================================
Sign up for email list here.
Find value in this video? Buy Me A Coffee!
LET’S SOCIALIZE!
Linkedin:
My course “Can I Retire” will help reduce your stress when it comes to retirement planning.
Get it here:
and don’t forget there IS a 30 day money back guarantee if you’re not satisfied!
Get my books on Audible here:
Want to support what I’m doing for $10 a month?
Join my SubscribeStar page!
My Amazon Product page:
Anything you buy there Amazon pays me a commission. Much appreciated!
GET MY BOOKS:
ALL are FREE to Kindle Unlimited Subscribers!
You Can RETIRE on SOCIAL SECURITY:
The Tax Bomb In Your Retirement Accounts: How The Roth IRA Can Help You Avoid It:
Strategic Money Planning: 8 Easy Ways To Put Your House In Order
GET ALL MY LATEST BLOGPOSTS:
…(read more)
LEARN MORE ABOUT: IRA Accounts
INVESTING IN A GOLD IRA: Gold IRA Account
INVESTING IN A SILVER IRA: Silver IRA Account
REVEALED: Best Gold Backed IRA
Roth conversions are a common, and often misunderstood, strategy for investors looking to maximize their retirement savings. This powerful financial tool, however, is frequently misrepresented or underestimated by academics.
First, let’s discuss what a Roth conversion is. Roth conversions involve transferring funds from a traditional IRA or 401(k) account into a Roth IRA. This allows individuals to convert pre-tax retirement savings into after-tax savings. While individuals have to pay taxes upfront on the amount converted, the benefit is that the funds can then grow tax-free, and withdrawals in retirement are also tax-free.
One common misconception about Roth conversions among academics is that they are not beneficial for high-income individuals. Some argue that since high-income individuals are in a higher tax bracket, the taxes on a conversion would be too burdensome. However, the reality is that a Roth conversion can still be advantageous for high earners. By converting funds to a Roth account, individuals can potentially avoid paying higher taxes in retirement, when their tax bracket could be even higher. Additionally, Roth accounts have no required minimum distributions, so individuals have more flexibility in managing their taxes in retirement.
Another misunderstanding is that Roth conversions are only relevant for people approaching retirement age. While it’s true that those nearing retirement can benefit from converting funds to a Roth account, younger individuals can also take advantage of this strategy. By converting funds earlier in their career, individuals have more time for the tax-free growth of their investments, potentially resulting in substantial tax savings in retirement.
Another area where academics often miss the mark is the impact of Roth conversions on estate planning. Roth IRAs have no required minimum distributions during the account owner’s lifetime, and withdrawals in retirement are tax-free. This means that funds can continue to grow and be passed on to beneficiaries tax-free. This can be a significant advantage for individuals looking to leave a legacy for their heirs.
In conclusion, while academics often misunderstand or underestimate the benefits of Roth conversions, this strategy can be a powerful tool for investors looking to maximize their retirement savings. It can provide tax-free income in retirement, flexibility in managing taxes, and benefits for estate planning. It’s important for investors to educate themselves on the potential advantages of Roth conversions and to consider consulting with a financial advisor to see if this strategy is suitable for their specific circumstances.
Debt=40T Yield=5% Year=30
Debt(30 Year)=40T*1.05^30
Debt(30 Year)=180T
Payout(30 Year)=1000T
{
Debt(30 Year)=180T
Income(30 Year)=200T
Loan(30 Year)=620T
}
Insurance:
Premium=? Yield(30 Year)=1000%
Premium=1000T/1000%
Premium=100T
Loan(30 Year)=620T Yield=5%
Loan=620T/1.05^30
Loan=143T
Loan=143T
{
Premium=100T
Extra=43T
}
Thank you.
Good points as always.
That makes sense. If you’re living off your 403B money from 65 to 70 to delay taking SS at 70. That has the same effect as converting to Roth because it lowers your RMD’s.
I think they are also forgetting the taxable amount of SS is really low if you don't have to draw from other taxable assets.
Josh incorrectly states that surviver Sue will pay a 22% tax on the 36k of rmd income,when in fact Suzy will have to pay an effective 6.50% tax rate .And unless the contribution was made in a marginal tax rate that is less than 6.50% there is no need for roth conversions.
imo. ..a mistake that many make is to not realize how much Income it takes, at an effective tax rate to equal a tax savings that was made in a marginal tax rate .
