another unknown is the possibility of years of assisted living expenses. If you end up with years of assisted living expenses, these expenses can be deducted and cover the taxes you would pay on your RMD's. Much better to pay these assisted living expenses from your IRA than from your Roth.
I was just going to comment this. Very very few people understand this. You can deduct any qualifying medical expenses >7.5% of your income. Home health care, assisted living, nursing home, retrofitting your house for accessibility, all standard medical expenses etc.
Thank you for all the great content. It's so much easier, in many ways to work, bring home a paycheck, healthcare, let my 401k grow, ect. Wow, retirment is so overwhelming and complicated!
Just did our first conversion. Seven more to go. Able to pay taxes out of brokerage which helps. Primary reasons for doing it is to avoid the widow tax with RMDs (we are not dying at the same time) and to make sure that my children do not get a tax bomb when they inherit what is left in our estate. Both kids are in high paying professional jobs and will be crushed by a taxable windfall.
Good video. It highlights an important issues related to Roth conversions, which is focusing on the tax savings will make Roth a better choice in many more scenarios than focusing on the correct item which is after tax wealth. It takes much longer for a Roth to pay off when looking at after tax net worth. In fact, you can defer and pay twice as much tax and still come out ahead if those tax dollars are paid by you or your heirs at lower rates (%) than you would pay on the conversion
Excellent videos overall! I appreciate the one video where you included a single person as an example. Far too many retirement advisors focus on married couples only. Also, please include some state taxation on retirement accounts in at least some of your calculations. I know states are different but many states do tax capital gains so how does that affect retirement financials? You can choose say 4 or 5% state taxation on capital gains as an example. Does it fundamentally change anything?
There are many examples which shows the math where the roth vs IRA comes out as a wash if all conditions are the same. There is no break even point. Now we know things are not the same as we transition into IRMMA for medicare, RMD, and higher tax bracket/rates changes in the future. All of these points to a Roth being more advantaged.
My Roth conversion paid off immediately. My wife and I had to keep our reportable income at a certain level in order to qualify for subsidies on our health insurance. When we had an emergency come up we used the Roth conversion to pay for it and kept it from disqualifying us from the subsidies.
Only if you are under 59 and 1/2. Once you are over 59 and 1/2 and you have had ANY Roth IRA open for at least 5 years then all distributions are qualified and tax free. I opened a Roth when they first started and funded it each year. Then I retired at 61 and converted some of my company retirement funds into a Roth at my local bank. Since I had paid the taxes on the conversion and I was over the required age I had immediate access to the money.
But a Roth conversion DOES result in reportable income and it WILL affect your subsidies in the year that you take it. Unless you are saying it was worth it to give up the subsidies in that particular year? And if that was the case, why not just do a full conversion and then get both the full subsidies and the tax-free income going forward?
A lot of the perceived "saved tax $$" is merely because one now has less $$ after the Roth conversion, thus one pays less taxes on less $$. It's counterintuitive, but consider: having more $$ usually means paying more taxes. So your point about solving for *both* needs to be balanced. One thing not considered is the devaluing of $$ over time via inflation. Those $$ lost up front are worth more than $$ paid as taxes later. You should recalculate these numbers with that in mind.
But the odds are RMDs will push you into a higher bracket, and if you are working making good six figures I don't think it makes a lot a sense unless you just use cash to pay the conversion
@@scotth3354 If you stay in the same tax bracket. Some people will, and some won't. Some people should, and some won't be able to. The latter are the better off ones.
Thanks, their realistic life expectancy is 80 and 82, so convertions only good if retire early and have a big window? Don't really need the spousal longevity insurance as taking SS at 70 so is covered?
As I understand it, this is assuming an average market return. One of the biggest risks early in retirement is sequence of return risk…you get multiple years of low returns while also selling investments to live off of. If you have several years of poor returns right after doing a Roth conversion it seems the break even would take even longer. So on average it might be a good thing but worse if you do it and then have a period of low returns. At least that’s how I think about it.
I think the question is, not how much taxes you pay or save, but what strategy yields the most money long term. I modeled the following. Assume you have $1M in an IRA, and the tax will be a total of $300k, and you covert the $1M over 5 years to stay in a lower bracket, and also of course spread the tax payment over the same 5 yrs. Then run out how much you have in 20 yrs, 30 yrs. Now scenario 2: instead of converting, take that money you have in cash or equivalent, and invest it in S&P500 for 20 yrs, 30 years, you’ll have enough growth from that investment to pay the taxes on your RMD’s as well as the taxes needed to cover the withdrawal to pay the taxes. I even modeled the taxes going up 35% and it the accounts still had more in them at 30 years then they would have if you had paid the taxes now and converted. So to me it seems to be a question of are you looking to pay less in taxes, or have the most money. The models in Right Capital don’t seem to consider this angle. What you’re giving up on the growth of the money used to pay taxes now.
@@foundryfinancial I either didn’t explain it right or you aren’t understanding. What I’m saying is that it does not make sense to convert because of the amount that you make on what would have been used to pay taxes makes more than enough to cover all the taxes for RMDS and more.
@@gehartman I think this is why you should not pay the taxes from the conversion money, but from a separate taxable account. So the full amount can grow tax deferred. Then it becomes a comparison of taxes now versus taxes at a possibly higher rate in future. I think of it as effectively moving money from the taxable account into the Roth.
Great info, my dilemma is that we have a sizeable amount of retirement savings in traditional IRA, just don't have that much cash to pay for the conversions, the only way would be from the conversation itself, and I'm not sure if that would be worthwhile.
Don’t be afraid of paying for the conversion using distributions from your traditional IRA. The real question is how much to convert and how much to convert each year. For this you need deep understanding of tax brackets, IRMAA, and the RMD schedule. Answer depends on your age, how large your IRA savings actually are and expected income in retirement (Social Security, pension, etc).
You can do that ONLY if you are already 59 1/2 where the part of your ira you use to pay taxes wont be charged the additional 10 percent penalty. The portion you use to pay the taxes is considered earnings and NOT a conversion so taxes will be assessed. If you are not 59 1/2 then you will pay taxes on that portion AND 10 percent penalty
I like the certainty and future flexibility that Roth conversions provide, as well as the tax-free bucket my wife can draw from should I predecease her.
Exactly this. I call this, "solving for simplicity." It may cost me more now, but I can afford it and it is "buying" future simplicity when I cannot predict the future.
The certainty is that you choose to pay your marginal (i.e. highest) tax rate up front that you could have dodged with traditional contributions, and now that taxed money can't grow for you and can't be Roth converted later at lower income tax brackets.
@@ordinaryhuman5645 I'd be very pleasantly surprised if my tax rate at any time in the next 40 years is as low as I'm paying right now. Converting now is a known thing. And converting eliminated the uncertainty of future income tax rates, the uncertainty of that income on medicare and social security taxation, the uncertainty of RMDs, the uncertainty of taxes when needing to take an unexpected withdrawal, the uncertainty of my wife needing to deal with that should she outlive me, etc
@@ordinaryhuman5645 They didn't specify when these conversions take place... if one does the Roth conversions during the "golden window" between retirement and SS, you can choose your tax bracket. It would seem that most people with traditional tax-deferred retirement accounts over a few $100K would profit from converting up to a 10% or 12% bracket.
@@momhouser Even with SS, you still have control over how much you convert and which tax bracket you end up in. And it's not hard to keep that rate lower than your marginal rate when you were working. That'll be even more true for younger folks today, because SS income is likely going to be reduced and delayed, and pensions will be long gone.
