $125k annually. Already in the 22% bracket so converting to the top of the 24% for two more years then re-evaluate to avoid IRMAA or not (I'm 60 now).
I am 55 and I contributed to a Roth and then found out that I made to much money at years end. What do I do now?? so just re characterize it to a traditional Roth?
Honestly was hoping for some more details in a response..perhaps a couple of scenarios for both singletons and married who DONT anticipate forced income, laying out an example 'desired' Tax Deferred retirement account balance as they head into their retirement years that would optimally fill their lower brackets given some example numbers.