Excellent video. I've been doing annual Roth conversions, to the limit of the 22% bracket, in order to reduce impact of future RMD. Once 2026 arrives, and taxes are raised, the conversions will be reduced to fill only the lowest bracket. We are living on the Roth accounts and SSI. So glad to see the potential tax savings of up to 2M using this strategy. Thanks for a very enlightening video.
I would like an analysis on pre-tax vs roth contributions. I would love to go all in with the roth, but the tax savings at tax time with the pre-tax route keeps me from making that jump.
I have not yet filled out the tool but am looking forward to it. Sounds promising. One very important thing this video made me realize is that I can save even more tax money by not converting the amount in my IRA that I want to donate to charity upon my death. To be more precise, since I can donate IRA money to non-profits without paying taxes on gains of what I donate, I would actually pay more taxes if I convert what I plan to donate. If I learned just that from this short video, I can only imagine what more I will learn from the rest of your videos. I've been watching a lot of Roth Conversion videos - some good, some bad - and this is the BEST!!! Thank you!
I managed to watch a few of your videos in the last few days. Your videos are very informative, and I appreciate your method of teaching and sharing your knowledge. I tried your tool and must say I’m very impressed, I particularly like the simple vs the more detailed approach you offer. Thank you for sharing your story and knowledge on TH-cam.
Great video.. Retire a year ago at 61. Wife is retiring in couple months so have been moving cash into Roths while we still have wages. Next is to start some smaller Roth conversions and this video really helps get me thinking more deeply about the best taxing strategy. Thanks john
Glad I stumbled onto your videos. Truly kicking myself for neglecting this topic, along with other issues the last 10 years … work distractions, gun shy from very poor advice 40 years ago, laser focused on paying off the house mortgage as fast as possible ( 6 years rather than the 30 year mortgage we took out @3.0% … a house is a roof over your head, not ant investment). Thank you.
I hammered a low interest home loan to almost paid off, for me it was a mistake. The cash using to pay off a 3% home loan can get a safe 5% CD, the cash from laddering CDs can be used to live on to have anemic taxable income, with a low taxable income 401K money can be rolled over to Roths at a low tax rates
Why would you pay down a 3% mortgage when you could put that money in a 401K S&P500, avoid state/fed tax, and reap 8% on average (last year 20%). (Also, if you itemize, you would be losing ‘some’ mortgage deduction). Or put it in a Roth IRA? As the guy above said, even banks are offering 5% CDs. If you have enough to max out on a 401K AND pay down the house and have emergency money, then great, pay off the house early.
wise! good peace of mind sleeping at night! once it's paid off, it's paid off! everything else (investments) will fluctuate over time. the price of a peaceful nights sleep (paid off house) is priceless!
@@1MinuteFlipDoc You're still paying property taxes and insurance on your house, which I assume will increase over time. Possible HOA, too. I didn't want to pay off my mortgage but I refinanced at 3% so my mortgage payment is just under the total of my property tax & insurance every month. That works well in my retirement cash flow without gutting my investments for it.
Good info, lots to consider here. I have a large IRA/401k, and small Roth accounts. We’re flirting with a 24% bracket, so it doesn’t make sense to do a conversion this year. But wife is planning to retire next year at 59. That will be a good time to start.
I find those analysis about Roth conversion always a bit oversimplified. For example, they are assuming the tax bracket can be filled up with the Roth conversion. But during the year of Roth conversion, need to leave on some revenu, which also most likely will be taxable in some way ( unless it is seating in a checking account bringing close to 0% interest). Another risk is being obsessed with the Roth conversion and target lowering the tax bracket, which means not enjoying the Gogo years.. for getting more money at age 85..
Agreed. To get the most bang out of Roth conversions is to have an influx of tax free money, or nearly tax free money (withdrawals from a taxable account are partially taxable; just the capital gain is taxed at 0% or 15%, usually). I had an influx of tax free money (inheritance & cash-out refinanced mortgage money), which allowed me to maximize the benefit of Roth conversions. I've convinced no one to do a cash-out refinance, but it was key for my plan. I started my Roth conversions in 2015, and I'll finish up in 2026. My future avoided federal, state, IRMAA & NIIT totals $2,300,000. My conversions are being done in a no state income tax state (Texas), while my Roth withdrawals will be in a high income tax state (California).
Thanks Kevin. I actively manage a taxable brokerage acct. and have taxable capital gains and dividend income, in addition to a large IRA. I am not taking social security yet but I am past full retirement age. I pay very high IRMA on the Medicare premiums for my wife and I which really pisses me off given the high taxes I have had to may in my life time. Roth conversion would just put me in a higher bracket now for many years up to RMDs. I guess I just let it grow till then.
I am in the same situation with IRMA. I found that out the hard way after my first year of Medicare (had to pay double the norm). I am not taking SS (67 yrs old) either in gap years trying to burn down some 401k early on. Retired just living on tax paid savings and 401k. Now trying to strategize, but looks like all efforts will lead me to the first tier IRMA increase. Yes this IRMA crap is hard to swallow and I don't think that it is fair. Noted in Kevin's sample, I think they were in IRMA territory for stealth tax too for some years.
I am contributing 100% to the Roth 401K. I am 42 and started to do In Plan Roth rollovers. The main reason I am doing this is because currently my effective tax rate is 18.5%. That is for the state and federal combined. I guess anything is possible. But I highly doubt it that my effective tax rate will be this low in the future!
Don’t forget there are several states that have zero income tax. Personally, I’m considering a move to a warmer state and the fact there is zero state income tax is a big bonus.
You want to make your decision on whether to do Roth conversions on your marginal tax rate, not your effective tax rate. If your marginal tax rate on your conversion is lower than your predicted future tax rate avoided on your Roth withdrawals, then that's advantageous. You may also need to factor in IRMAA & NIIT taxes.
I'm retiring in 2-3 years at age 62-63. It makes sense to me to start the Roth conversions now, doing a partial over the next 3 years while I'm still working and have the extra money to pay for the extra taxes, being mindful not to cross into the next tax bracket. This is what I'm doing, I'm not waiting until I actually retire to start the conversations. Plus, the better 2017 tax brackets are expiring starting 2026 tax year.
I'm doing the same, largely because in retirement health care costs (ACA or Medicare) increase with income. So, one has protection from this hidden cost of Roth conversions while health benefits are covered through company benefits. It's important to note that for Medicare, cost uses a 2-year look back. So, the income you show at age 63 will drive your Medicare cost at age 65. Here it helps if one was born closer to year's end instead of near the beginning of the year because increase Medicare cost would be limited based on the number of age-65 months is the first year it is taken.
If your increase occurs because work and conver sion but expected income is expected to change because of life changes (retirement) you can file notice of expected change and avoid extra Medicare charges for that past income because working.
You mention "stealth taxes" but I think they deserve more attention. The "Inflation Reduction Act" limits heathcare premiums to 8.5% of income and is effective through 2025, this includes Roth conversions. Someone who early retired with $100k in income might have $20k in insurance premiums so that's 8.5% additional on income over $100k up to $235k. It's significant. For someone in this situation I'd say wait until 2026 for any Roth conversions.
Wow, thanks for the walkthrough and the pointer to the tool. I’ve been working with my own spreadsheet trying to make these calculations. Interesting all the variables you can tweak to maximize the result.
one problem with roth conversions early before social security kicks in is it increases your income level and can eat into any price subsidies on healthcare through the ADA
It's a savings, but not such a huge savings. You need to show the results using real rather than nominal dollars. That $1+ million savings is inflated future tax dollars vs current dollars. A better measure is ending net worth.
great video. but also remember that not everyone has the money to pay the extra taxes from the roth conversion. .... and....speaking of roth, 401k, HSA and all that... please make a video for Freelancers. You live in LA, you know they exist.
Social Security for me is taxed up to 85%. I am old enough to need to make an annual RMD. I don’t have a use for the $30,000 ish RMD. I use the RMD to pay the taxes for a $100,000 annual ROTH conversion. The tax bracket stays the same at 22%. If one spouse dies, then the tax bracket increases for the conversions. The ROTH conversion is an easy way to put surplus money into a ROTH at no change in taxes. Eventually, all the 401k will get converted.
Thank you for the offer to turn on the tools. I had previously tried with this site but found that the basic tools are too basic and the site wasn't very valuable from a planning perspective. It might give a good doomed / only mostly doomed thumbs-up thumbs-down fuzzy feelings, but the marginal tax graph is what I really wanted to sort this out and that is not a feature. Thank you!