This was my issue. I would have loved to do ROTH conversions prior to Medicare but the extra income from the conversion would have reduced the premium tax credit I was getting through the Affordable Care Act.
I think even if everything is even, if one spouse dies early the other goes into single bracket and just gets destroyed with taxes. This is reason alone to convert.
One angle to be mindful, breakeven age is a number. Most ppl age rapidly before expiration. The best retirement years are the golden age when there is health & $ to enjoy. Paying the lowest taxes in life will never be my goal.
Interesting...I have never heard of break even point for roth conversions. I have for social security, regarding age to claim. I may need to watch this video again to better understand this roth conversion breakeven point. Any articles about it anywhere?
Something interesting about conversions is that it’s deceiving to compare taxes paid today versus taxes to be paid 15 to 30 years in the future. You really need to understand the escalation of the money owed now versus the scary RMD. The future RMD looks huge but so is the unrealized income from the money used for taxes today. If those funds used for taxes were saved and invested and earned about 6 percent per year they would also be huge when you are 75 to 90 years old. Also you need to face the fact that money will have different meaning when you are in the last few years of life, so the conversion is really for your beneficiaries and not yourself.
I break even on day one with my tax free Roth conversion that I do slowly over time and under taxable limits using the form 8880 retirement saver's credit to bump up my tax free zone from the standard deduction. Alas, the Secure Act 2.0 ruins the saver's credit, turning into a deposit while Roth contributions are no longer eligible for the credit and you can no longer use IRA contributions to lower your taxable income to make yourself eligible for the credit. So while I can no longer convert all of our tax deferred accounts to our Roths it doesn't really matter as I can use what's left for income for the first 11.4 years or so of retirement and still remain income tax free as our taxable income will be just under the standard deduction and exemptions if/when those come back.
If healthy, using leverage of life insurance owned by ILIT or kids on one or both of parents would be way more tax efficient. If you then do QCD’s for RMD, further increase tax benefits
A conversion doesn't make sense for us if you need the money to live off. Plus limited taxable cash to pay for the conversion. Also, we will claim SS earlier at 62 y/o because my wife has breast cancer. My lifetime pension is affected by WEP & GPO!
My overall thinking when Roth first came out, was just to defer taxes, and let the 401-K money I already had, grow tax deferred. With the bigger pool of money, i felt more comfortable taking more risk in the market. More winners, than losers, so worked out. I also view the Roth conversion as an upfront money grab by the Feds. If i was younger, I would do the Roth with new money, and the longer duration to earn tax free. Now 68, and retired 2 years, i am taking 401-K money to be in the 22 to 24% tax bracket. Trips, discretionary spending taken out of savings, so no additional taxes.
My concern is the ‘unpredictability’ of tax policy. For example Joey suggesting changes to capital gains and now Cammys suggestion to tax unrealized gains. All this forecasting is assuming a hungry government is predictable. I predict, Roth accumulations in the future will be a target, and be taxed when they realize they need more money. Personally I prefer to continue deferring taxes as long as I can, let my heirs figure out how to play the game in the future
It feels weird to talk about a "break even" point with Roth conversions, because isn't the entire +/- related to a Roth vs Traditional in the tax rate at contribution(conversion) and withdrawal? As you say, it is complicated, but builed down to it's simplest form it's tax rate at contribution vs withdrawal. Spreading out the conversions and determining the withdrawals are ALL assumptions. If our assumptions are incorrect, then the calculations are incorrect. All we can do is make the best assumptions we can, right? We have to guess whether we'll have a LOT of years of VERY large RMDs or widow(er) penalties, etc. If someone knows that they'll have WAAAAAY more money in their traditional account than they'll ever need, AND they'll be passing that to their heirs, then that's one thing. I feel ike calling it a "break-even" is kind of incorrect. Social Security has a break-even date when assuming only an internal rate of return. The ONLY variable in that equation is the IRR. A Roth conversion has about a million variables. It's hard for me to call that a break-even time frame. It's more of a: how does your specific situation, in the specific scenario that you've chosen work out if you only live x years, because that totally changes the tax rates which is the only thing that affects a Roth conversion decision.
It was developed in response to a client’s question, but people do need to realize there’s a payoff period and sometimes it’s simply not worth it. The longer you live the more eye popping the savings. But, generally I agree it’s not possible to calculate in the same way as say Social Security because there are so many variables at play.
Great video. If I am in my early 50's and my Roth conversion strategy has me breaking even in my mid-80's (which is also my current life expectancy) and I have no heirs to whom I wish to leave tax-free money, do Roth conversions make sense? If it turns out I live well past my breakeven, I will have some "extra" money at that point, but will not likely be able to spend it to enjoy things like I would have if I hadn't done the conversions in the first place. If I have shorter life expectancy, then I have lost the "gamble". Also, if I do in fact pursue conversions, can I anticipate some of the potential tax savings in the future and take those savings as additional spending now? Thanks.
Confused, 1) how is fill up the tax bracket 12% realistic? 2) When they make the conversion, to account for the tax payment, you either have to reduce the ROTH by $300,000 (est for taxes) or add the $300,000 that you would have paid in taxes a deferred annuity to make the example equal. How did you account for that?
A lot, if it's taxable income. We've found that a pension (while great to have the guaranteed income) reduces the amount of flexibility you have to control taxes through these kind of strategies because you are easily pushed out of the best (lowest) tax brackets.
Comments on Eric @ Safeguard (my co-favorite YT finance guy) video that “break-even on Roth conversions” is a bit of a non-sensical question? If you fill a tax bucket higher than your projected and terminal tax rate, it will be a loss. Lower and you benefit. It’s purely tax rate arbitrage.
But don’t you have to consider the returns you are missing out on my paying taxes now vs later? It seems like there has to be more to it than just tax rates.
I’m a bit confused about your math. Example: if I convert 100,000 to a Roth I pay 20% in tax. 80,000 goes into my Roth. At 6% rate of return it will take about 4 years to turn that 80,000 back to 100,000. I would think that would be my break even point.
You should never pay the tax with the money being converted. The entire $100,000 should be converted, and tax come from somewhere else, so the entire $100k grows.
@@jdgolf499 Agree if under age 59.5 as the tax paid from the conversion would trigger early withdrawal penalty. Disagree if over 59.5. Ideally, it makes sense to use other funds to pay the tax as you then essentially are making an extra contribution to your Roth that doesn’t count against the annual limit. Reality is that many people don’t have large balances in non-retirement accounts. So, those folks over 59.5 are just fine paying the tax from the conversion.
If you have the $20,000 to pay the taxes up front, you should take that $20,000 and invest it. Don't waste it on a Roth. Roths are all smoke an mirrors.
I agree. Invest what the money that you would have used to pay tax on the conversion in a S&P500 EFT and it’ll grow more than enough to pay the taxes on what you didn’t convert, PLUS, what your pulling out to pay the taxes with. Because that will also be taxable.
MFJ, $200k is in the 22% bracket this year. Single, with the standard deduction, in the 24% bracket. “Highest” brackets start at over $600k. 35% starts at $243k and $487k. Other income obviously will affect this - I wouldn’t convert if you already have $500k in earned income. And “five years” - it could change with reverted/new brackets in 2026.
I don’t want to convert that much now because it will raise my Medicare premiums substantially. Met with my CPA. I can convert only about 75k per year and keep my Medicare premiums reasonable.
