Great video. My dad recently died at age 88 and even after taking RMDs for many years, he left a large IRA balance due to gains on the accounts (mostly invested in stock funds). My point is when doing the comparison to decide on converting, done assume you will pay tax on the full account but take into consideration your heirs tax brackets. If you have multiple beneficiaries, you may want to give more of the tax deferred money to the one with the lowest tax bracket and more non taxable to the one with the higher tax bracket. Another factor is State tax. Will you be retiring to Florida with zero tax vs paying to convert today in a high tax state. Then there is IRMAA which can cut both ways, meaning conversions can put you in IRMAA today and/or help avoid IRMAA in the future. At the end of the day you have to do the math and see what is best.
Unless you have a lot of other income outside your IRA and SS, RMDs are not going to put you into IRMAA surcharges, which kicks in at higher incomes each year adjusted for inflation. Even a $5m IRA year one RMD is less than $200k and won’t cause an IRMAA issue a few years from now when RMDs start.
RMDs in and of themselves are not a bad thing. It depends on where your after tax net worth ends up, which you won’t know until 10 years after you die, when your heirs empty the accounts. Each individual situation is different. One example is when you have both a large 401k and large taxable account. A strategy could be to spend down the taxable account or reallocate the money to tax free items such as municipal bonds or MLPs or cash value life insurance or even growth stocks or real estate where your heirs get a step up in basis. You now have freed up space to take your RMDs taking advantage of the standard deduction and lower tax brackets that are both adjusted annually for inflation. Yes your RMDs are more than they would be if you converted to Roth, but more are taxed at zero or lower tax rates, especially in those first few years. Year 1 RMD on $1m is only $40k, which could all be taxed at zero (projecting out the standard deduction adjusted for inflation). Bottom line is you have to do the math. Less tax and less RMDs does not automatically make for a better plan
Great vid and point about the need to be forward thinking with your plan and take acion earlier! The root cause of this issue is the pension and probably no Roth option. My initial thought is that I'd rather have (ha!) a 401(k) or 457 with Roth and trad options. So I can control where my contributions go. It's not easy or fast to change government.
How do you deal with the increased tax payment generated by the conversions? ex. $25,000 @ 24% = $6000. If you do a portion monthly are the taxes paid at that time so you don't get caught with your pants down at the end of the year?
I appreciate your detailed explanations about how people “should have” methodically planned BEFORE age 72 to get $$ transferred over to Roth. But, that said, what can be done after RMD’S start?? Not everyone is even clued into the IRA tax jab, but some of us who came lately into understanding really need some help coping now. Should coulda woulda.
I think that it is important to note that total tax saved is a misleading stat. A better stat is a post taxed future value of retirement assets. I would use 85% of any tax deferred funds minus the state tax rate. The reason is that taxes collected on an IRA conversion are lost at the conversion but the IRA, when not converted continue to grow at the investment growth rate and then get paid later. Taxes paid on the growth of that money is of no loss to the retiree. The goal of your algorithms should be to optimize the future value of post taxed retirement accounts.
Ralph, I'm not sure I'm understanding your example here. It sounds like your saying you have to factor in the cost of the growth lost on the taxes paid on a conversion.? This is a common mistake we see people making. If you assume the growth rate and tax rate is static in both calculations, there is no difference in future value. Paying 15% on $100,000 now during a conversion will end up being equal to letting that $100,000 grow and paying 15% in taxes in the future. Conversions work by paying less in taxes now then you will be subject to in the future. I apologize if I am misunderstanding what you are trying to say.
Don't go 100% pre tax into a 401k during your career. I did that. I should have split it. Pay the tax when my income was low. Now I see my RMDs will be taxed away,. I'm going to do conversions until 73 but it won't be enough.
Can you clarify @13:48 and you said both of them start their RMD (in green) at 72 in year 2038. Then what is the green in the previous 7 years. It will help if the ages are also on the horizontal axes. Thank you.