Please do consider that the dividends and interest in your taxable accounts will be taxed as ordinary income EVEN IF they are invested back automatically without taking a distribution. When determining what your income bracket would be while determining how much Roth Conversion you can afford to take in a given year while staying within a target tax rate.
I'm 72, and must start takingRMDs this year (don't want to wait till 73, because then I'd have to take two RMDs in the same year, increasing my taxes.) I really wish I'd known to do conversions much earlier, but better late than never, I guess. I converted about $75K over the last 5 years, paying the taxes due from non-IRA sources. The conversion caused me to have to pay income taxes on 85% of my SS, but because my RMDs will only be about a third of my yearly previous conversion amounts, I'm betting that my SS taxable rate will drop to 50%. And I'm betting that federal income taxes will keep going up during the rest of my lifetime.
I think an easier, back of envelope, way to figure out if you want to do Roth conversion is to compute the breakeven, in terms of dollar amount. Let's say that you are in the 35% tax bracket and expect to drop down to the 24% tax bracket in retirement. Let's assume you have $100,000 in your 401K. The tax you would pay would be about $35,000. The breakeven point is the value of the account when you would have to pay the same amount from taking withdrawals from your 401K. In this case, you would need 35K X 100K / 24K = 146K. ie. You would pay the same taxes if you had 146K in your 401K account. ie. a 46% growth. If you paid for the taxes during the Roth conversion out of a taxable account, you would end up with $100,000 in your Roth IRA, so only need to make 46% gain to break even. Beyond that, all the compounding growth is tax free. If you paid with taxes from the 401K, you would end up with $65,000 in the Roth IRA, which would require 146/65 = 124% growth to break even. 46% seems reasonable. 124% is much harder. The growth of the market last year was such that people who did the conversion a year ago would almost have broken even. If someone is in the 24% tax bracket and would be in the 22% tax bracket in retirement, then the decision is a lot simpler as the amount of growth needed to break even is a lot less. The hard part is saving enough to pay the taxes out of a taxable account, so you can get maximum impact out of the Roth account.
Maybe for a basic estimate, but really need to comprehend full picture of income/expenses, taxes social security, conversions, widow tax on spouse, etc
This ALMOST made sense to me, but not quite. If I convert my entire trad IRA of $450,000 and pay 35% tax from my taxable account, how does that work out? Not sure I understood the early paragraph’s calculation.
@@candecarro The breakeven would be about paying the same amount of tax now, versus in the future. If you are at 35% and have $100,000, you would pay $35,000. To break even, it means you have to figure out how much your would need the IRA to grow to also have to pay $35,000 if you take it out later. 24% of $146,000 would be $35,000. ie. The same tax paid now to convert as what would have to be paid in the future. This assumes that you are paying all the tax out of your taxable account. The difficulty is in saving up enough in your taxable account in order to pay the taxes. This means doing the conversion over a number of years as you save up cash. If your retirement tax bracket will be very low (e.g. 12%), the breakeven would be $100,000 X 35 / 12 = $291,000. That is a lot of growth required.
@@candecarro If all your total tax deferred accounts is 450k, i wouldn't do roth conversions at all. I would just withdraw what I needed annually and try to stay in lower marginal tax brackets. And also figure how not to run out of money if 450k is the total of all savings.
Your videos are all really helpful. I also used the software to see if a Roth conversion would help me, but it won’t. However, the tool helped me to see that I should wait until 70 to take social security, and it also got me thinking about equity location, which I had never considered before.
Thanks for the excellent Video Kevin--just subscribed and also just setup an account at Right Capital. Looking forward to you activating the "Tax" tab so I can run through different conversion scenarios.
Thank you for knowledgeable video. I have subscribed to your channel and also made an account with your software. I really like how it is laid out. I will be looking out for when you are able to activate the tax part so I can look at my options. Thanks again.
I am a CFP who LOVES Roth. Don’t get me wrong…. But the obsession on RMDs out of traditional has always been a little strange to me… you’re mid 70s. It likely makes sense to unwind traditional at that age anyways
That’s why you run the numbers and show clients various options. But, as you said, you’re forced to unwind at age 73/75. If you don’t control the withdrawal - it could create a larger tax bill for you and your heirs if you don’t plan properly. And trigger IRMAA and a higher tax rate.
Something for people to keep in mind is to actually do the math. Most people don't realize hitting a higher tax bracket isn't necessarily that bad. For instance married filing joint 24% bracket starts at $201,051. You DON'T pay 24% on the entire amount. If you go over by $1K you only pay 24% on that $1K NOT the entire $202,051. Most people don't seem to know how brakets work. You pay exactly the same takes on the first 100K that someone who only makes 100K total.
True, in general, but there are possible "tax cliffs" where deductions or benefits are no longer available because you exceeded income thresholds, or 1/2 of soc sec income can suddenly become taxable by crossing a threshold.
appreciate these videos a lot! Thank you. I too noticed the client age goes up to 106! Wonder this: if bring endpoint to "more usual" life expectancy of, say, 92, how do these final savings numbers change?
The account growth does not change the math unless it is negative in which case conversion is less attractive. Positive growth whether 5% or 15% per year if you pay the same % tax will not change the result.
Thanks for the video and the understandable presentation of an often complex topic. I just retired at 67 and I’m considering moving to Spain where Roth IRA and Roth 401(k) are not recognized. So, Roth is not a panacea. Roth income would be considered as ordinary income and taxed as such. Although you’d be exempt from US federal income taxes, Spain will ask for its share of taxes as you did not pay taxes to them. Effectively raising your taxes in retirement. There is also no benefit in the double taxation treaty between US and Spain on this. Some European countries do recognize Roth generated income like the UK, France and Belgium but Spain and Portugal, two popular retirement destinations do not. I haven’t done my 2023 tax return yet but I expect to be in the 32% tax bracket. I’m not filing for social security benefits until I’m 70 and will take distributions from my 401(k) in the interim. My SSB will be substantial thus pushing me into the 85% (of SSB) taxable category. Between now and 70 I can control the withdrawal amount out of my 401(k) to lower the RMD when I reach 73. My calculations and projections on my 401(k) future growth and annual income generated there from will likely keep me in the same or slightly higher tax brackets. Since Roth is not an option for me, can you suggest other strategies to shelter future income from taxes?
My wife and I are in a very similar situation. We are planning to move to Spain this fall. I will soon be 62, and I intend to work another couple of years remotely on the DNV. I'm still doing Roth conversions now. We recently spoke with a Spainish tax lawyer. They will only tax the gains within the Roth, and only if you make withdrawals. I don't intend to even touch this Roth money for a long, long time, and who knows, may return to the states to live one day where it will be completely tax-free. We will live off of other income while residing in Spain. Also, move to Spain after July 1st, 2024, and you won't be paying any Spanish taxes until Apr 2026. Best wishes to you! Maybe we will run into each other there!
As someone who maxed pretax limits for about the last 12-15 years of my career, I wish I'd known more about RMDs and the IRMAA surcharges back then. I was totally focused on building the retirement balance while minimizing taxes. Did a Roth too for most of the last 20 years. Now I'm doing Roth conversions and pretax distributions for spending. The goal is to take taxable income to the edge of the edge of the lower IRMAA threshold to reduce the pretax balance in the golden years post-ACA until SS starts at 70, with limited conversions at age 70&71. It's a PITA to run all these calculations.
if you have a few million in tax deferred accounts and take out an extra $50K / year to convert before RMDs let's say 8-10 years, that's $400K to $500K total conversions that would have been taxed as ordinary income; but if you have a few million tax deferred and it's still growing for those 8-10 years, that $400K - $500K conversion isn't going to make a big impact on your future RMDs...this is my issue: I'd have to take out too much each year to convert, pushing my tax bracket higher during those early retirement years before RMD, for it to matter when RMDs hit. I'm unable to find a path where Roth IRA conversions make sense. If my combined SSI and withdrawals from deferred accounts keep me in the 24% tax bracket, my tax deferred accounts will continue to grow faster than my withdrawals, unless the markets drop for an extended period of time or I move up to a higher tax bracket and withdraw more.
Good video. Glad you mention that Roth Conversions are not always a good idea. So many think that a Roth leaves you more money no matter what, and that tax free growth is automatically better than pretax growth, which then causes those with smaller portfolios to over convert.