After 30 years of IRA/401k growth, we have a tax problem that 55% of Americans would like to have. A lot of people are retiring with only SS because they did not plan. Some have a small nest egg if they got to 45 and started putting it away. But for those of us who started with our first job at 24, that money it has been growing for 35-40 years. It is all growth. So yes, we have to take out a large chunk of money under RMD, but almost all of it is growth (free money) that we will be paying tax on. In every case, we will have more to live on than the SS person or the person who has a small nest egg. Also, if you go to 50 and you decided to start a Roth, that might also have time to grow just by your normal funding for 15 years. Also, you will have all of the RMD in the 10 %and 12% tax brackets too, so it's all good.
I dont care to leave my kids millions of dollars, so I won't be doing them. Plus, that will be money out of the market, and I expect returns to be much lower than present
not sure the best way to contact you. I signed up for access to foundry and never got anything back via email. Does it take more than three days? I can just try again but wanted to check.
If the market flies.... it is quick payoff because of the gains in gain on gains.... Not sure why the calcs being pimped is so simplistic.... It is ZERO Taxes ever forever.... Soooooo..... I stopped with pretty long ago &&&& I got into mega backdoor brilliance of my employer.... So I maxed that out aftertax.... instead of loading up brokerage...
It's mostly pointless to discuss this until whatever version of Trump's tax/tariff package is passed. One possibility is that if income taxes are eliminated, all current IRAs/401k's/etc effectively become ROTHs for free.
If you have $1,000,000 in a pretax 401K and you have to take a first time Required Minimum Distribution - it will be $38,000. If Trump gets in and makes it so you don't have to pay tax on your Social Security benefits, you will owe $500 in taxes on the $38,000 if you are married and both 65 years or older
Actually if all you have is the RMD on $1m of $38k plus SS, after the standard deduction of $33k joint over 65, even under the current rules your SS is not going to be taxable and you will be in the 10% bracket on the $5k AGI so he or she is correct.
A Roth Conversion breakeven has nothing to do with time. That is the wrong way to look at it. A Roth Conversion breakeven is determined solely by tax rates. Are you paying a lower tax rate today than you (or your heirs) would be paying on the withdrawals in the future? It really is that simple. The reality is future tax rates are uncertain. So, you make an educated decision and don’t look back.
This isn't entirely true if you pay taxes with outside funds; if those funds are invested and pay dividends, there is a "tax drag" on the invested funds so the break even tax rate goes down over time.
The theory of Roth is misleading. In no case does prepayment of taxes, sometimes by decades, make any economic sense. Traditional IRAs grow tax free too, you only pay when you withdraw...similar to stock market transactions. In Roth, you lose out to economic price change over time, like inflation, you lose the 'yearly tax deductions', and with Trump, if he swaps out tariffs for income taxes, Roth people will now have prepaid taxes on income that you will not in the future. Traditional for me.
There are so many reasons not to convert. I just retired at 60 but my wife still works. With her salary and my IRA withdrawals, we keep our marginal federal tax rate just under the threshold where it jumps from 24 to 32%. If I were to begin to convert to a Roth, even over a period of 5 years, we would be paying marginal rates at 32-37% on literally several million dollars in converted income, resulting in several hundred thousand dollars in additional taxes, just from the higher brackets. No one knows, of course, what will happen to taxes in the future (current rates expire at the end of 2025), but even Dems seem hesitant to raise tax rates on families earning under $400k. And, I can plan income realization for higher rates once they are known. Even though I realize I will pay income on SS and may pay more for Medicare, these potential savings are dwarfed but the tax rate differences from converting. I don’t need a software program to tell me a conversion is a huge financial loser for me - I know it makes sense for some.
Tell someone with a high pre-tax portfolio "you only pay when you withdraw" and see what their reaction is. Tax preparers usually hate Roths because they only see it in terms of taxes paid in a single year. I'm a Roth multi-millionaire and I have a diff perspective. People that have no flexibility in their choices are like rats running in a maze.
Roth contributions when tax deductible Traditional contributions were an option may have only ever made sense for boomers with pensions and generous SS benefits, because their guaranteed income would push them into a higher bracket in retirement before pulling anything from their traditional account. For younger folks with no pension and delayed and diminished SS benefits likely, tax deductible traditional contributions are a no brainer.
@@ordinaryhuman5645 All depends on what you end up owning and how it performs later on, which you won't know until later in your life.. I've never made a high income and never had any chance of a pension, but I'm a saver and savvy investor with pre-tax, Roth, and taxable buckets. Dividends from taxable bucket from investments two decades ago along with SS when I'm forced to take it will drive me into higher tax rates. Glad I've poured money into Roth IRA (incl spousal Roth) and 401k Roth. I continue to make Roth conversions every year. I'll probably never spend the Roth money and pass it onto my heirs.
@@joycewright5386 I did too, back in like 2008. Now the balance looks good, but I often wonder what the balance would be if that money I paid in tax had been left there to grow for the last 16 years.
@@markroberts8975I think you made the right move, because that money is now insulated from any future tax increases. I think that’s the one piece that folks don’t consider, tax rates are not fixed, they can go up so having money growing that is immune to future taxes is probably the closest thing any of us will ever get to having some offshore account beyond the reach of the IRS.
@@globalfamily8172 ROTH conversions need to take into account your current tax liability to make sense. This is why doing some backdoor ROTH conversions in your 401K now make sense, because those need 5-years before you can start withdrawing the growth tax-free. Assuming you have enough there and in other accounts that limit your tax liability when you retire, you can live off those while you start converting large chunks of your 401K to ROTH in retirement, up to whatever tax threshold you are comfortable with. It's going to be a multi-year process. And probably worth your time to talk with a live CFP about your situation.
Seems like significant growth of converted money in a tax free Roth account is a X factor besides potential higher taxes in the future when deciding to do Roth conversions. For example a growth rate or 10-15 percent per year in a Roth account can quickly reduce the break even age. Thoughts?
Not true. Returns do not change the math (unless your account loses value in which case Roth loses big time). Otherwise whether your account grows by 2% or 200% does not matter. The only decision is regarding the % tax paid.
@@foundryfinancial I'm hedging my bets. I'm doing Roth 401k now from age 47 to age 54, spend down the pretax 401k from age 55 to 75, Roth convert when stock market drops 30 percent or under 25 percent tax bracket in the future, do QCDs at 70.5. I can see the tax bomb going off in my mind with the federal government looking for more money in the future
17 years ago, I didn't open a IRA, I bought a duplex for $220K, and had the renters pay the mortgage (only break-even for many years). Now the building is almost paid off, brings in close to 3K a month, and is worth over 500K, and as inflation goes up, so does the value of my building ( and so do the rental rates I charge). Stock Markets go up and down, but Real estate accumulation+time, it just works predictably.
Rental real estate is no panacea. Factor in all your costs in maintenance, insurance, cost of managing it, etc. Then compare with the money you'd spent and how much it would be if you put it in an SP500 index fund 17 years ago if you want a comparison. Also, I know people that had their rental property destroyed by renters, and there are calls in the middle of the night or you pay a management company to do it.
@@TheRogerhill1234 - Is frequency your concern or is it duration and severity? Because US RE market appreciation chart shows a severe inversion from 2007 clear through to 2012. That was deeper and longer than any market drawdown in most of our lifetimes. I won't hold my breath waiting for you to compare real profits the the SP500 over that 17 year period. Because if you did you'd cry.
@@5metooI agree. Investing in (stocks) equities beats real estate investing overall. The main source of wealth for the wealthiest people are in equity and not from real estate.
Im not buying the Roth conversion conclusions. Conversion tax and ACA subsides are paid with today's money. A far-future revenue stream of tax breaks has lower NPV due to the discounted time value of money. Summing the future tax savings as today's money is false and misleading.
