ROTH conversions can be a great strategy but you need to be careful.
In this video, we discuss things you should consider before you decide to do a ROTH conversion.
Here is a basic IRA-ROTH IRA calculator
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Thank you for this video!
many words but little content
Pay taxes out of taxable accounts, Delay SS till IRA is converted (if reasonable), You have to models how much to convert to optimize expected portfolio value. Quit watching how much tax you pay because post tax money grows at the same rate as pretax money and the ratio stays the same if the tax rate stays the same. You should not convert if you are in a higher bracket than when you retire (including effects of RMDs). Watch what happens to SS tax and Medicare when RMD are finally required. Live off IRA and save your taxable account if conversion is not reasonable. Large RMDs can be a big whammy if you ain't careful. …
Thanks for your video. Question: If someone is already over 59.5 years old and does a Roth conversion, do they still have to wait five years before withdrawing funds from that new Roth account?
Seems like the only reasonable window of opportunity for these conversions is between age 60 and 70. My main problem currently is the unpredictability of the size of the capital gain distributions from my non-IRA mutual funds.
the big benefit of doing a roth conversion comes if you are currently in a lower tax bracket than the one in which you forecast for the future. This way you can pay tax on the converted funds at 10% or 12% instead much higher brackets (22% to 37%) that you are forecasting for the future.
Roth conversions make the most sense if you are retiring early and have a window of time when you taxable income will be much lower than when you were working, or when you get into your 70s and have to do the Required Minimum Distributions.
Roth conversions done while you have a relatively high level of taxable income doesn't seem to have much benefit.
What is I transfer after tax money to traditional ira, not invest it and then convert to Roth ira., do I need to pay any more taxes?
If you rolled over a old 401k into an IRA, can you move that money back into a current 401k and avoid the pro-rata rule later when you move money into a Roth IRA?
Can you put it in an HSA without penalty?
This guy's analysis seems flawed.
I always thought a traditional IRA was a good deal as long as the contribution was deductible because I thought I would need less income in retirement and therefore, I would pay less tax when I withdraw the money. Turns out, I need almost as much money in retirement as I did while working (I have bought a few luxury items that I never would have bought when working), so all I did was delay paying the tax. But a Roth seems like a much better deal, especially while the stock market is going up rapidly and my investments are making a lot of money. I started contributing to a Roth about 10 years after they first came out, but wish I had pumped in the maximum I could have to my Roth. I also bit the bullet and converted some inherited funds to the Roth and paid the tax, and that has turned into a fantastic windfall for me due to stock market investment increases. As noted, the Roth is much better for estate planning.
There’s not enough time remaining for me to get a Roth conversion done and have it count towards 2020. What if I was able to take out a disbursement (from a 403b) in the next remaining week and then deposit it into a Roth in January? Would that taxable event still count towards 2020?
Some great things to consider – thanks.
Let’s take your $100K example. Yes, I’ll likely have to pay 24% on a large portion of that, but even if I leave it in a standard IRA, I’ll probably be stepping into the 22% bracket when I withdraw.
Not that simple, and lots of variables – but I look at it as how much EXTRA tax would I pay on a conversion rather than simply how much tax. Makes the justification clearer (at least to me).
Thanks again.
I thought maximum yearly contributions for a Roth is $7,000. How do you convert $100,000 into a Roth if you can only invest $7,000 a year?
Tax rates will be lower if President Trump gets re-elected, Biden is campaigning on a 4% tax increase across the board to afford the green new deal. My point- vote according to your retirement plans in 2 months.
so hard to understand
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I have a 401 k fund at work with a split amount of savings in roth and conventional IRAs invested in High cap funds.
The amount of IRAs that i'm allowed to convert to Roths changes depending on the value of the Fund.
Lets say that I have saved $100,000.00 in IRA and the value of my stock has devalued to $20,000.00 , And I convert the $20,000.00 to a roth at this low stock Value.
Will I pay income Taxes this year on only the converted value ($20,000.00 ) when I convert it to Roth? Thus avoiding Taxes on $80,000.00
or am I still liable to pay the original amount that I saved in a IRA. of ($100,000.00 0)
i am new in investment how do i find the best person who can aid me earn more income in my investment
Don't ignore the fact that tax will be due on any distributions; the question then becomes when will I have the lowest marginal tax rate. If you have cash to pay the tax and expect your marginal tax rate to be higher in future, conversion to a Roth will likely make sense in the absence of mitigating circumstances. A good period to examine is the time from retirement to 70.5 when RMDs begin if you retire before 70.5. You may have more flexibility in managing taxable income during this period.