How much would it cost to get additional or full access to the software? I subscribe to new retirement but find RC to be better suited for my needs. However, I don't believe the numbers are realistic. Inflation seems to be set at 2.5% for the first year and 1.5% for the remainder of the plan. Of course I've seen many training videos that show enhanced capabilities that are not present in the version I'm working with so I'm wondering if it's possible to gain more access to those capabilities.
Hi Kevin, Just checking if you saw my recent question, as I cannot see in RC the edit button you show at 11:35 to limit the number of years you do the Roth conversions. Thanks
Very informative. However, you are missing one important piece of the puzzle. HEALTHCARE. I just retired at 61 1/2. For the next 3 1/2 yrs i need healthcare. Cobra way to expensive @ $900/month. Obama care is the way to go, But.... Subsidies to make the policy palatable come at a cost. With my wife who is 65 and on SSDI we have yearly income. We set a income level at $50,000/yr so our obama care subsidy would be fairly good. The more money you make, the lower the subsidy, the higher the monthly cost. This will all but alleviate any roth conversions for the next 3 1/2 yrs. Which are probably our best years to do conversions. Now i plan to wait to collect ss so i can have 2 yrs of conversions before collecting at 67. Will also have to deal with IRMA at that time. So many in's and out's to deal with.
Yes, there are many conflicting options. In some instances, it may be better to take less ACA subsidies in some years and convert some each year. You have to model the numbers, and include RMDs, etc.
Wouldn’t your wife be on Medicare? Then your ACA subsidy is going to be about $10k max per year for you. That is 20% of $50k if you don’t take it, which bumps your effective tax rate up to about 30%. A tough call. The effective tax rate on $100k of income for a couple is still less than 10% including SS discounts.
Hi, are you a RIA...Registered Investment Advisor, registered with SEC with a ADV form Part 2, disclosing all your fees and services? I was told by Eldermann if you talk to a advisor and they can not produced a ADV form, RUN away as fast as you can!
I'm not sure I agree with your example at 8:12. In 2049, it shows tax of 37,063 on 215,153 of income. This approximates 2024 tax tables, however 2049 is 25 years from now and the brackets will have changed. What I do is use the current tables, calc the tax of the PV of the income, then calc the FV of the tax. Something liike FV(Tax(PV(215153))). This gives me a tax of $26,617 in 2049 dollars, assuming a 3% inflation rate. Granted this is a major assumption but so is assuming the brackets will not change.. This one change convinced me not do do rollovers at my stage in life. Good video.
Thanks for the video. One thing to touch on is the comparison of paying for the Taxes out of Converted Funds or pay the taxes from Brokerage Accounts or Savings. If you don't have a Brokerage Account, it will come from savings. If not enough savings, it will have to come from the 401K account which will impact future earnings after the conversion. For those already retired...... If you are receiving ACA subsidies it could wipe those out also. Insurance is not getting cheaper. Lots to unpack if you are considering a conversion and just like SS decisions, everyone has a different scenario. There is a limit to how much most of these Financial Videos can share.
Excellent information! I look forward to reviewing the tax consequences page once turned on. How long will the free access to Right Capital be extended?
No point converting if the amount you’ll be withdrawing is below the standard deduction. Also if you want to utilize ACA subsidies you need to show some income otherwise you’ll be thrown in Medicaid
@@rickyaz8640 I don't think I have to worry about that I inherited 325,000 from a family member in 2020. Because of this only about 13% of my net worth is in Roth 401K Roth IRA.
Excellent summary. Really clear explanation. Thanks! I'm fortunate enough to retire this year (I'm 53). I'm also fortunate enough to receive a lifetime pension starting this year from the military. The pension puts me in the middle of the 22% tax bracket - which may become the 25% bracket in 2026. I fall into the majority that you mentioned in the video; most of my retirement savings is in a Traditional IRA (Thrift Savings Plan) so I'm not sure of the benefit of converting some or most into a Roth IRA. I also have a Roth IRA but the Traditional's value is about twice as much (because I was able to contribute so much more to the TSP compared to the Roth IRA). Because of the pension, I'll remain in the 22% (or 25%) bracket forever. Paying 25% is a big fee on the amount I convert from the Traditional IRA. Certainly gives me something to think about! Thanks again.
@@foundryfinancialIndeed…the pension is a nice problem to have! It’s funny (and very predictable) how much I think of taxes now that I am on the verge of retirement compared to when I was in my 20s trying to save as much as I could.
I am 69, retiring next spring. Will use a little out of the IRAs for living expenses. Should I do a Roth conversion? I already have some money In a Roth.
Here is where I struggle. I currently at the top of the 22% bracket with a 7 figure IRA. Advice is often to convert to the top of the 24% bracket before 2026 when it turns into the 28% bracket. I would also have 5% state tax. If I do nothing and wait for RMDs and live off other money to draw it down so by RMD age all I have is SS plus my taxable IRA withdrawals. If my IRA grows to $5m the year one RMD will be about $200k and increase annually. Added to my SS that seems to be about what I project is needed to live on adjusting for 15 years of inflation and should be well below inflation adjusted IRMAA limit. That would put me in the 25% bracket adjusted for inflation. Assuming SS eats up the standard deduction, I will pay 10% and 15% on some of my RMD and only pay 25% on a portion. The average will be less than the 24% paid today to convert and I am paying with future dollars and avoided the potential disaster of a market drop soon after converting. Also if I move to a zero tax state in retirement I will save another 5% in state tax.
I’m in similar position. Think you’re going to find a very large portion of your social security is going to become taxable when your RMDs kick in. That creates zones of double taxation that can/will elevate your marginal tax rate well above 25%.
Have a 35000 per year pension. No matter how I slice it I appear to have to pay social security taxes. It kills my Roth conversion plans at lower tax brackets.
What I think is missing is what the amount you would have from leaving the money needed to pay the taxes on the conversion. It would far exceed the tax savings. Even after paying tax on the growth for the money that you didn’t use to pay for the taxes on the conversion.
Big sequence of returns risk by pulling that much out in the early years (to pay the tax), would definitely be worth running Monte Carlo, not just assuming x% return every year.
Is it too late for us?! We came to retirement planning late in the game. I'm 66, my husband is 68. We're both still working making more than ever, but we figured we couldn't retire before 70 because we only have like $750k in 401ks. Would converting to Roth's still make sense for us?
in a few years, due to medical conditions, I will be off of work. I will be, hopefully, living off of rental income from my properties. Would that be an ideal time to Roth convert?
The thing I do not understand is…. If someone is transferring $50,000 from 401K to Roth… in addition to that $50,000 being transferred, they have to pay Tax on it.. If 15% Tax Bracket that would be and additional $7500 I will have pay to do this deal. Less money to invest in my other accounts.
Great video Kevin!..I'm considering a Roth conversion now at 61 yrs old with $875k in a traditional pre-tax 401k contribution. I'll probably work til 65-67yrs old. I'm wondering if it's still worth doing, but taxes never go down, do they:) Though my question is that since I'll be retired and not making an income except drawing from retirement accounts, won't my tax bracket be that much lower anyway?..and being that retirement is only 5-7yrs away, would a Roth conversion make up the difference in what I'll pay in taxes now?
I don't understand your suggestion that instead of a Roth Conversion you may want to take a distribution from your Trad IRA and put it in savings. Savings accounts have virtually no growth, so why not convert to ROTH where presumably you are getting a higher return? You can withdraw funds from the Roth as needed and any growth will be tax free, whereas you'll pay tax on the interest from savings account. Of course this is assuming one is over 59.5 years old.
Great video, I have worked all my life without thinking about my retirement. Now my kids are growing fast, the way I am spending my savings, it has come to my attention that at my old age, I will have no jobs, no money left and no retirement funds to fall back to. So I am asking what do I need to do and how do I begin investing in my retirement. I just need professional advice. Thanks.
Excellent video. I'm just curious, wouldn't you be better off with smaller ROTH conversions on the front end and paying less taxes then and paying some small tax amounts later in life? What you would call tax efficient not tax free. What are your thoughts.
I'm not fully done with this video yet but if you didn't mention it; if your age is before 59 1/2 years old and you convert or roll over money from a retirement account do Not take out money from the account as you will be hit with the 5 year rule where then you will be subjected to the 10% Tax anyways.