This makes no sense to me. How in God's name do you pay $928,000 taxes on a $1M portfolio? Bear in mind most people increase bond holdings as they age and won't average 7% returns, probably closer to 5%-5.5%. But even if it doubles over the next 20 years RMD will only require a $108,000 withdrawal, resulting in a tax bill of $19,000. Meanwhile the $300,000 you used to convert has grown to $600,000.
You talk too fast, your screen charts need to be enlarged so they are viewable, you need an arrow to show about which number you're talking and so on. Not very helpful.
Uh life expectancy for males is about 74 years and females is 80. Plus or minus 2 years. If you were to begin the Roth conversion, what would be the age range to do the conversion? I don’t wanna to the conversion at 65 years old and die at 74 when to tell people on my deathbed, I finally broke even 😢
That includes people who die as children or in early adulthood. For retirement, best to use life expectancies after age 65. People who make it to 65 tend to live longer than the wider average. Factors like income levels and education also factor in.
@@KateStalter I'm using actuaries for the life expectancy numbers. Since I'm getting up there myself, I've know people who usually pass away before those numbers. I don't think actuaires use "retirement" as a beginning basis for their calculations
C'mon...You lose a lot of credibility because your "comparison" isn't apples/apples. Your reference strategy and proposed strategy use different equity allocations, rendering any "how much more" number completely meaningless.
Eww demanding email addresses to get the link is gross. Especially in today’s age of data breaches, it’s not worth the risk just to see if your tool is useful to me.
@@semosancus5506 Let’s not make excuses for shitty behavior. You are either missing the point or disingenuous. Many others won’t know to do that, or how to do it, especially in this age group. It’s taking advantage of people.
@@AnonVideos Fair enough. I am 54 and know how to do this stuff, but maybe somebody somewhat older doesn't. I suspect if you enter your email, then when you start getting emails you can just unsubscribe. Maybe that is a more "above board" way of doing it.
@@semosancus5506 A data broker can take a phone number or email address and link people across sites. That information is shared with the broker in many ways including via advertising. Just visiting a site gives a fingerprint for your browser that can be tracked across sites. Burner email? That’s a 1990s method that no longer works reliably. The whole thing is of course designed to make a lot of money for others by selling your information.
I'm confused on why no one ever speaks of a Roth Conversions benefit from the perspective of utilizing it to raise your 5 highest taxable income years, which can also raise your future Social Security payments. I've never heard anyone discuss this aspect. 😊
@KimberleyK-ts9vo so I'm imagining things when I'm doing a Roth conversion and my IRA withdrawal pushed my taxable income higher and later my Social Security benefit rose by $140/month?
@@momhouser so I'm imagining things when I'm doing a Roth conversion and my IRA withdrawal pushed my taxable income higher and later my Social Security benefit rose by $140/month?
This is wrong in so many ways. In 2020, I made $165,000 (combined with spouse) and my federal tax rate for what I had to pay (including a Roth) was an average of 13.6% . Now that I'm retired, I receive $65,000 in social security and withdraw $100,000 from my pre-tax 401K. (the same net amount as before $165,000) I'm now taxed at 10.4% . That's 3.2% less. If Trump gets in and they stop taxing Social Security, it will be even less - 7.6% The Roth IRA is smoke and mirrors.
@@ericmasters360 That's because you paid it all before you put it into a Roth. I paid 0% to put it in my 401K. I bet you paid more Federal tax on the money that went into your Roth than the money I'm paying to get mine out of my 401K. If all I had to live on was my 401k, I would pay 0% on the first $32,000 (joint deduction) that I'd withdraw.
The way I look at the situation would be if you were to put in 15% of your $165,000 income per year into Roth 401k instead of a traditional 401k for a total of $24,750 each year for 20 years. This would eventually be worth $1,132,608 at an 8% growth rate. Then you would only be taxed on the initial $24,750/yr which would be $495,000 total you paid taxes on. And the other $637,608 would be tax free. And RMD’s would be irrelevant also.
Your math does not work. In the example of making $165k and putting $24k into a Roth that will be worth $1m plus, the fact is you paid tax on that $24k each year that could otherwise be invested and growing. Thus you might have $1.5m instead of $1m. Yes you would need to pay tax on the higher balance so the end result will depend on the % paid when deferred vs if you paid the tax up front.
@@ericmasters360 $24,750 going into a pre-tax 401k allows you to pay $6358 less in federal tax each year (including state). If you took that after-tax $6358 and invested it @ 8% for 20 years it would be $274,000. That's enough money to pay the federal and state tax on a one-time withdrawal from a pre-tax 401k in the amount of $928,000. Like I said, it's all smoke and mirrors. (btw, my state is Ohio)
another unknown is the possibility of years of assisted living expenses. If you end up with years of assisted living expenses, these expenses can be deducted and cover the taxes you would pay on your RMD's. Much better to pay these assisted living expenses from your IRA than from your Roth.
I was just going to comment this. Very very few people understand this. You can deduct any qualifying medical expenses >7.5% of your income. Home health care, assisted living, nursing home, retrofitting your house for accessibility, all standard medical expenses etc.
Thank you for all the great content. It's so much easier, in many ways to work, bring home a paycheck, healthcare, let my 401k grow, ect. Wow, retirment is so overwhelming and complicated!
Makes a huge difference if you pay the conversion taxes with cash!
Just did our first conversion. Seven more to go. Able to pay taxes out of brokerage which helps. Primary reasons for doing it is to avoid the widow tax with RMDs (we are not dying at the same time) and to make sure that my children do not get a tax bomb when they inherit what is left in our estate. Both kids are in high paying professional jobs and will be crushed by a taxable windfall.
What about step up in cost basis?
Good video. It highlights an important issues related to Roth conversions, which is focusing on the tax savings will make Roth a better choice in many more scenarios than focusing on the correct item which is after tax wealth. It takes much longer for a Roth to pay off when looking at after tax net worth. In fact, you can defer and pay twice as much tax and still come out ahead if those tax dollars are paid by you or your heirs at lower rates (%) than you would pay on the conversion
One thing I didn’t hear you mention is that another benefit of converting to Roth is that by avoiding RMD’s, you can also potentially avoid IRMAA.
I love the ending statement in that “This is how we got into this situation in the first place!”
Excellent videos overall! I appreciate the one video where you included a single person as an example. Far too many retirement advisors focus on married couples only.
Also, please include some state taxation on retirement accounts in at least some of your calculations. I know states are different but many states do tax capital gains so how does that affect retirement financials? You can choose say 4 or 5% state taxation on capital gains as an example. Does it fundamentally change anything?
There are many examples which shows the math where the roth vs IRA comes out as a wash if all conditions are the same. There is no break even point. Now we know things are not the same as we transition into IRMMA for medicare, RMD, and higher tax bracket/rates changes in the future. All of these points to a Roth being more advantaged.
My Roth conversion paid off immediately. My wife and I had to keep our reportable income at a certain level in order to qualify for subsidies on our health insurance. When we had an emergency come up we used the Roth conversion to pay for it and kept it from disqualifying us from the subsidies.
I thought you had to wait 5 years to access the conversion?
Only if you are under 59 and 1/2. Once you are over 59 and 1/2 and you have had ANY Roth IRA open for at least 5 years then all distributions are qualified and tax free. I opened a Roth when they first started and funded it each year. Then I retired at 61 and converted some of my company retirement funds into a Roth at my local bank. Since I had paid the taxes on the conversion and I was over the required age I had immediate access to the money.
@@johnscott2746 thank you for clarifying :)
@@mandypdxThe 5 year limit is only for the interest earned on the money. You are free to take the principal at anytime after 59 1/2.