This is the first year they are both having to take an RMD. One spouse is younger but has less of the tax-deferred assets so that is why there were smaller green bars leading up to 2038. "It will help if the ages are also on the horizontal axes." - Noted. Thank you
The one flaw in the analysis is assuming the “income brackets” are the same now as in 20 years. It won’t be. Most feel “tax rates” will go up but many are not talking about the “income brackets”. Go back to Year 2000 and 22 years ago 31% bracket started at 63,550 for single. Even in 2015, one could have had retirement income of 90k and be in the 25% tax bracket. So it would be proper to assume that come year 2030 the income bracket would have been raised yet again. One could most likely have retirement income over 100k and still be in a 15% bracket. Still doesn’t hurt to convert some to Roth and just let it grow. Better to have some extra cushion in retirement also vs none. Also the Standard Deduction keeps increasing year after year. In 1997 it was 4,150. It’s now 12-13k for single. What will it be in 2030? 16k?
@@SafeguardWealthManagement at 9:36 of your vid you have a chart which has The Cascade of Tax Problems. In the after column you have “Tax Bracket Hikes”. You even discuss it as a “problem”. You’re focusing more on the 22% which may eventually be in the 28%. That’s why consider Roth conversion now in these Trump tax cut years. Yes? All I stated was that you’re making the viewer assume it works like below: Married/Jointly: 81,051-172,750 22% After tax cut ends 81,051-172,750 28%. Not sure if I missed the portion where you adjusted the “income” bracket. Can you point out where? In reality the 28% bracket in 20 years will be more like 150k-300k. Yes? But you’re using the same dollar figures of withdrawals. So somebody taking out 35k in RMD’s 20 years from today won’t be at 31%. Did I miss something? One could argue with the way the country is going meaning more socialist that this trend won’t be the same. But like I said most don’t present it this way anyhow. I believe I made a fair comment. It’s still a great vid.
@@f430ferrari5, please don't take offense to this, but I think you may be misinterpreting. Or maybe we miscommunicated. After 2025, the 22% doesn't become 28% but rather 25%. The 24% becomes 28%. At 5:35 and 12:35, you can see adjustments on the tax graph for both the slight adjustment in brackets in 2026 as well as adjusted for inflation through time. The $35k RMD is math is shown looking at the 2020 tax year. RMDs typically grow through time due to investment performance and the life expectancy factor part of the equation decreasing. So RMDs are set to grow much faster than tax bracket inflation adjustments. I'm just not seeing where I said that brackets would stay static in retirement.
@@SafeguardWealthManagement thanks for the correction on the “rates” but it’s more a “formality”. 22 to 25 and 24 to 28. Also thanks about the graph but perhaps it just wasn’t very transparent. Yes the 35k RMD is math looking at a 2020 tax year but this is for a 72 year old where 35k was a lot of money 30 years ago. We are talking “income” brackets here from my point of view. You’re using a denial of you never said “brackets” would stay static in retirement. Maybe the point is in my view is that you never “emphasized” “income” brackets will most likely not remain static in retirement years. You can’t guarantee that the income and marginal rate brackets will even be the same after the tax cuts end. I can’t guarantee it either. Example: 81-172k at 22% now but in 2026 it could be like this 96-190k at 25%. In 2026 the standard deduction can also be 28k not 25k. You could be a little more transparent. I’m not sure if you’re pushing all in Roth conversion either. There are other vids out there which discourage doing any Roth conversions at this time. I don’t think this is correct either. It would seem best to have a balance of both. I have yet to see a vid which focuses more on “balance”. It doesn’t seem to be 50/50 either going into retirement. Roth vs traditional.
Thanks for subscribing! Unfortunately, I don't know of a great online calculator. Even a lot of paid options are not great. We've had to develop a lot of our own software
👍👍 Liked the walk through of the tax rates graph for each topic. Also liked how you showed how large RMDs can grow and the required conversion to address them.
Great video. My dad recently died at age 88 and even after taking RMDs for many years, he left a large IRA balance due to gains on the accounts (mostly invested in stock funds). My point is when doing the comparison to decide on converting, done assume you will pay tax on the full account but take into consideration your heirs tax brackets. If you have multiple beneficiaries, you may want to give more of the tax deferred money to the one with the lowest tax bracket and more non taxable to the one with the higher tax bracket. Another factor is State tax. Will you be retiring to Florida with zero tax vs paying to convert today in a high tax state. Then there is IRMAA which can cut both ways, meaning conversions can put you in IRMAA today and/or help avoid IRMAA in the future. At the end of the day you have to do the math and see what is best.