I would love to determine if a Roth like work for me but I just don’t see it. I just retired at 69 years of age. I never did Roth because I was already in the 34% tax bracket. In my first year if retirement, I plan on starting Social security this July and I will receive the maximum amount allowed, about $4,973 a month. I have a pension of about $76,000 which like social security, will behind t to a cola. I did work in January and also cashed in unused vacation and between pay and vacation, that adds in another $56,000. The bigger issue is that while I have private health and life insurance for life, I wanted to add Medicare part b as a wrap around and I’m already going to because to an Irmma so a Roth conversion will increase that irmma significantly. I will pay income tax on social security (85%) but no state tax on SS. I do have a 401k that after splitting it through divorce is still fairly large but since I have the pension and SS, it’s not clear I will need that money but will be hitting RMD in two years. If you know a way that a Roth IRA conversion makes sense, especially with the 5 year holding period, I’m all ears.
Thanks Kevin for another great tutorial. However, the version of planner software you are using is not similar to the one we have access to. For example, on the Roth conversion page, we don't have an Edit option (bottom right corner) that you have to customize (like number of years to convert). Is there any work around this?
My daughter has a medical problem that will need life long assistance . I would like to financial , how can I put the Roth in a special needs to take advantage of the normal ten year period ? I realize you just cannot transfer to trust without cashing it out but I heard there is a way . Thx u
I’m like the Dunphy’s with what I have in my retirement accts but I’m widowed (2020) and I’m 76. My SS and other investments easilycover my living expenses. I want to convert all of my tax-deferred IRA now to get rid of RMDs and eliminate taxes for my kids when they inherit.
Great video, thanks, What if your Roth IRA contribution room is already used up. Can you still roll over amounts from 401k? Or would that be considered over contribution and lead to penalties?
Many people worry about paying taxes out of pre tax Ira money, but the fact is that the balance you see on your statement is not all your money. In my case, 20 to 25% of that balance belongs to the Federal and State governments. You can pay it now or let it grow and pay it later, but unless you give it to charity, taxes will claim their share. Our son is in a higher bracket than us so we are annually converting to the top of our bracket to a Roth. If the market rewards you, I feel fine using some of that gain to pay taxes.
Great video and explanation on ROTH conversions. I'm 72 and turning 73 in 2024. Therefore, RMD's come into play. I have been making conversions from traditional IRA'S to Roth and keeping it below the taxable mark in the 10 % bracket. I did $9,500 in 2023, and it turns out I could have done $14,000 without being taxed. Now that I'm required to take RMD'S it will reduce my conversion amounts drastically. How can I maximize conversions in this situation? Also, can I take payments from my Roth annuity and transfer to my Roth stock account, therefore making it grow in a better interest or dividend account.
Through divorce I will be getting a portion of the community 401k/ira account. What would you advise me to make sure I will not pay any tax on the amount. I currently have a Roth IRA account to which I’m thinking of moving my share to. I am 66 yo. My only asset is the equity on my house. Thanks for your thoughts.
Why would you not convert the entire IRA in one year? 2/3s to the Roth 1/3 to pay the tax owed. IRMAA goes to max value in two years, but the Medicare surcharge only lasts one year and drops back when the income goes back to normal.
Love the info here thank you. My question is in your example where Phil and Claire withdrew 12 to 15% annually, what did that equal in dollars for them for that year?
Hi Kevin, thanks so much for your video, it was very easy to understand and informative. I have a couple questions... I'm 60 and retired and I recently converted my Roth 401k to a Roth IRA both with the same administrator /company.. which I had opened for more than 5 yrs. 1. Do I now have to wait 5 years before I pull the existing money out? 2. If I do conversions from my regular IRA to the Roth do each of those have a separate 5-year waiting . Before I can access the money? Thanks again!
Im confused. This has nothing ro do with mega backdoor roth conversions? It is about taking your already 401k tax deferred and converting to roth ira earlier? This strategy is about getting tour money out of an already tax deferred 401k? Do i understand that correctly?
If I'm 62 and have about 3 million in combined 401K/403b funds, I feel like withdrawing this money over the next few years to do a Roth conversion would put most of this withdrawal in the highest tax bracket. If that is the case, does that reduce or eliminate the benefit of doing a Roth conversion?
Depends. I’d you don’t get the money out, you could have some painful RMDs in ten years - assuming the account grows. I’d probably do a hybrid approach. Reach out and I can walk through some options.
Two questions. At time stamp 13:26 you mention taking money out of pre-tax account and putting it into a taxable account to help drain the pre-tax bucket. When would that ever be better than a ROTH conversion even if the money will be spent in the next couple of years? We feel filling the 12% tax bracket with ROTH conversions is a no brainer. Even if we are going to spend the money in the next few years, if we need a large sum of money, it will keep us from taking a large tax hit, in a higher bracket, in the future. We will still have plenty of pre-tax money to fill the 0% tax bracket (standard deduction), 10% tax bracket, fund QCD's and pay deductible LTC expenses in the future. Does this make sense?
Nice video thanks. Even greater thanks for the access to the tool. Is this a 14day trial or anything or can I keep playing with it later (not a lot of time now)?
I am really mad at myself as I learned this stuff. My biggest traditional IRA is $622K. Over the years, I contributed $232k pretaxed with a company match of $81k. I wish now I had pay taxes back then and did a conversion.. I now have $300k taxable profit that could have been tax free😢. I am 62 and retired now for 3 years. Hubby still working. We are in the 22% bracket. I can convert about $83k before moving to the next bracket so that is my plan. Also keeping an eye on IRMAA.
@@foundryfinancial Thanks for the heads up. I do have a rental property and interest bearing accounts. I also read currently it is not indexed for inflation. Is NIIT based on MAGI and IRMAA based on taxable income?
Excellent video. I've been doing annual Roth conversions, to the limit of the 22% bracket, in order to reduce impact of future RMD. Once 2026 arrives, and taxes are raised, the conversions will be reduced to fill only the lowest bracket. We are living on the Roth accounts and SSI. So glad to see the potential tax savings of up to 2M using this strategy.
Thanks for a very enlightening video.
I would like an analysis on pre-tax vs roth contributions. I would love to go all in with the roth, but the tax savings at tax time with the pre-tax route keeps me from making that jump.
I have not yet filled out the tool but am looking forward to it. Sounds promising.
One very important thing this video made me realize is that I can save even more tax money by not converting the amount in my IRA that I want to donate to charity upon my death. To be more precise, since I can donate IRA money to non-profits without paying taxes on gains of what I donate, I would actually pay more taxes if I convert what I plan to donate.
If I learned just that from this short video, I can only imagine what more I will learn from the rest of your videos. I've been watching a lot of Roth Conversion videos - some good, some bad - and this is the BEST!!! Thank you!
I managed to watch a few of your videos in the last few days. Your videos are very informative, and I appreciate your method of teaching and sharing your knowledge. I tried your tool and must say I’m very impressed, I particularly like the simple vs the more detailed approach you offer.
Thank you for sharing your story and knowledge on TH-cam.
Thanks, Rick! I really appreciate it.
This video represents exactly how TH-cam can democratize financial planning and freedom. Excellent content. Thank you!
Thank you!
Great video.. Retire a year ago at 61. Wife is retiring in couple months so have been moving cash into Roths while we still have wages. Next is to start some smaller Roth conversions and this video really helps get me thinking more deeply about the best taxing strategy. Thanks john
Thanks, John! Glad it was helpful.
Glad I stumbled onto your videos. Truly kicking myself for neglecting this topic, along with other issues the last 10 years … work distractions, gun shy from very poor advice 40 years ago, laser focused on paying off the house mortgage as fast as possible ( 6 years rather than the 30 year mortgage we took out @3.0% … a house is a roof over your head, not ant investment). Thank you.
I hammered a low interest home loan to almost paid off, for me it was a mistake.
The cash using to pay off a 3% home loan can get a safe 5% CD, the cash from laddering CDs can be used to live on to have anemic taxable income, with a low taxable income 401K money can be rolled over to Roths at a low tax rates
Why would you pay down a 3% mortgage when you could put that money in a 401K S&P500, avoid state/fed tax, and reap 8% on average (last year 20%). (Also, if you itemize, you would be losing ‘some’ mortgage deduction). Or put it in a Roth IRA? As the guy above said, even banks are offering 5% CDs. If you have enough to max out on a 401K AND pay down the house and have emergency money, then great, pay off the house early.
wise! good peace of mind sleeping at night! once it's paid off, it's paid off! everything else (investments) will fluctuate over time. the price of a peaceful nights sleep (paid off house) is priceless!