But a Roth conversion DOES result in reportable income and it WILL affect your subsidies in the year that you take it. Unless you are saying it was worth it to give up the subsidies in that particular year? And if that was the case, why not just do a full conversion and then get both the full subsidies and the tax-free income going forward?
I would like to use the software you demonstrated. Could you please tell me where I can obtain it? Thank you
A lot of the perceived "saved tax $$" is merely because one now has less $$ after the Roth conversion, thus one pays less taxes on less $$. It's counterintuitive, but consider: having more $$ usually means paying more taxes.
So your point about solving for *both* needs to be balanced.
One thing not considered is the devaluing of $$ over time via inflation. Those $$ lost up front are worth more than $$ paid as taxes later. You should recalculate these numbers with that in mind.
I agree with your statements, but we have no idea of what the tax rate will be in the future. I don’t foresee the rate staying the same or going down.
if you stay in the same tax bracket pre-to-post conversion, it's neutral from day 1 to day infinity.
But the odds are RMDs will push you into a higher bracket, and if you are working making good six figures I don't think it makes a lot a sense unless you just use cash to pay the conversion
@@TheDjcarter1966if you stay in the same tax bracket, the numbers are a wash, if you pay the taxes from the distribution.
@@scotth3354 If you stay in the same tax bracket. Some people will, and some won't. Some people should, and some won't be able to. The latter are the better off ones.
@@scotth3354 Depends on the IRMAA penatlies and ACA penalties and RMD bracket creep.
Thanks, their realistic life expectancy is 80 and 82, so convertions only good if retire early and have a big window? Don't really need the spousal longevity insurance as taking SS at 70 so is covered?
As I understand it, this is assuming an average market return. One of the biggest risks early in retirement is sequence of return risk…you get multiple years of low returns while also selling investments to live off of. If you have several years of poor returns right after doing a Roth conversion it seems the break even would take even longer. So on average it might be a good thing but worse if you do it and then have a period of low returns. At least that’s how I think about it.
I think the question is, not how much taxes you pay or save, but what strategy yields the most money long term. I modeled the following. Assume you have $1M in an IRA, and the tax will be a total of $300k, and you covert the $1M over 5 years to stay in a lower bracket, and also of course spread the tax payment over the same 5 yrs. Then run out how much you have in 20 yrs, 30 yrs.
Now scenario 2: instead of converting, take that money you have in cash or equivalent, and invest it in S&P500 for 20 yrs, 30 years, you’ll have enough growth from that investment to pay the taxes on your RMD’s as well as the taxes needed to cover the withdrawal to pay the taxes. I even modeled the taxes going up 35% and it the accounts still had more in them at 30 years then they would have if you had paid the taxes now and converted.
So to me it seems to be a question of are you looking to pay less in taxes, or have the most money.
The models in Right Capital don’t seem to consider this angle. What you’re giving up on the growth of the money used to pay taxes now.
They do take that into account. They’re running all of that in the back end. That’s how it’s deciding what the tax adjusted value will be.
@@foundryfinancial I either didn’t explain it right or you aren’t understanding. What I’m saying is that it does not make sense to convert because of the amount that you make on what would have been used to pay taxes makes more than enough to cover all the taxes for RMDS and more.
@@gehartman I think this is why you should not pay the taxes from the conversion money, but from a separate taxable account. So the full amount can grow tax deferred. Then it becomes a comparison of taxes now versus taxes at a possibly higher rate in future. I think of it as effectively moving money from the taxable account into the Roth.
Great info, my dilemma is that we have a sizeable amount of retirement savings in traditional IRA, just don't have that much cash to pay for the conversions, the only way would be from the conversation itself, and I'm not sure if that would be worthwhile.
Don’t be afraid of paying for the conversion using distributions from your traditional IRA. The real question is how much to convert and how much to convert each year. For this you need deep understanding of tax brackets, IRMAA, and the RMD schedule. Answer depends on your age, how large your IRA savings actually are and expected income in retirement (Social Security, pension, etc).
That’s why you need the software that he uses or some other modeling tool to be able to run the numbers
You can do that ONLY if you are already 59 1/2 where the part of your ira you use to pay taxes wont be charged the additional 10 percent penalty. The portion you use to pay the taxes is considered earnings and NOT a conversion so taxes will be assessed. If you are not 59 1/2 then you will pay taxes on that portion AND 10 percent penalty
I like the certainty and future flexibility that Roth conversions provide, as well as the tax-free bucket my wife can draw from should I predecease her.
Exactly this. I call this, "solving for simplicity." It may cost me more now, but I can afford it and it is "buying" future simplicity when I cannot predict the future.
The certainty is that you choose to pay your marginal (i.e. highest) tax rate up front that you could have dodged with traditional contributions, and now that taxed money can't grow for you and can't be Roth converted later at lower income tax brackets.
@@ordinaryhuman5645 I'd be very pleasantly surprised if my tax rate at any time in the next 40 years is as low as I'm paying right now. Converting now is a known thing.
And converting eliminated the uncertainty of future income tax rates, the uncertainty of that income on medicare and social security taxation, the uncertainty of RMDs, the uncertainty of taxes when needing to take an unexpected withdrawal, the uncertainty of my wife needing to deal with that should she outlive me, etc
@@ordinaryhuman5645 They didn't specify when these conversions take place... if one does the Roth conversions during the "golden window" between retirement and SS, you can choose your tax bracket. It would seem that most people with traditional tax-deferred retirement accounts over a few $100K would profit from converting up to a 10% or 12% bracket.
@@momhouser Even with SS, you still have control over how much you convert and which tax bracket you end up in. And it's not hard to keep that rate lower than your marginal rate when you were working.
That'll be even more true for younger folks today, because SS income is likely going to be reduced and delayed, and pensions will be long gone.
Any ideas or videos on ways to maximize Roth conversions while at the same time minimize Affordable Care Act costs?
Careful planning. It’s possible but tricky
@@foundryfinancial I think that would make for a great video (with some examples) if possible. Thanks. 🙂
This was my issue. I would have loved to do ROTH conversions prior to Medicare but the extra income from the conversion would have reduced the premium tax credit I was getting through the Affordable Care Act.
I think even if everything is even, if one spouse dies early the other goes into single bracket and just gets destroyed with taxes. This is reason alone to convert.
Destroyed, that is until the next wedding....
@@TheRogerhill1234 🥰
Flexibility is a big benefit of Roth conversions, and that's why I don't split hairs quite as much as others because that itself has a value for me.
One angle to be mindful, breakeven age is a number. Most ppl age rapidly before expiration. The best retirement years are the golden age when there is health & $ to enjoy. Paying the lowest taxes in life will never be my goal.
Sooner than you think if your spouse passes. Might also help if SS gets means-tested.
Interesting...I have never heard of break even point for roth conversions. I have for social security, regarding age to claim. I may need to watch this video again to better understand this roth conversion breakeven point. Any articles about it anywhere?
I’m sure there’s writing on the topic. We explored this because a client asked about it.
Something interesting about conversions is that it’s deceiving to compare taxes paid today versus taxes to be paid 15 to 30 years in the future. You really need to understand the escalation of the money owed now versus the scary RMD. The future RMD looks huge but so is the unrealized income from the money used for taxes today. If those funds used for taxes were saved and invested and earned about 6 percent per year they would also be huge when you are 75 to 90 years old. Also you need to face the fact that money will have different meaning when you are in the last few years of life, so the conversion is really for your beneficiaries and not yourself.