"The only thing worse than having to pay taxes is NOT having to pay taxes."
~ Oscar Wilde
Unless you have a lot of other income outside your IRA and SS, RMDs are not going to put you into IRMAA surcharges, which kicks in at higher incomes each year adjusted for inflation. Even a $5m IRA year one RMD is less than $200k and won’t cause an IRMAA issue a few years from now when RMDs start.
RMDs in and of themselves are not a bad thing. It depends on where your after tax net worth ends up, which you won’t know until 10 years after you die, when your heirs empty the accounts. Each individual situation is different. One example is when you have both a large 401k and large taxable account. A strategy could be to spend down the taxable account or reallocate the money to tax free items such as municipal bonds or MLPs or cash value life insurance or even growth stocks or real estate where your heirs get a step up in basis. You now have freed up space to take your RMDs taking advantage of the standard deduction and lower tax brackets that are both adjusted annually for inflation. Yes your RMDs are more than they would be if you converted to Roth, but more are taxed at zero or lower tax rates, especially in those first few years. Year 1 RMD on $1m is only $40k, which could all be taxed at zero (projecting out the standard deduction adjusted for inflation). Bottom line is you have to do the math. Less tax and less RMDs does not automatically make for a better plan
Great vid and point about the need to be forward thinking with your plan and take acion earlier! The root cause of this issue is the pension and probably no Roth option. My initial thought is that I'd rather have (ha!) a 401(k) or 457 with Roth and trad options. So I can control where my contributions go. It's not easy or fast to change government.
How do you deal with the increased tax payment generated by the conversions? ex. $25,000 @ 24% = $6000. If you do a portion monthly are the taxes paid at that time so you don't get caught with your pants down at the end of the year?
I appreciate your detailed explanations about how people “should have” methodically planned BEFORE age 72 to get $$ transferred over to Roth. But, that said, what can be done after RMD’S start?? Not everyone is even clued into the IRA tax jab, but some of us who came lately into understanding really need some help coping now. Should coulda woulda.
The only thing I know to do is to do a qualified charitable donation with your rmd. It has to go directly to charity.
I think that it is important to note that total tax saved is a misleading stat. A better stat is a post taxed future value of retirement assets. I would use 85% of any tax deferred funds minus the state tax rate. The reason is that taxes collected on an IRA conversion are lost at the conversion but the IRA, when not converted continue to grow at the investment growth rate and then get paid later. Taxes paid on the growth of that money is of no loss to the retiree. The goal of your algorithms should be to optimize the future value of post taxed retirement accounts.
Ralph, I'm not sure I'm understanding your example here. It sounds like your saying you have to factor in the cost of the growth lost on the taxes paid on a conversion.?
This is a common mistake we see people making. If you assume the growth rate and tax rate is static in both calculations, there is no difference in future value.
Paying 15% on $100,000 now during a conversion will end up being equal to letting that $100,000 grow and paying 15% in taxes in the future. Conversions work by paying less in taxes now then you will be subject to in the future.
I apologize if I am misunderstanding what you are trying to say.
Don't go 100% pre tax into a 401k during your career. I did that. I should have split it. Pay the tax when my income was low. Now I see my RMDs will be taxed away,. I'm going to do conversions until 73 but it won't be enough.
Don't you need to have earned income to be able to do a Roth conversion?
No.
Excellent video. Perfect timing! I like your slides, easier to understand on the old brain.
Kenny. Budman.
Thanks Kenny!
Can you clarify @13:48 and you said both of them start their RMD (in green) at 72 in year 2038. Then what is the green in the previous 7 years. It will help if the ages are also on the horizontal axes. Thank you.
This is the first year they are both having to take an RMD. One spouse is younger but has less of the tax-deferred assets so that is why there were smaller green bars leading up to 2038.
"It will help if the ages are also on the horizontal axes." - Noted. Thank you
Fantastic info. Thanks for providing this.
Thanks Paul!