@@1MinuteFlipDoc You're still paying property taxes and insurance on your house, which I assume will increase over time. Possible HOA, too. I didn't want to pay off my mortgage but I refinanced at 3% so my mortgage payment is just under the total of my property tax & insurance every month. That works well in my retirement cash flow without gutting my investments for it.
Good info, lots to consider here. I have a large IRA/401k, and small Roth accounts. We’re flirting with a 24% bracket, so it doesn’t make sense to do a conversion this year. But wife is planning to retire next year at 59. That will be a good time to start.
I find those analysis about Roth conversion always a bit oversimplified. For example, they are assuming the tax bracket can be filled up with the Roth conversion. But during the year of Roth conversion, need to leave on some revenu, which also most likely will be taxable in some way ( unless it is seating in a checking account bringing close to 0% interest). Another risk is being obsessed with the Roth conversion and target lowering the tax bracket, which means not enjoying the Gogo years.. for getting more money at age 85..
totally agree...IMHO the only reason to worry about this is the viability of your retirement style...
Agreed. To get the most bang out of Roth conversions is to have an influx of tax free money, or nearly tax free money (withdrawals from a taxable account are partially taxable; just the capital gain is taxed at 0% or 15%, usually).
I had an influx of tax free money (inheritance & cash-out refinanced mortgage money), which allowed me to maximize the benefit of Roth conversions. I've convinced no one to do a cash-out refinance, but it was key for my plan.
I started my Roth conversions in 2015, and I'll finish up in 2026. My future avoided federal, state, IRMAA & NIIT totals $2,300,000. My conversions are being done in a no state income tax state (Texas), while my Roth withdrawals will be in a high income tax state (California).
Thanks Kevin. I actively manage a taxable brokerage acct. and have taxable capital gains and dividend income, in addition to a large IRA. I am not taking social security yet but I am past full retirement age. I pay very high IRMA on the Medicare premiums for my wife and I which really pisses me off given the high taxes I have had to may in my life time. Roth conversion would just put me in a higher bracket now for many years up to RMDs. I guess I just let it grow till then.
Sometimes there’s just nothing you can do.
I am in the same situation with IRMA. I found that out the hard way after my first year of Medicare (had to pay double the norm). I am not taking SS (67 yrs old) either in gap years trying to burn down some 401k early on. Retired just living on tax paid savings and 401k. Now trying to strategize, but looks like all efforts will lead me to the first tier IRMA increase. Yes this IRMA crap is hard to swallow and I don't think that it is fair. Noted in Kevin's sample, I think they were in IRMA territory for stealth tax too for some years.
I am contributing 100% to the Roth 401K. I am 42 and started to do In Plan Roth rollovers. The main reason I am doing this is because currently my effective tax rate is 18.5%. That is for the state and federal combined. I guess anything is possible. But I highly doubt it that my effective tax rate will be this low in the future!
Don’t forget there are several states that have zero income tax. Personally, I’m considering a move to a warmer state and the fact there is zero state income tax is a big bonus.
You want to make your decision on whether to do Roth conversions on your marginal tax rate, not your effective tax rate. If your marginal tax rate on your conversion is lower than your predicted future tax rate avoided on your Roth withdrawals, then that's advantageous. You may also need to factor in IRMAA & NIIT taxes.
I'm retiring in 2-3 years at age 62-63. It makes sense to me to start the Roth conversions now, doing a partial over the next 3 years while I'm still working and have the extra money to pay for the extra taxes, being mindful not to cross into the next tax bracket. This is what I'm doing, I'm not waiting until I actually retire to start the conversations. Plus, the better 2017 tax brackets are expiring starting 2026 tax year.
That sounds like a smart plan.
@wdeemarwdeemar8739 Good point. I'm 4 yrs away from Medicare eligibility.
I'm doing the same, largely because in retirement health care costs (ACA or Medicare) increase with income. So, one has protection from this hidden cost of Roth conversions while health benefits are covered through company benefits. It's important to note that for Medicare, cost uses a 2-year look back. So, the income you show at age 63 will drive your Medicare cost at age 65. Here it helps if one was born closer to year's end instead of near the beginning of the year because increase Medicare cost would be limited based on the number of age-65 months is the first year it is taken.
Even though tax rates will go up in 2026, trust the numbers. For example 15% in 2026 is less than 22% now.
If your increase occurs because work and conver sion but expected income is expected to change because of life changes (retirement) you can file notice of expected change and avoid extra Medicare charges for that past income because working.
Thank you very much Kevin. The demo makes this topic a lot more relatable rather than simply explaining the components. Much appreciated.
My pleasure.
I already made enough profit in my Roth to cover the taxes I paid last year on my conversion. Yay!
You mention "stealth taxes" but I think they deserve more attention. The "Inflation Reduction Act" limits heathcare premiums to 8.5% of income and is effective through 2025, this includes Roth conversions. Someone who early retired with $100k in income might have $20k in insurance premiums so that's 8.5% additional on income over $100k up to $235k. It's significant. For someone in this situation I'd say wait until 2026 for any Roth conversions.
Wow, thanks for the walkthrough and the pointer to the tool. I’ve been working with my own spreadsheet trying to make these calculations.
Interesting all the variables you can tweak to maximize the result.
one problem with roth conversions early before social security kicks in is it increases your income level and can eat into any price subsidies on healthcare through the ADA
Will you elaborate on this?
Excellent video. Thoughtfully laid out and easy to understand.
Thanks, Troy!
It's a savings, but not such a huge savings. You need to show the results using real rather than nominal dollars. That $1+ million savings is inflated future tax dollars vs current dollars. A better measure is ending net worth.
great video. but also remember that not everyone has the money to pay the extra taxes from the roth conversion. .... and....speaking of roth, 401k, HSA and all that... please make a video for Freelancers. You live in LA, you know they exist.
Social Security for me is taxed up to 85%. I am old enough to need to make an annual RMD. I don’t have a use for the $30,000 ish RMD. I use the RMD to pay the taxes for a $100,000 annual ROTH conversion. The tax bracket stays the same at 22%. If one spouse dies, then the tax bracket increases for the conversions. The ROTH conversion is an easy way to put surplus money into a ROTH at no change in taxes. Eventually, all the 401k will get converted.
Thank you for the offer to turn on the tools. I had previously tried with this site but found that the basic tools are too basic and the site wasn't very valuable from a planning perspective. It might give a good doomed / only mostly doomed thumbs-up thumbs-down fuzzy feelings, but the marginal tax graph is what I really wanted to sort this out and that is not a feature. Thank you!
Please do consider that the dividends and interest in your taxable accounts will be taxed as ordinary income EVEN IF they are invested back automatically without taking a distribution. When determining what your income bracket would be while determining how much Roth Conversion you can afford to take in a given year while staying within a target tax rate.
Good content. I am looking forward to you activating the "Tax" tab so I can run through different conversion scenarios.
Should be live.
I'm 72, and must start takingRMDs this year (don't want to wait till 73, because then I'd have to take two RMDs in the same year, increasing my taxes.) I really wish I'd known to do conversions much earlier, but better late than never, I guess. I converted about $75K over the last 5 years, paying the taxes due from non-IRA sources. The conversion caused me to have to pay income taxes on 85% of my SS, but because my RMDs will only be about a third of my yearly previous conversion amounts, I'm betting that my SS taxable rate will drop to 50%. And I'm betting that federal income taxes will keep going up during the rest of my lifetime.
I think an easier, back of envelope, way to figure out if you want to do Roth conversion is to compute the breakeven, in terms of dollar amount. Let's say that you are in the 35% tax bracket and expect to drop down to the 24% tax bracket in retirement. Let's assume you have $100,000 in your 401K. The tax you would pay would be about $35,000. The breakeven point is the value of the account when you would have to pay the same amount from taking withdrawals from your 401K. In this case, you would need 35K X 100K / 24K = 146K. ie. You would pay the same taxes if you had 146K in your 401K account. ie. a 46% growth. If you paid for the taxes during the Roth conversion out of a taxable account, you would end up with $100,000 in your Roth IRA, so only need to make 46% gain to break even. Beyond that, all the compounding growth is tax free. If you paid with taxes from the 401K, you would end up with $65,000 in the Roth IRA, which would require 146/65 = 124% growth to break even. 46% seems reasonable. 124% is much harder. The growth of the market last year was such that people who did the conversion a year ago would almost have broken even. If someone is in the 24% tax bracket and would be in the 22% tax bracket in retirement, then the decision is a lot simpler as the amount of growth needed to break even is a lot less. The hard part is saving enough to pay the taxes out of a taxable account, so you can get maximum impact out of the Roth account.