I break even on day one with my tax free Roth conversion that I do slowly over time and under taxable limits using the form 8880 retirement saver's credit to bump up my tax free zone from the standard deduction. Alas, the Secure Act 2.0 ruins the saver's credit, turning into a deposit while Roth contributions are no longer eligible for the credit and you can no longer use IRA contributions to lower your taxable income to make yourself eligible for the credit. So while I can no longer convert all of our tax deferred accounts to our Roths it doesn't really matter as I can use what's left for income for the first 11.4 years or so of retirement and still remain income tax free as our taxable income will be just under the standard deduction and exemptions if/when those come back.
If healthy, using leverage of life insurance owned by ILIT or kids on one or both of parents would be way more tax efficient. If you then do QCD’s for RMD, further increase tax benefits
Boy, were you sold a bill of goods to suggest life insurance.
A conversion doesn't make sense for us if you need the money to live off. Plus limited taxable cash to pay for the conversion. Also, we will claim SS earlier at 62 y/o because my wife has breast cancer. My lifetime pension is affected by WEP & GPO!
great video ! thank you .
I'm considering a Roth IRA conversion. How long did it take for yours to pay off?
My overall thinking when Roth first came out, was just to defer taxes, and let the 401-K money I already had, grow tax deferred.
With the bigger pool of money, i felt more comfortable taking more risk in the market.
More winners, than losers, so worked out.
I also view the Roth conversion as an upfront money grab by the Feds.
If i was younger, I would do the Roth with new money, and the longer duration to earn tax free.
Now 68, and retired 2 years, i am taking 401-K money to be in the 22 to 24% tax bracket.
Trips, discretionary spending taken out of savings, so no additional taxes.
My concern is the ‘unpredictability’ of tax policy. For example Joey suggesting changes to capital gains and now Cammys suggestion to tax unrealized gains. All this forecasting is assuming a hungry government is predictable. I predict, Roth accumulations in the future will be a target, and be taxed when they realize they need more money. Personally I prefer to continue deferring taxes as long as I can, let my heirs figure out how to play the game in the future
Correct answer. Never prepay taxes.
It feels weird to talk about a "break even" point with Roth conversions, because isn't the entire +/- related to a Roth vs Traditional in the tax rate at contribution(conversion) and withdrawal? As you say, it is complicated, but builed down to it's simplest form it's tax rate at contribution vs withdrawal. Spreading out the conversions and determining the withdrawals are ALL assumptions. If our assumptions are incorrect, then the calculations are incorrect. All we can do is make the best assumptions we can, right? We have to guess whether we'll have a LOT of years of VERY large RMDs or widow(er) penalties, etc. If someone knows that they'll have WAAAAAY more money in their traditional account than they'll ever need, AND they'll be passing that to their heirs, then that's one thing.
I feel ike calling it a "break-even" is kind of incorrect. Social Security has a break-even date when assuming only an internal rate of return. The ONLY variable in that equation is the IRR. A Roth conversion has about a million variables. It's hard for me to call that a break-even time frame. It's more of a: how does your specific situation, in the specific scenario that you've chosen work out if you only live x years, because that totally changes the tax rates which is the only thing that affects a Roth conversion decision.
It was developed in response to a client’s question, but people do need to realize there’s a payoff period and sometimes it’s simply not worth it. The longer you live the more eye popping the savings. But, generally I agree it’s not possible to calculate in the same way as say Social Security because there are so many variables at play.
Not to mention the positive affect a Roth has Social Security versus a 401k or IRA
Great video. If I am in my early 50's and my Roth conversion strategy has me breaking even in my mid-80's (which is also my current life expectancy) and I have no heirs to whom I wish to leave tax-free money, do Roth conversions make sense? If it turns out I live well past my breakeven, I will have some "extra" money at that point, but will not likely be able to spend it to enjoy things like I would have if I hadn't done the conversions in the first place. If I have shorter life expectancy, then I have lost the "gamble". Also, if I do in fact pursue conversions, can I anticipate some of the potential tax savings in the future and take those savings as additional spending now? Thanks.
Will the Roth ever go away? Meaning would the government ever take away this option? Or change it so that it becomes taxable somehow?
There’s a always a risk.
@@foundryfinancial Where’s the crystal ball when you need it?
Confused, 1) how is fill up the tax bracket 12% realistic? 2) When they make the conversion, to account for the tax payment, you either have to reduce the ROTH by $300,000 (est for taxes) or add the $300,000 that you would have paid in taxes a deferred annuity to make the example equal. How did you account for that?
How would a 34000 per year pension affect that scenario?
A lot, if it's taxable income. We've found that a pension (while great to have the guaranteed income) reduces the amount of flexibility you have to control taxes through these kind of strategies because you are easily pushed out of the best (lowest) tax brackets.
How old are Phil and Claire at conversion? Did I miss it…
Comments on Eric @ Safeguard (my co-favorite YT finance guy) video that “break-even on Roth conversions” is a bit of a non-sensical question? If you fill a tax bucket higher than your projected and terminal tax rate, it will be a loss. Lower and you benefit. It’s purely tax rate arbitrage.
But don’t you have to consider the returns you are missing out on my paying taxes now vs later? It seems like there has to be more to it than just tax rates.
I’m a bit confused about your math. Example: if I convert 100,000 to a Roth I pay 20% in tax. 80,000 goes into my Roth. At 6% rate of return it will take about 4 years to turn that 80,000 back to 100,000. I would think that would be my break even point.
You should never pay the tax with the money being converted. The entire $100,000 should be converted, and tax come from somewhere else, so the entire $100k grows.
@@jdgolf499Where else does it come from?
@@jdgolf499 Agree if under age 59.5 as the tax paid from the conversion would trigger early withdrawal penalty. Disagree if over 59.5. Ideally, it makes sense to use other funds to pay the tax as you then essentially are making an extra contribution to your Roth that doesn’t count against the annual limit. Reality is that many people don’t have large balances in non-retirement accounts. So, those folks over 59.5 are just fine paying the tax from the conversion.
If you have the $20,000 to pay the taxes up front, you should take that $20,000 and invest it. Don't waste it on a Roth. Roths are all smoke an mirrors.
@@dublinbluetune Huh? Why can't you invest from within the Roth? Anything you can invest in from an IRA you could do the same from a Roth.
Why pay tax before you have to and significantly reduce the principal income base of your account by giving away a large part it?
The idea is to use extra money to pay those taxes, not the funds from the 401K (assuming, you have it)
I agree. Invest what the money that you would have used to pay tax on the conversion in a S&P500 EFT and it’ll grow more than enough to pay the taxes on what you didn’t convert, PLUS, what your pulling out to pay the taxes with. Because that will also be taxable.
@@TheRogerhill1234 money is money no matter where you draw it from. you pay $200,000 to $300,000 in taxes and therefore have that much less
@@jaynelson8304 Since I have no extra money to convert my Million dollar 401K, I guess I am paying my taxes over time....
Link to the calculator tool? Or did I misunderstand that a link for it would be provided?
It’s there now! I forgot to post it.
@@foundryfinancialis the link there now? I still don't see it? Thanks!
If I'm converting $200,000 a year for five years isn't each conversion going to automatically put me in the highest tax bracket for those five years?
The highest? I doubt it. Unless you have other income.
MFJ, $200k is in the 22% bracket this year. Single, with the standard deduction, in the 24% bracket. “Highest” brackets start at over $600k. 35% starts at $243k and $487k. Other income obviously will affect this - I wouldn’t convert if you already have $500k in earned income. And “five years” - it could change with reverted/new brackets in 2026.
I don’t want to convert that much now because it will raise my Medicare premiums substantially. Met with my CPA. I can convert only about 75k per year and keep my Medicare premiums reasonable.
