Roth conversions can be a wonderful tool. When used inappropriately, it can do more harm than good. Here are 4 instances where you should NOT do a Roth Conversion.
Timestamps:
00:00 – Introduction
1:22 – Tax-Free Future
3:28 – Mortgage Payoff Example
5:31 – Example
7:45 – RMD (Required Min Distributions)!
10:35 – QCDs (Qualified Charitable Distributions)
11:55 – RMD Requirement!
13:10 – Summary
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4 Reasons You Should NOT Do a Roth Conversion
A Roth conversion is a financial strategy that involves converting funds from a traditional individual retirement account (IRA) into a Roth IRA. This conversion comes with several advantages, including tax-free withdrawals in retirement and no required minimum distributions (RMDs). However, there are certain circumstances where a Roth conversion might not be the best choice. Let’s explore four reasons why you should reconsider doing a Roth conversion.
1. High Current Tax Rate: One of the main reasons to forgo a Roth conversion is if you find yourself in a high tax bracket at the time of conversion. A Roth conversion requires you to pay income taxes on the amount converted, so if your current tax rate is substantially higher than what you anticipate in retirement, it may not be beneficial to convert. Instead, it might be wiser to keep the funds in a traditional IRA, where you can benefit from tax deductions now and potentially withdraw the funds at a lower tax rate later.
2. Insufficient Funds to Pay Taxes: Converting to a Roth IRA may result in a hefty tax bill. If you don’t have enough cash on hand to cover the taxes owed, it might be prudent to delay the conversion until you can afford it. Using funds from the IRA itself to pay the taxes is generally ill-advised, as it can trigger early withdrawal penalties and diminish the long-term benefits of the conversion.
3. Close to Retirement: If you are within a few years of retirement, a Roth conversion might not be the most effective strategy. The short-term tax hit may not be worth it if you won’t have enough time to take advantage of the tax-free growth that a Roth IRA offers. Additionally, your retirement income might be lower, potentially placing you in a more favorable tax bracket. In such scenarios, exploring other retirement planning options might be more suitable.
4. Anticipated Changes in Tax Laws: Tax laws are subject to change over time, and it’s important to consider potential future revisions when considering a Roth conversion. If you anticipate that tax rates will decrease in the future, it might be more advantageous to delay the conversion until rates are lower. However, predicting tax changes can be challenging, and it’s crucial to consult with a financial advisor or tax professional to assess the potential impact of tax law changes on your specific situation.
In conclusion, while a Roth conversion offers numerous benefits, it may not always be the right choice for everyone. Considering factors such as current tax rates, tax payment capability, proximity to retirement, and anticipated tax law changes is essential in determining whether a Roth conversion is suitable for your financial goals. Consult with a professional who can provide personalized advice based on your unique circumstances to make an informed decision.
Consider the Infinite Banking Concept as an alternative to Markets. Just a thought.
The best simple to understand video on Roth conversion
People put too much emphasis on avoiding a higher tax bracket. The real goal is to maximize after-tax dollars in your pocket, which might actually be achieved with higher tax brackets.
I have been planning for 5 years around the notion that I will have RMDs starting at 70 1/2 .. aka this year (2023) … but since congress keeps pushing back RMD age .. I have been thinking “Great! Now I can do a Roth conversion”
BUT .. after a financial scare, I started to prioritize paying off my mortgage, and instead dropping my annual budget. So NOW I’m thinking … maybe I should just stick to the original plan, take out the 401k $ this year ANYWAY, and pay off my mortgage by 2025, essentially in 3 big payments.
NOW I can take that mortgage payment and instead, put it into a brokerage account. I am thinking this is a safety hedge?
Any thoughts on this? Basically it would only be 5% of my 401k each year. I’m expecting taxes to go up in 2026 so now is a better time to withdraw?
How about addressing one spouse dies early and the other dies late
Come on you " MoMos " give me some feedback and replay !!
Lets see? I gift 100,000.00 to a charity. " I am out 100,000.00 !" I keep 100,000.00 and I pay 34% IRS tax = 34,000.00 to the IRS , but I keep $66,000.00. Truck the charity! What kind of advice is this — uh, stupid advice…
Could you do a video on what to do with a 401k that is 80% pretax and 20% post tax.