Maybe for a basic estimate, but really need to comprehend full picture of income/expenses, taxes social security, conversions, widow tax on spouse, etc
This ALMOST made sense to me, but not quite. If I convert my entire trad IRA of $450,000 and pay 35% tax from my taxable account, how does that work out? Not sure I understood the early paragraph’s calculation.
@@candecarro The breakeven would be about paying the same amount of tax now, versus in the future. If you are at 35% and have $100,000, you would pay $35,000. To break even, it means you have to figure out how much your would need the IRA to grow to also have to pay $35,000 if you take it out later. 24% of $146,000 would be $35,000. ie. The same tax paid now to convert as what would have to be paid in the future. This assumes that you are paying all the tax out of your taxable account. The difficulty is in saving up enough in your taxable account in order to pay the taxes. This means doing the conversion over a number of years as you save up cash. If your retirement tax bracket will be very low (e.g. 12%), the breakeven would be $100,000 X 35 / 12 = $291,000. That is a lot of growth required.
@@candecarro If all your total tax deferred accounts is 450k, i wouldn't do roth conversions at all. I would just withdraw what I needed annually and try to stay in lower marginal tax brackets. And also figure how not to run out of money if 450k is the total of all savings.
Your videos are all really helpful. I also used the software to see if a Roth conversion would help me, but it won’t. However, the tool helped me to see that I should wait until 70 to take social security, and it also got me thinking about equity location, which I had never considered before.
Great job of making me very complex topic extremely understandable!
Thanks!
Thanks for the excellent Video Kevin--just subscribed and also just setup an account at Right Capital. Looking forward to you activating the "Tax" tab so I can run through different conversion scenarios.
Thanks, Tony!
Thank you for knowledgeable video. I have subscribed to your channel and also made an account with your software. I really like how it is laid out. I will be looking out for when you are able to activate the tax part so I can look at my options. Thanks again.
I am a CFP who LOVES Roth. Don’t get me wrong…. But the obsession on RMDs out of traditional has always been a little strange to me… you’re mid 70s. It likely makes sense to unwind traditional at that age anyways
That’s why you run the numbers and show clients various options. But, as you said, you’re forced to unwind at age 73/75. If you don’t control the withdrawal - it could create a larger tax bill for you and your heirs if you don’t plan properly. And trigger IRMAA and a higher tax rate.
Something for people to keep in mind is to actually do the math. Most people don't realize hitting a higher tax bracket isn't necessarily that bad.
For instance married filing joint 24% bracket starts at $201,051. You DON'T pay 24% on the entire amount. If you go over by $1K you only pay 24% on that $1K NOT the entire $202,051. Most people don't seem to know how brakets work. You pay exactly the same takes on the first 100K that someone who only makes 100K total.
True, in general, but there are possible "tax cliffs" where deductions or benefits are no longer available because you exceeded income thresholds, or 1/2 of soc sec income can suddenly become taxable by crossing a threshold.
Agreed...there is a difference between the "tax bracket rate" and the "effective tax rate" (tax paid divided by taxable income)
Where is the link to the software? Thanks
Love how these analyses always show people living into their hundreds! Wow.
My mother is 98
appreciate these videos a lot! Thank you. I too noticed the client age goes up to 106!
Wonder this: if bring endpoint to "more usual" life expectancy of, say, 92, how do these final savings numbers change?
Kevin, thanks for the video. So many things to consider! I need an advisor to help me through this.
The account growth does not change the math unless it is negative in which case conversion is less attractive. Positive growth whether 5% or 15% per year if you pay the same % tax will not change the result.
Thanks for the video and the understandable presentation of an often complex topic.
I just retired at 67 and I’m considering moving to Spain where Roth IRA and Roth 401(k) are not recognized. So, Roth is not a panacea. Roth income would be considered as ordinary income and taxed as such. Although you’d be exempt from US federal income taxes, Spain will ask for its share of taxes as you did not pay taxes to them. Effectively raising your taxes in retirement. There is also no benefit in the double taxation treaty between US and Spain on this. Some European countries do recognize Roth generated income like the UK, France and Belgium but Spain and Portugal, two popular retirement destinations do not.
I haven’t done my 2023 tax return yet but I expect to be in the 32% tax bracket. I’m not filing for social security benefits until I’m 70 and will take distributions from my 401(k) in the interim. My SSB will be substantial thus pushing me into the 85% (of SSB) taxable category. Between now and 70 I can control the withdrawal amount out of my 401(k) to lower the RMD when I reach 73. My calculations and projections on my 401(k) future growth and annual income generated there from will likely keep me in the same or slightly higher tax brackets.
Since Roth is not an option for me, can you suggest other strategies to shelter future income from taxes?
My wife and I are in a very similar situation. We are planning to move to Spain this fall. I will soon be 62, and I intend to work another couple of years remotely on the DNV. I'm still doing Roth conversions now. We recently spoke with a Spainish tax lawyer. They will only tax the gains within the Roth, and only if you make withdrawals. I don't intend to even touch this Roth money for a long, long time, and who knows, may return to the states to live one day where it will be completely tax-free. We will live off of other income while residing in Spain. Also, move to Spain after July 1st, 2024, and you won't be paying any Spanish taxes until Apr 2026. Best wishes to you! Maybe we will run into each other there!
As someone who maxed pretax limits for about the last 12-15 years of my career, I wish I'd known more about RMDs and the IRMAA surcharges back then. I was totally focused on building the retirement balance while minimizing taxes. Did a Roth too for most of the last 20 years. Now I'm doing Roth conversions and pretax distributions for spending. The goal is to take taxable income to the edge of the edge of the lower IRMAA threshold to reduce the pretax balance in the golden years post-ACA until SS starts at 70, with limited conversions at age 70&71. It's a PITA to run all these calculations.
if you have a few million in tax deferred accounts and take out an extra $50K / year to convert before RMDs let's say 8-10 years, that's $400K to $500K total conversions that would have been taxed as ordinary income; but if you have a few million tax deferred and it's still growing for those 8-10 years, that $400K - $500K conversion isn't going to make a big impact on your future RMDs...this is my issue:
I'd have to take out too much each year to convert, pushing my tax bracket higher during those early retirement years before RMD, for it to matter when RMDs hit.
I'm unable to find a path where Roth IRA conversions make sense.
If my combined SSI and withdrawals from deferred accounts keep me in the 24% tax bracket, my tax deferred accounts will continue to grow faster than my withdrawals, unless the markets drop for an extended period of time or I move up to a higher tax bracket and withdraw more.
Good video.
Glad you mention that Roth Conversions are not always a good idea.
So many think that a Roth leaves you more money no matter what, and that tax free growth is automatically better than pretax growth, which then causes those with smaller portfolios to over convert.
How much would it cost to get additional or full access to the software?
I subscribe to new retirement but find RC to be better suited for my needs.
However, I don't believe the numbers are realistic.
Inflation seems to be set at 2.5% for the first year and 1.5% for the remainder of the plan.
Of course I've seen many training videos that show enhanced capabilities that are not present in the version I'm working with so I'm wondering if it's possible to gain more access to those capabilities.
Hi Kevin, Just checking if you saw my recent question, as I cannot see in RC the edit button you show at 11:35 to limit the number of years you do the Roth conversions. Thanks
Very informative. However, you are missing one important piece of the puzzle. HEALTHCARE. I just retired at 61 1/2. For the next 3 1/2 yrs i need healthcare. Cobra way to expensive @ $900/month. Obama care is the way to go, But.... Subsidies to make the policy palatable come at a cost. With my wife who is 65 and on SSDI we have yearly income. We set a income level at $50,000/yr so our obama care subsidy would be fairly good. The more money you make, the lower the subsidy, the higher the monthly cost. This will all but alleviate any roth conversions for the next 3 1/2 yrs. Which are probably our best years to do conversions.
Now i plan to wait to collect ss so i can have 2 yrs of conversions before collecting at 67. Will also have to deal with IRMA at that time. So many in's and out's to deal with.