@@artsie8282 So, that's fine. You convert a little to take the edge off of things, right?
@ Great question. I won’t be spending it. I am just trying to avoid future taxes
After 30 years of IRA/401k growth, we have a tax problem that 55% of Americans would like to have. A lot of people are retiring with only SS because they did not plan. Some have a small nest egg if they got to 45 and started putting it away. But for those of us who started with our first job at 24, that money it has been growing for 35-40 years. It is all growth. So yes, we have to take out a large chunk of money under RMD, but almost all of it is growth (free money) that we will be paying tax on. In every case, we will have more to live on than the SS person or the person who has a small nest egg. Also, if you go to 50 and you decided to start a Roth, that might also have time to grow just by your normal funding for 15 years. Also, you will have all of the RMD in the 10 %and 12% tax brackets too, so it's all good.
Great never thought about that
I dont care to leave my kids millions of dollars, so I won't be doing them. Plus, that will be money out of the market, and I expect returns to be much lower than present
12% tax rate.wonderful. Most folks would be in the 21% tax rate with SSA and other income.
I am trying the free tool, however can not get any 401k (tax deferred) numbers to show up in the data. Guess I am doing something wrong.
Sorry, I do not see the link to Right Capital to run calculations?
Because I forgot to put it there. Look in a minute.
not sure the best way to contact you. I signed up for access to foundry and never got anything back via email. Does it take more than three days? I can just try again but wanted to check.
Hmm. It should be automatic. Email my assistant: Jeannette@foundryfinancial.org
What is the name of this software you are using comparing strategies?
The video is using "Right Capital". I believe they are offering free (limited) access in the description.
If the market flies.... it is quick payoff because of the gains in gain on gains....
Not sure why the calcs being pimped is so simplistic....
It is ZERO Taxes ever forever....
Soooooo.....
I stopped with pretty long ago &&&& I got into mega backdoor brilliance of my employer....
So I maxed that out aftertax.... instead of loading up brokerage...
That does play into it, but of course that’s a big unknown.
It's mostly pointless to discuss this until whatever version of Trump's tax/tariff package is passed. One possibility is that if income taxes are eliminated, all current IRAs/401k's/etc effectively become ROTHs for free.
If you have $1,000,000 in a pretax 401K and you have to take a first time Required Minimum Distribution - it will be $38,000. If Trump gets in and makes it so you don't have to pay tax on your Social Security benefits, you will owe $500 in taxes on the $38,000 if you are married and both 65 years or older
If you think they’ll end tax on Social Security, I have some oceanfront property in Kansas you might be interested in. :)
Actually if all you have is the RMD on $1m of $38k plus SS, after the standard deduction of $33k joint over 65, even under the current rules your SS is not going to be taxable and you will be in the 10% bracket on the $5k AGI so he or she is correct.
So pay all those taxes in your go go years to have more money in your no go years? 🤔
What is Right Capital?
It's the modeling software he was using to analyze the sample case.
A Roth Conversion breakeven has nothing to do with time. That is the wrong way to look at it. A Roth Conversion breakeven is determined solely by tax rates. Are you paying a lower tax rate today than you (or your heirs) would be paying on the withdrawals in the future? It really is that simple. The reality is future tax rates are uncertain. So, you make an educated decision and don’t look back.
This isn't entirely true if you pay taxes with outside funds; if those funds are invested and pay dividends, there is a "tax drag" on the invested funds so the break even tax rate goes down over time.
I don't see a link to the tool here... unless I am missing something.
In all caps it says Right Capital link about halfway down.
The theory of Roth is misleading. In no case does prepayment of taxes, sometimes by decades, make any economic sense. Traditional IRAs grow tax free too, you only pay when you withdraw...similar to stock market transactions. In Roth, you lose out to economic price change over time, like inflation, you lose the 'yearly tax deductions', and with Trump, if he swaps out tariffs for income taxes, Roth people will now have prepaid taxes on income that you will not in the future. Traditional for me.
There are so many reasons not to convert. I just retired at 60 but my wife still works. With her salary and my IRA withdrawals, we keep our marginal federal tax rate just under the threshold where it jumps from 24 to 32%. If I were to begin to convert to a Roth, even over a period of 5 years, we would be paying marginal rates at 32-37% on literally several million dollars in converted income, resulting in several hundred thousand dollars in additional taxes, just from the higher brackets. No one knows, of course, what will happen to taxes in the future (current rates expire at the end of 2025), but even Dems seem hesitant to raise tax rates on families earning under $400k. And, I can plan income realization for higher rates once they are known. Even though I realize I will pay income on SS and may pay more for Medicare, these potential savings are dwarfed but the tax rate differences from converting. I don’t need a software program to tell me a conversion is a huge financial loser for me - I know it makes sense for some.
Tell someone with a high pre-tax portfolio "you only pay when you withdraw" and see what their reaction is. Tax preparers usually hate Roths because they only see it in terms of taxes paid in a single year. I'm a Roth multi-millionaire and I have a diff perspective. People that have no flexibility in their choices are like rats running in a maze.
Roth contributions when tax deductible Traditional contributions were an option may have only ever made sense for boomers with pensions and generous SS benefits, because their guaranteed income would push them into a higher bracket in retirement before pulling anything from their traditional account.
For younger folks with no pension and delayed and diminished SS benefits likely, tax deductible traditional contributions are a no brainer.
@@ordinaryhuman5645 All depends on what you end up owning and how it performs later on, which you won't know until later in your life.. I've never made a high income and never had any chance of a pension, but I'm a saver and savvy investor with pre-tax, Roth, and taxable buckets. Dividends from taxable bucket from investments two decades ago along with SS when I'm forced to take it will drive me into higher tax rates. Glad I've poured money into Roth IRA (incl spousal Roth) and 401k Roth. I continue to make Roth conversions every year. I'll probably never spend the Roth money and pass it onto my heirs.
You gotta pay taxes now or later. Pay up front and let it ride tax free
Yes but I converted mine when the market had tanked. Now it has made more profit than I paid in taxes and still growing.
@@joycewright5386 I did too, back in like 2008. Now the balance looks good, but I often wonder what the balance would be if that money I paid in tax had been left there to grow for the last 16 years.
@@markroberts8975I think you made the right move, because that money is now insulated from any future tax increases. I think that’s the one piece that folks don’t consider, tax rates are not fixed, they can go up so having money growing that is immune to future taxes is probably the closest thing any of us will ever get to having some offshore account beyond the reach of the IRS.
What if you are a high earner? I was told it makes no sense to pay a higher amount now.
@@globalfamily8172 ROTH conversions need to take into account your current tax liability to make sense. This is why doing some backdoor ROTH conversions in your 401K now make sense, because those need 5-years before you can start withdrawing the growth tax-free. Assuming you have enough there and in other accounts that limit your tax liability when you retire, you can live off those while you start converting large chunks of your 401K to ROTH in retirement, up to whatever tax threshold you are comfortable with. It's going to be a multi-year process. And probably worth your time to talk with a live CFP about your situation.
Seems like significant growth of converted money in a tax free Roth account is a X factor besides potential higher taxes in the future when deciding to do Roth conversions. For example a growth rate or 10-15 percent per year in a Roth account can quickly reduce the break even age. Thoughts?
For sure. But it’s hard to know what those returns will be.
Not true. Returns do not change the math (unless your account loses value in which case Roth loses big time). Otherwise whether your account grows by 2% or 200% does not matter. The only decision is regarding the % tax paid.
I'm planning on doing a Roth conversion if the stock market tanks 30 percent.
What if it doesn’t?