Thank you for your analysis. I have a question regarding the cost and potential tax deductions for long term care. If someone has a large RMD distribution with 180k AGI but is paying 100k per year for long term care wouldn't their tax liability be reduced by 82k (LTC expense over 10% of AGI)? Would this be a valid consideration in not doing Traditional/Roth IRA conversions when considering the expense of LTC and its tax deduction affect on their marginal tax rate?
You’re right, I am terrified because the RMD percentages just keep going up and up. To me, would I be right in thinking this is a compounding tax bite each year? Part of me just wants to bite the bullet, and withdraw as much as I can over a 3 year period. For instance, let’s say someone has a pre-tax portfolio of $1 million dollars and $1 MM in after tax accounts. Over a course of 3 years, take out $335,000 each year from pre-tax. Add in SS and/or pensions which mean income will likely be over )400K for 3 years. Or, maybe take out just enough to keep income under $400K. Tax liability will be big (unless doing a QCD), but the nightmare will be OVER WITH going forward and the money left will only continue to grow for years to come with no RMDs required and feeling free after suffering through this for 3 years. Thoughts?
Might I consider a Roth conversion when my taxes are low, and I plan an activity with a tax credit greater than my tax liability? I'll be getting those $$$ back with the tax credit.
If you are under 65 and are getting ACA subsidies it probably doesn’t make sense to do a Roth conversion.
I am concerned about the nonspousal inherited IRA law requirements that force one to withdraw and deplete the inherited IRA within 10 years. IMy siblings and I were not aware of this law and I bet many of your viewers do not know of this law and it can have a great tax impact on the beneficiary.
The 5 th reason being if you don’t have enough money from savings or brokerage accounts for conversion.
My situation with my spouse may be unique, we retired early 56 and 62 (2 years ago), we got an inheritance (non taxable event). We were going to do some Roth conversions but we discovered that we qualified for free medical due to our income being so low. We are now supplementing with one spouse doing early Social Security and some rental income. My point of the planning is considering medical costs in your planning, in our case we are able to conserve our capital for longer by not having an outlay for medical expenses.
poor health. May die before rmd kicks in
i got laid off from work and thought i would put money in an ira since i couldn't put it in a 401k plan. once i put it in a traditional ira (since my salary and severance package put my wages too high to go straight into a roth ira), i then did the backdoor roth strategy by converting the ira money into a roth. i didn't even realize that when doing roth conversions, you have to look at all your ira accounts. i have a larger ira account that another financial planner manages that has money in it that hasn't been taxed. now, the money i converted (even though it was money that had already been taxed), i will have to pay taxes again on when i did that conversion. My financial planner is from one of those big companies that has different departments i could/should have consulted. when i talk to the person i normally do with this financial advisor company, they always tell me to talk to my cpa about tax issues like you mention in your other videos. my old financial planner was a smaller office that had cpa's, social security experts, etc.
I am more concern about fees pay to 403b manager vs self manage Roth IRA. I believed I paid almost $3K every year for my 403b manager whether I market ups or down.
I am wondering if you have future properties you plan to sell (a real estate property that was inherited) the income will raise your tax bracket. So then a conversion would not make sense? right?
You are a cute guy !!!!!
Loved the info on charitable giving through the IRA. I've never heard this before and it will probably keep me in the 12% tax bracket for the rest of my life. Thanks!
It is better to invest now,. You will never be younger than you are today and there will never be a perfect time to invest. Due to compounding, which Einstein called the 8th wonder of the world, you can get rich slowly from investing if you do it from a young enough age..
yes
Thanks for what you do, great videos…would love to see video that explains how bucket strategy and 60/40 portfolio should be used together
Taking money out of a roth doesnt count against the social security earnings limit and it is not taxed so it doesnt raise the percentage of tax taken on your social security you do make
RMD gets larger over time. It might be 80k in the beginning but 250k later. RMD money cannot go into a Roth. I'm paying 24% FED 6% State doing Roth conversions. It's a gamble it will grow tax free much more than the increased tax I'm paying now in a few years. I pay the tax out of income to maximize the Roth conversion. I will never be in a lower tax bracket either.
All good reasons, however, you also want to understand tax consquences of your beneficiaries if you plan to leave money to someone. Taxes on pretax money is more complicated, and could be higher for the beneficiary. It might be worth paying a little higher taxes doing a roth, than leaving rhe tax problem to the beneficiaries. Just consider that when saying no for those four reasons.
Graduated income tax is brutal on people who have worked hard and saved then the RMDs withdrawals are beat down with taxes.