Yes, there are many conflicting options. In some instances, it may be better to take less ACA subsidies in some years and convert some each year. You have to model the numbers, and include RMDs, etc.
Couldn't agree more with your frustrations and I'm also in this same boat. Uncle Sam always has a way to put the screws to us!
Wouldn’t your wife be on Medicare? Then your ACA subsidy is going to be about $10k max per year for you. That is 20% of $50k if you don’t take it, which bumps your effective tax rate up to about 30%. A tough call. The effective tax rate on $100k of income for a couple is still less than 10% including SS discounts.
Hi, are you a RIA...Registered Investment Advisor, registered with SEC with a ADV form Part 2, disclosing all your fees and services? I was told by Eldermann if you talk to a advisor and they can not produced a ADV form, RUN away as fast as you can!
I am.
Investments are the roots of financial security; the deeper they grow, the stronger your future will be."
Once again, great video. Can you explain how to determine Fill Up The Tax Bracket tax rate?
Thanks! We use software called Holistiplan to do those calculations each year for clients.
I'm not sure I agree with your example at 8:12. In 2049, it shows tax of 37,063 on 215,153 of income. This approximates 2024 tax tables, however 2049 is 25 years from now and the brackets will have changed. What I do is use the current tables, calc the tax of the PV of the income, then calc the FV of the tax. Something liike FV(Tax(PV(215153))). This gives me a tax of $26,617 in 2049 dollars, assuming a 3% inflation rate. Granted this is a major assumption but so is assuming the brackets will not change.. This one change convinced me not do do rollovers at my stage in life. Good video.
Thanks for the video.
One thing to touch on is the comparison of paying for the Taxes out of Converted Funds or pay the taxes from Brokerage Accounts or Savings. If you don't have a Brokerage Account, it will come from savings. If not enough savings, it will have to come from the 401K account which will impact future earnings after the conversion. For those already retired...... If you are receiving ACA subsidies it could wipe those out also. Insurance is not getting cheaper. Lots to unpack if you are considering a conversion and just like SS decisions, everyone has a different scenario. There is a limit to how much most of these Financial Videos can share.
I’m 32 and have over $200k in my Roth IRAs. Good plan to convert in low income years.
You are in the good shape in your retirement life.
Good video- Where can I download a spreadsheet to analyze
Excellent information! I look forward to reviewing the tax consequences page once turned on. How long will the free access to Right Capital be extended?
As long as possible. There may be a cap on how many people (not sure).
Glad that 100% of my retirement contributions are Roth IRA/Roth 401k. Only have to worry about converting my employer match in the future.
No point converting if the amount you’ll be withdrawing is below the standard deduction. Also if you want to utilize ACA subsidies you need to show some income otherwise you’ll be thrown in Medicaid
@@rickyaz8640 I don't think I have to worry about that I inherited 325,000 from a family member in 2020. Because of this only about 13% of my net worth is in Roth 401K Roth IRA.
is there a link to the software?
Would be helpful to see the benefits offset by up front tax payments and the future benefits discounted back to today. Net present value calculation.
Excellent summary. Really clear explanation. Thanks!
I'm fortunate enough to retire this year (I'm 53). I'm also fortunate enough to receive a lifetime pension starting this year from the military. The pension puts me in the middle of the 22% tax bracket - which may become the 25% bracket in 2026. I fall into the majority that you mentioned in the video; most of my retirement savings is in a Traditional IRA (Thrift Savings Plan) so I'm not sure of the benefit of converting some or most into a Roth IRA. I also have a Roth IRA but the Traditional's value is about twice as much (because I was able to contribute so much more to the TSP compared to the Roth IRA).
Because of the pension, I'll remain in the 22% (or 25%) bracket forever. Paying 25% is a big fee on the amount I convert from the Traditional IRA. Certainly gives me something to think about! Thanks again.
Thanks, David. Yeah, it’s tough when you have a pension - although that’s a good problem to have. I’d still model it out.
@@foundryfinancialIndeed…the pension is a nice problem to have! It’s funny (and very predictable) how much I think of taxes now that I am on the verge of retirement compared to when I was in my 20s trying to save as much as I could.
@@davidrowland2773 Don't forget IRMAA & NIIT in your calculations.
I am 69, retiring next spring. Will use a little out of the IRAs for living expenses. Should I do a Roth conversion? I already have some money In a Roth.
Here is where I struggle. I currently at the top of the 22% bracket with a 7 figure IRA. Advice is often to convert to the top of the 24% bracket before 2026 when it turns into the 28% bracket. I would also have 5% state tax. If I do nothing and wait for RMDs and live off other money to draw it down so by RMD age all I have is SS plus my taxable IRA withdrawals. If my IRA grows to $5m the year one RMD will be about $200k and increase annually. Added to my SS that seems to be about what I project is needed to live on adjusting for 15 years of inflation and should be well below inflation adjusted IRMAA limit. That would put me in the 25% bracket adjusted for inflation. Assuming SS eats up the standard deduction, I will pay 10% and 15% on some of my RMD and only pay 25% on a portion. The average will be less than the 24% paid today to convert and I am paying with future dollars and avoided the potential disaster of a market drop soon after converting. Also if I move to a zero tax state in retirement I will save another 5% in state tax.
Year one RMD isn’t the problem. Look at year 5,10,15 etc. to see the broader picture.
I’m in similar position. Think you’re going to find a very large portion of your social security is going to become taxable when your RMDs kick in. That creates zones of double taxation that can/will elevate your marginal tax rate well above 25%.
Yes RMD’s increase but so do the inflation adjustments to tax brackets and the standard deduction.
When would it make more sense to simply withdraw from the 401k first versus doing a Roth conversion?
Have a 35000 per year pension. No matter how I slice it I appear to have to pay social security taxes. It kills my Roth conversion plans at lower tax brackets.
I think, There can be conversions on the other side of the SS tax torpedo, where SS has already been taxed as much as it can be.
What I think is missing is what the amount you would have from leaving the money needed to pay the taxes on the conversion. It would far exceed the tax savings. Even after paying tax on the growth for the money that you didn’t use to pay for the taxes on the conversion.
Thanks for the great video!
If I'm retired and living off my savings (no income) and convert an amount equal to the standard deduction, the I would owe zero taxes?
Big sequence of returns risk by pulling that much out in the early years (to pay the tax), would definitely be worth running Monte Carlo, not just assuming x% return every year.
Is it too late for us?! We came to retirement planning late in the game. I'm 66, my husband is 68. We're both still working making more than ever, but we figured we couldn't retire before 70 because we only have like $750k in 401ks. Would converting to Roth's still make sense for us?
When doing a Roth conversion, do we have to sell the existing positions? Thank you! Great video! 😊
No you can transfer positions in kind and pay the taxes from another account when you settle up to file taxes
in a few years, due to medical conditions, I will be off of work. I will be, hopefully, living off of rental income from my properties. Would that be an ideal time to Roth convert?
The thing I do not understand is…. If someone is transferring $50,000 from 401K to Roth… in addition to that $50,000 being transferred, they have to pay Tax on it.. If 15% Tax Bracket that would be and additional $7500 I will have pay to do this deal. Less money to invest in my other accounts.
Great video Kevin!..I'm considering a Roth conversion now at 61 yrs old with $875k in a traditional pre-tax 401k contribution. I'll probably work til 65-67yrs old. I'm wondering if it's still worth doing, but taxes never go down, do they:) Though my question is that since I'll be retired and not making an income except drawing from retirement accounts, won't my tax bracket be that much lower anyway?..and being that retirement is only 5-7yrs away, would a Roth conversion make up the difference in what I'll pay in taxes now?
Great question. I hope someone responds.
I don't understand your suggestion that instead of a Roth Conversion you may want to take a distribution from your Trad IRA and put it in savings. Savings accounts have virtually no growth, so why not convert to ROTH where presumably you are getting a higher return? You can withdraw funds from the Roth as needed and any growth will be tax free, whereas you'll pay tax on the interest from savings account. Of course this is assuming one is over 59.5 years old.
Maybe when he says savings he isn’t referring to a traditional bank savings account or mma that currently pays 3-5%?
Great video, I have worked all my life without thinking about my retirement. Now my kids are growing fast, the way I am spending my savings, it has come to my attention that at my old age, I will have no jobs, no money left and no retirement funds to fall back to. So I am asking what do I need to do and how do I begin investing in my retirement. I just need professional advice. Thanks.