@@foundryfinancial I'm hedging my bets. I'm doing Roth 401k now from age 47 to age 54, spend down the pretax 401k from age 55 to 75, Roth convert when stock market drops 30 percent or under 25 percent tax bracket in the future, do QCDs at 70.5. I can see the tax bomb going off in my mind with the federal government looking for more money in the future
Your tool is super nice... i have yo get it
17 years ago, I didn't open a IRA, I bought a duplex for $220K, and had the renters pay the mortgage (only break-even for many years). Now the building is almost paid off, brings in close to 3K a month, and is worth over 500K, and as inflation goes up, so does the value of my building ( and so do the rental rates I charge). Stock Markets go up and down, but Real estate accumulation+time, it just works predictably.
Real estate has booms and busts as well, but glad it worked for you!
Rental real estate is no panacea. Factor in all your costs in maintenance, insurance, cost of managing it, etc. Then compare with the money you'd spent and how much it would be if you put it in an SP500 index fund 17 years ago if you want a comparison. Also, I know people that had their rental property destroyed by renters, and there are calls in the middle of the night or you pay a management company to do it.
@@5metoo SP500 crash of 2009, SP500 crash of 2020, SP500 crash of 203x ... well, you get the point. My rental rates never,,, ever.. crash...
@@TheRogerhill1234 - Is frequency your concern or is it duration and severity? Because US RE market appreciation chart shows a severe inversion from 2007 clear through to 2012. That was deeper and longer than any market drawdown in most of our lifetimes. I won't hold my breath waiting for you to compare real profits the the SP500 over that 17 year period. Because if you did you'd cry.
@@5metooI agree. Investing in (stocks) equities beats real estate investing overall. The main source of wealth for the wealthiest people are in equity and not from real estate.
Living into your 80s or 90s? That's just crazy talk. The average person lives 8 years after they retire.
Im not buying the Roth conversion conclusions. Conversion tax and ACA subsides are paid with today's money. A far-future revenue stream of tax breaks has lower NPV due to the discounted time value of money. Summing the future tax savings as today's money is false and misleading.
Wut? Who is summing future tax savings as today's money? There are plenty of people summing current tax savings as future money.
So the go-go years will be spent doing Roth conversions...no thanks!
This makes no sense to me. How in God's name do you pay $928,000 taxes on a $1M portfolio? Bear in mind most people increase bond holdings as they age and won't average 7% returns, probably closer to 5%-5.5%. But even if it doubles over the next 20 years RMD will only require a $108,000 withdrawal, resulting in a tax bill of $19,000. Meanwhile the $300,000 you used to convert has grown to $600,000.
You talk too fast, your screen charts need to be enlarged so they are viewable, you need an arrow to show about which number you're talking and so on. Not very helpful.
Im just too stupid to retire. 😂
Uh life expectancy for males is about 74 years and females is 80. Plus or minus 2 years.
If you were to begin the Roth conversion, what would be the age range to do the conversion? I don’t wanna to the conversion at 65 years old and die at 74 when to tell people on my deathbed, I finally broke even 😢
That includes people who die as children or in early adulthood. For retirement, best to use life expectancies after age 65. People who make it to 65 tend to live longer than the wider average. Factors like income levels and education also factor in.
Wrong. If you are 60 now the average life expectancy is 81. You are not starting from zero.
@@KateStalter I'm using actuaries for the life expectancy numbers. Since I'm getting up there myself, I've know people who usually pass away before those numbers. I don't think actuaires use "retirement" as a beginning basis for their calculations
@@racoonracer7878 Yes, they do. Insurance and annuity actuaries do project life expectancy based on your current age.
i THINK I AM PRETTY ASTUTE, BUT THIS DOESN'T MAKE ANY SENSE FOR ME.
C'mon...You lose a lot of credibility because your "comparison" isn't apples/apples. Your reference strategy and proposed strategy use different equity allocations, rendering any "how much more" number completely meaningless.
John, same equity allocation. No change.
Living is getting so complicated. Animals are more peaceful. They just need to eat and sleep and have sex
Eww demanding email addresses to get the link is gross. Especially in today’s age of data breaches, it’s not worth the risk just to see if your tool is useful to me.
You can always grab a 10 minute mail...
@@semosancus5506 Let’s not make excuses for shitty behavior. You are either missing the point or disingenuous. Many others won’t know to do that, or how to do it, especially in this age group. It’s taking advantage of people.
@@AnonVideos Fair enough. I am 54 and know how to do this stuff, but maybe somebody somewhat older doesn't. I suspect if you enter your email, then when you start getting emails you can just unsubscribe. Maybe that is a more "above board" way of doing it.
@@semosancus5506 A data broker can take a phone number or email address and link people across sites. That information is shared with the broker in many ways including via advertising.
Just visiting a site gives a fingerprint for your browser that can be tracked across sites. Burner email? That’s a 1990s method that no longer works reliably.
The whole thing is of course designed to make a lot of money for others by selling your information.
The email is your login.
I'm confused on why no one ever speaks of a Roth Conversions benefit from the perspective of utilizing it to raise your 5 highest taxable income years, which can also raise your future Social Security payments. I've never heard anyone discuss this aspect. 😊
I believe social security only counts the w2 earnings on which you paid FICA taxes from your paycheck.
@@KimberleyK-ts9vo it went up for mine from a 1099 income off last years income.
Because retirement account withdrawals are not "earnings" and so do not affect SS.
@KimberleyK-ts9vo so I'm imagining things when I'm doing a Roth conversion and my IRA withdrawal pushed my taxable income higher and later my Social Security benefit rose by $140/month?
@@momhouser so I'm imagining things when I'm doing a Roth conversion and my IRA withdrawal pushed my taxable income higher and later my Social Security benefit rose by $140/month?
This is wrong in so many ways. In 2020, I made $165,000 (combined with spouse) and my federal tax rate for what I had to pay (including a Roth) was an average of 13.6% . Now that I'm retired, I receive $65,000 in social security and withdraw $100,000 from my pre-tax 401K. (the same net amount as before $165,000) I'm now taxed at 10.4% . That's 3.2% less. If Trump gets in and they stop taxing Social Security, it will be even less - 7.6% The Roth IRA is smoke and mirrors.
And if it was all in ROTH you would be paying 0%
@@ericmasters360 That's because you paid it all before you put it into a Roth. I paid 0% to put it in my 401K. I bet you paid more Federal tax on the money that went into your Roth than the money I'm paying to get mine out of my 401K. If all I had to live on was my 401k, I would pay 0% on the first $32,000 (joint deduction) that I'd withdraw.
The way I look at the situation would be if you were to put in 15% of your $165,000 income per year into Roth 401k instead of a traditional 401k for a total of $24,750 each year for 20 years. This would eventually be worth $1,132,608 at an 8% growth rate. Then you would only be taxed on the initial $24,750/yr which would be $495,000 total you paid taxes on. And the other $637,608 would be tax free. And RMD’s would be irrelevant also.
Your math does not work. In the example of making $165k and putting $24k into a Roth that will be worth $1m plus, the fact is you paid tax on that $24k each year that could otherwise be invested and growing. Thus you might have $1.5m instead of $1m. Yes you would need to pay tax on the higher balance so the end result will depend on the % paid when deferred vs if you paid the tax up front.
@@ericmasters360 $24,750 going into a pre-tax 401k allows you to pay $6358 less in federal tax each year (including state). If you took that after-tax $6358 and invested it @ 8% for 20 years it would be $274,000. That's enough money to pay the federal and state tax on a one-time withdrawal from a pre-tax 401k in the amount of $928,000. Like I said, it's all smoke and mirrors. (btw, my state is Ohio)