Also, inherited would be brutal if you have to liquidate a traditional millionaire account
People with other income like pensions may already be in the 22% bracket before RMDs start. That’s not exactly “inconceivable “.
If you think taxes are not going up in the future I have a bridge to sell you. Taxes constant name a time in history where this happened?
I am working on converting IRA's to a Roth due the widow tax. She is 12 years older than me and with my pensions, VA disability and SS I would be within 5k of the upper 22% bracket limit. RMD's that I likely will not need would definite push me up a bracket. I am sure my grandchildren will appreciate the conversions I did as well.
Wife and I in early 50's and in the midst of 3-year conversions now – 2023/24/25 – while we have historically low rates. That said, I am not 100% convinced this will save lifetime taxes, whether in retirement, after one spouse passes, or when left to heirs. However, I view converting today as a hedge against the unknown of increased rates and/or bracket compression way out into the future, a hedge against the widows tax trap, a hedge against potential SS taxability, and simplification for my wife/heirs down the road. It allows for significant income flexibility, depending our needs at any point post 59.5 yo. If rates stay low, our finances still "win". If things become confiscatory – worst case – these conversions serve as "insurance".
Light bulb moment for me. Never thought of this. Thank you for the video.
I convert every year an amount that is taxed at ZERO. Can't beat that rate IMO. So happy for all those who continue to work and pay those taxes to the government and also pay for my obamanation care. $47/month with ZERO deductible. Thank you soooooooo much for paying for my health insurance for my early retirement. Please please please keep working and paying those taxes!!!
I can vouch for widow(er's) torpedo as my wife died just as I entered into retirement and wow did my taxes jump up. Not only that but I have much less wiggle room to do any roth conversions within any given tax bracket. I find it very "interesting" (in a bad way) how most retirement scenarios are based on COUPLES when in reality about 36% of seniors (over 65) are single.
Missed the widows tax trap and also didn’t account for generational wealth transfer. Heirs are going to inherit millions of 401K dollars at a time they are in their highest earning years and will be forced to liquidate the account over 10 years. Guaranteeing the state gets half. Criminal.
Great points Josh. Wouldn’t it be a great problem to do Roth conversions to stave off the widow’s tax trap, only to find both you and your spouse growing very old together?! Now that’s a win-win scenario! “Hope for the best, but plan for the worst.”
Becoming a millionaire through a Roth IRA or a 401(k) involves different strategies for maximizing profits. A Roth IRA offers tax-free withdrawals in retirement, which can be advantageous if you expect to be in a higher tax bracket later in life. On the other hand, a 401(k) provides tax-deferred growth and potential employer contributions, boosting your savings. The optimal choice depends on factors like your current and future tax situation, employer match, and investment options. Consulting a financial advisor can help tailor a strategy that aligns with your financial goals and circumstances.
Wondering if doing Roth conversions to the top of the 12% bracket for next two years is something to consider. It wouldn’t be much, but growing that Roth for another 10-20 years might be worth it? Now to figure out exactly how much we actually bring in…..
A “soft issue” to consider – if the Roth conversion analysis, even factoring in the widow tax trap leads you to be on the fence about doing Roth conversions… if the most likely surviving spouse is less financially sophisticated, converting all or most of your 401K/IRA will likely simplify life for that surviving spouse.
Doing so removes a chunk of tax confusion and complexity for them. And your heirs as well. Do you want to drive them into higher tax brackets, potentially in their peak earning years?
Great video Josh. Oftentimes the "experts" are wrong…
Wazzup Freddy?
My state (Washington) has a relatively low estate tax. Doing roth conversions can shield some of the estate from future taxation.
You are 100% correct about the widow's tax trap. The other thing that academics ALWAYS get wrong is when taking RMDs, there is NO 10% or 12% marginal tax bracket due to the Social Security tax torpedo. Depending on the amount of Social Security you receive, the 10% bracket becomes 15% or 18.5%, the 12% bracket becomes 18% or 22.2%, the 22% bracket becomes 40.7%. In 2026, these rates go higher!!
Excellent video