Could you please refer me to your expert, I will like to look him up.
Excellent video. I'm just curious, wouldn't you be better off with smaller ROTH conversions on the front end and paying less taxes then and paying some small tax amounts later in life? What you would call tax efficient not tax free. What are your thoughts.
I have a Merrill Lynch advisor. As a CFP, would you be offended if your client told you they wanted to also see a CPA to discuss tax strategies?
I'm not fully done with this video yet but if you didn't mention it; if your age is before 59 1/2 years old and you convert or roll over money from a retirement account do Not take out money from the account as you will be hit with the 5 year rule where then you will be subjected to the 10% Tax anyways.
I would love to determine if a Roth like work for me but I just don’t see it. I just retired at 69 years of age. I never did Roth because I was already in the 34% tax bracket. In my first year if retirement, I plan on starting Social security this July and I will receive the maximum amount allowed, about $4,973 a month. I have a pension of about $76,000 which like social security, will behind t to a cola. I did work in January and also cashed in unused vacation and between pay and vacation, that adds in another $56,000.
The bigger issue is that while I have private health and life insurance for life, I wanted to add Medicare part b as a wrap around and I’m already going to because to an Irmma so a Roth conversion will increase that irmma significantly. I will pay income tax on social security (85%) but no state tax on SS. I do have a 401k that after splitting it through divorce is still fairly large but since I have the pension and SS, it’s not clear I will need that money but will be hitting RMD in two years.
If you know a way that a Roth IRA conversion makes sense, especially with the 5 year holding period, I’m all ears.
Depends on your needs, but I could definitely see it making sense to do a partial conversion.
Thanks Kevin for another great tutorial. However, the version of planner software you are using is not similar to the one we have access to. For example, on the Roth conversion page, we don't have an Edit option (bottom right corner) that you have to customize (like number of years to convert). Is there any work around this?
My daughter has a medical problem that will need life long assistance . I would like to financial , how can I put the Roth in a special needs to take advantage of the normal ten year period ? I realize you just cannot transfer to trust without cashing it out but I heard there is a way . Thx u
I think this video should be titled, "How to save a million bucks in only 14 minutes and 49 seconds." Fantastic video and big thanks, Kevin!
Thanks. It really is a powerful concept.
I’m like the Dunphy’s with what I have in my retirement accts but I’m widowed (2020) and I’m 76. My SS and other investments easilycover my living expenses. I want to convert all of my tax-deferred IRA now to get rid of RMDs and eliminate taxes for my kids when they inherit.
Feel free to set-up an appointment if you’d like me to run the calculations.
Thank you, Kevin!
Could you do the same scenario for the couple retired at 55?
Great video, thanks, What if your Roth IRA contribution room is already used up. Can you still roll over amounts from 401k? Or would that be considered over contribution and lead to penalties?
Thank you very much, Kevin.
where are the tools? Links to your "non-sponsored" financial firm to make an appointment, but none of the spreadsheets you demo'd
I don't see the link to the software?
I'm 62 and feeling like I should retire to start this conversion (though I still want to continue to work.)
It’s all about income brackets. I’d run a model with your current salary and see what happens.
Hi, what software were you using in the demo? Thanks!
It's linked at the top of the page
Many people worry about paying taxes out of pre tax Ira money, but the fact is that the balance you see on your statement is not all your money. In my case, 20 to 25% of that balance belongs to the Federal and State governments. You can pay it now or let it grow and pay it later, but unless you give it to charity, taxes will claim their share. Our son is in a higher bracket than us so we are annually converting to the top of our bracket to a Roth. If the market rewards you, I feel fine using some of that gain to pay taxes.
How charitable of you. 😂
Good points. 👍🏼
Great video and explanation on ROTH conversions. I'm 72 and turning 73 in 2024. Therefore, RMD's come into play. I have been making conversions from traditional IRA'S to Roth and keeping it below the taxable mark in the 10 % bracket. I did $9,500 in 2023, and it turns out I could have done $14,000 without being taxed.
Now that I'm required to take RMD'S it will reduce my conversion amounts drastically. How can I maximize conversions in this situation?
Also, can I take payments from my Roth annuity and transfer to my Roth stock account, therefore making it grow in a better interest or dividend account.
Thanks! You should be able to, although there could be a surrender charge.
Through divorce I will be getting a portion of the community 401k/ira account. What would you advise me to make sure I will not pay any tax on the amount. I currently have a Roth IRA account to which I’m thinking of moving my share to. I am 66 yo. My only asset is the equity on my house. Thanks for your thoughts.
Why would you not convert the entire IRA in one year? 2/3s to the Roth 1/3 to pay the tax owed. IRMAA goes to max value in two years, but the Medicare surcharge only lasts one year and drops back when the income goes back to normal.
Tax brackets, NIIT, IRMAA, etc - can save a lot of money
Love the info here thank you. My question is in your example where Phil and Claire withdrew 12 to 15% annually, what did that equal in dollars for them for that year?
Thanks! That’s the tax bracket, not a conversion percentage. So, you’d just look at the federal tax brackets to get a sense of what they converted.
Didnt notice a mention of medicare costs. Convert too much and your medicare costs go up. Two spaces both get the increase.
Did I not mention it? I thought I did. You’re right. I definitely mention it in the buckets video right before this one.
Hi Kevin, thanks so much for your video, it was very easy to understand and informative. I have a couple questions... I'm 60 and retired and I recently converted my Roth 401k to a Roth IRA both with the same administrator /company.. which I had opened for more than 5 yrs. 1. Do I now have to wait 5 years before I pull the existing money out? 2. If I do conversions from my regular IRA to the Roth do each of those have a separate 5-year waiting . Before I can access the money? Thanks again!
I just had the same question. Waiting..,
As long as u are over 59.5 and have had the roth for 5 years there are no further restrictions or penalties
Thanks you Kevin - so helpful much appreciated
Im confused. This has nothing ro do with mega backdoor roth conversions? It is about taking your already 401k tax deferred and converting to roth ira earlier? This strategy is about getting tour money out of an already tax deferred 401k? Do i understand that correctly?
If I'm 62 and have about 3 million in combined 401K/403b funds, I feel like withdrawing this money over the next few years to do a Roth conversion would put most of this withdrawal in the highest tax bracket. If that is the case, does that reduce or eliminate the benefit of doing a Roth conversion?
Depends. I’d you don’t get the money out, you could have some painful RMDs in ten years - assuming the account grows. I’d probably do a hybrid approach. Reach out and I can walk through some options.
Two questions. At time stamp 13:26 you mention taking money out of pre-tax account and putting it into a taxable account to help drain the pre-tax bucket. When would that ever be better than a ROTH conversion even if the money will be spent in the next couple of years? We feel filling the 12% tax bracket with ROTH conversions is a no brainer. Even if we are going to spend the money in the next few years, if we need a large sum of money, it will keep us from taking a large tax hit, in a higher bracket, in the future. We will still have plenty of pre-tax money to fill the 0% tax bracket (standard deduction), 10% tax bracket, fund QCD's and pay deductible LTC expenses in the future. Does this make sense?
@@1-Wheel-Drive That was the point I was making. I am glad you agree.
Nice video thanks. Even greater thanks for the access to the tool. Is this a 14day trial or anything or can I keep playing with it later (not a lot of time now)?
I’ll give you access as long as I can. Not limit as far as I know right now.
@@foundryfinancial Great thanks.
I am really mad at myself as I learned this stuff. My biggest traditional IRA is $622K. Over the years, I contributed $232k pretaxed with a company match of $81k. I wish now I had pay taxes back then and did a conversion.. I now have $300k taxable profit that could have been tax free😢. I am 62 and retired now for 3 years. Hubby still working. We are in the 22% bracket. I can convert about $83k before moving to the next bracket so that is my plan. Also keeping an eye on IRMAA.
Watch out for NIIT if you have taxable accounts.
@@foundryfinancial Thanks for the heads up. I do have a rental property and interest bearing accounts. I also read currently it is not indexed for inflation. Is NIIT based on MAGI and IRMAA based on taxable income?
Shouldn't the goal be to increase my net worth rather than just saving tax money? Can you incorporate scenario NPV into this analysis?
Hi I'm not seeing the link to the software you used in the video. The demo was very helpful!
foundryfinancial.typeform.com/rightcapital
@@foundryfinancial Thank you!!