Let me check and see if I am going to care if I pay a lot of tax at 90 or 95 LOL. Nope at that point I will be just happy to be alive. K
Do you do fee only planning?
Yes, our fee is asset-based, however, and not hourly.
The one flaw in the analysis is assuming the “income brackets” are the same now as in 20 years. It won’t be.
Most feel “tax rates” will go up but many are not talking about the “income brackets”.
Go back to Year 2000 and 22 years ago 31% bracket started at 63,550 for single.
Even in 2015, one could have had retirement income of 90k and be in the 25% tax bracket.
So it would be proper to assume that come year 2030 the income bracket would have been raised yet again.
One could most likely have retirement income over 100k and still be in a 15% bracket.
Still doesn’t hurt to convert some to Roth and just let it grow.
Better to have some extra cushion in retirement also vs none.
Also the Standard Deduction keeps increasing year after year.
In 1997 it was 4,150. It’s now 12-13k for single. What will it be in 2030? 16k?
Who is assuming income brackets are the same now as in 20 years? Tax brackets adjust to inflation. This is reflected in our analysis in each video.
@@SafeguardWealthManagement at 9:36 of your vid you have a chart which has The Cascade of Tax Problems.
In the after column you have “Tax Bracket Hikes”. You even discuss it as a “problem”. You’re focusing more on the 22% which may eventually be in the 28%. That’s why consider Roth conversion now in these Trump tax cut years. Yes?
All I stated was that you’re making the viewer assume it works like below:
Married/Jointly:
81,051-172,750 22%
After tax cut ends
81,051-172,750 28%.
Not sure if I missed the portion where you adjusted the “income” bracket. Can you point out where?
In reality the 28% bracket in 20 years will be more like
150k-300k. Yes?
But you’re using the same dollar figures of withdrawals.
So somebody taking out 35k in RMD’s 20 years from today won’t be at 31%. Did I miss something?
One could argue with the way the country is going meaning more socialist that this trend won’t be the same.
But like I said most don’t present it this way anyhow. I believe I made a fair comment.
It’s still a great vid.
@@f430ferrari5, please don't take offense to this, but I think you may be misinterpreting. Or maybe we miscommunicated. After 2025, the 22% doesn't become 28% but rather 25%. The 24% becomes 28%.
At 5:35 and 12:35, you can see adjustments on the tax graph for both the slight adjustment in brackets in 2026 as well as adjusted for inflation through time.
The $35k RMD is math is shown looking at the 2020 tax year. RMDs typically grow through time due to investment performance and the life expectancy factor part of the equation decreasing. So RMDs are set to grow much faster than tax bracket inflation adjustments.
I'm just not seeing where I said that brackets would stay static in retirement.
@@SafeguardWealthManagement thanks for the correction on the “rates” but it’s more a “formality”. 22 to 25 and 24 to 28.
Also thanks about the graph but perhaps it just wasn’t very transparent.
Yes the 35k RMD is math looking at a 2020 tax year but this is for a 72 year old where 35k was a lot of money 30 years ago.
We are talking “income” brackets here from my point of view.
You’re using a denial of you never said “brackets” would stay static in retirement.
Maybe the point is in my view is that you never “emphasized” “income” brackets will most likely not remain static in retirement years.
You can’t guarantee that the income and marginal rate brackets will even be the same after the tax cuts end. I can’t guarantee it either.
Example:
81-172k at 22% now but in 2026 it could be like this
96-190k at 25%.
In 2026 the standard deduction can also be 28k not 25k.
You could be a little more transparent. I’m not sure if you’re pushing all in Roth conversion either.
There are other vids out there which discourage doing any Roth conversions at this time. I don’t think this is correct either.
It would seem best to have a balance of both. I have yet to see a vid which focuses more on “balance”. It doesn’t seem to be 50/50 either going into retirement. Roth vs traditional.
New subscriber here. Do you know of some sort of online calculator to help us with all of this? It is so confusing to plan.
Thanks for subscribing! Unfortunately, I don't know of a great online calculator. Even a lot of paid options are not great. We've had to develop a lot of our own software
👍👍 Liked the walk through of the tax rates graph for each topic. Also liked how you showed how large RMDs can grow and the required conversion to address them.
Thanks Nadine!