Where in the world do you get a 28% rate on the 100k. It's more like 20%. If you are going to give advice at least try to be accurate
I wish I had started doing Roth conversions earlier, as I only have a few years till I have to start taking RMDs now. But at least I won't be paying the taxes out of my IRA assets (for the conversion).
I’m 53 retiring at 55 and yes I’m converting 1.2M NOT in my ROTH 401k to the ROTH IRA. In your break even analysis you did not take in to account the following:
1) Medicaid premiums at 65 are based on AGI and if we use your scenario, anyone making over 85k (individual) and 170k(couple) has to pay the increased monthly premiums for Medicare, medigap and the prescription drug plan. It gets worse in a widower scenario and when RMD’s kick in.
2) SSI subject to tax based on your income from before tax Qualified plans
Assuming I live to my 80’s (God only knows) and wife lives to 90 that is 25 years of Medicare and 20 years of SSI(assuming we take SSI at 70) taxes we’ll have to pay. I am assuming good health of course and having the income to pay the tax, moving to a 0 income tax state in retirement, moving money over incrementally to minimize the tax before 65… the ROTH seems to be the only thing the little guys got…
There's a few issues with stealth tax that people need to use in order to decide whether the Roth conversion is worth it or not. Obamacare premium is one of those stealth tax. If you leave work and no longer have employer covered health insurance and are under age 65, there's a good chance you will be relying on Health Insurance purchased from Affordable Care Act Marketplace. The premium will vary significantly based on your income and your age. Between Adjusted Gross Income of 200% to 400% of federal poverty level (FPL) (which is hardly rich), the additional cost hovers around 15% flat rate up to the cost of the premium of the 2nd lowest cost of a silver plan. 15% added on top of your federal income tax and your state income tax. Suppose your tax bracket is at 12% and this issue with Obamacare raises the effective bracket to 27% even if you had no state income tax. This implies that your tax bracket can actually be higher than when you were working. At age 63, there's another stealth tax potential that impacts higher income people. The Medicare part B premium and drug coverage premium are increased after adjusted gross income is above $85,000 for single people and $170,000 for married filing jointly. The premium can rise upward of more than 3 times as much–the slope is more gradual at around 5% but this will vary depending on how high medicare premiums will be when you are ready to enroll in it. Why age 63? The income based monthly adjustment is based on income that happened 2 years prior to the year you are paying for medicare. The third issue is 3.8% Net Investment Income tax that impacts those making more than $200,000 for single and $250,000 for married filing jointly. While the medicare premium increase and this 3.8% increase does not seem to impact too many people now, the lack of inflation indexing over 10% on the medicare premium adjustment and the complete lack of inflation indexing on the 3.8% Net Investment Income thresh hold makes longer range planning more problematic. The 4th issue is that Social Security Income is taxable based on its own unique way of calculating Modified adjusted gross income = 1/2 of your social security + other income including tax free bond interest but NOT including Roth distribution. The distorted effective tax bracket can rise to over 40% even without state income tax and at a very very low income range. So it is complete mythology to presume that your tax bracket is going to be lower at retirement for a very large proportion of the population in variety of income range (not just the rich). Seeing these different issues, it might actually pay to contribute to the Roth, convert to anything you can to a Roth as soon as possible except maybe a small balance in the traditional retirement for strategic opportunity when the market tanks. It is also prudent to pester your employer to offer the Roth option on your 401(k), 403(b), or 457(b) plan if they don't currently offer it so that you can convert to a Roth earlier. It's much easier to convert a $100,000 balance over many years than trying to convert $500,000 over just a few strategic years and retain the same real effective tax bracket after all of the stealth tax situations are considered.
Roger – I doesn't seem like you are factoring in the purchasing power of your traditional IRA/401K. If you are in the same tax bracket during retirement as you are now, it's break even on day #1 (assuming you pay the taxes from after-tax $$$). In the 22% marginal tax bracket, $1 million is worth $780K in purchasing power.
Another factor rarely mentioned is the social security tax torpedo. Assuming a low (or no) pension, withdrawing from traditional accounts ADDs tax to your social security.James Lange has great videos on Roth Conversions and addresses purchasing power.
Love this video! I was looking at doing the Roth conversions not only to avoid RMD's but also to delay starting social security. Does that make since to you? Thanks
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