Great breakdown of a complex topic! It’s so helpful to understand the pros and cons of a Roth conversion, especially in today’s market. This video really clears up a lot of questions-thanks for the thoughtful analysis!
"Seamless"... I was watching the bloopers when you got to laughing about making things seamless. All joking aside, you are one of my favorite TH-cam channels to watch, partly because most of your videos have very little splicing and dicing. Keep up the great work E!
I retired in 2021 at 59 years old. I have become pretty savvy in finances, but was not always so. I had a large amount of money in my traditional 401k so I built a spreadsheet that showed how much I would have in the future (I have a pension which covers my expenses). I quickly realized that when my wife and I start taking SS, along with my pension, and future RMDs, we would be thrust into higher tax brackets! So I started doing conversions. Thank you for validating my concerns. It took me a lot of research to learn all this. I wish you would have put out this video 4 years ago! One thing that I am not completely sure about is deliberately going past the first IRMAA cliff, and possibly the second, while still staying in the 24% tax bracket. In 2024, we were 63 and 64 years old, so we stayed below the first IRMAA cliff. This year I will have to do a little more analysis!
Thanks, I converted in 2000, 2010, and 2014. Today, I’m so grateful I did. I had no idea what my tax bracket would be decades ago. However, I knew that I wanted access to my money at 59.5 years old and tax free growth for decades.
Planning on doing a Roth IRA conversion soon thanks to you and your videos. I only wish I had found you sooner. I am 76 and my wife is 72 and have roughly $2,000,000.00 in traditional IRA's. I hate getting this late a start. I just hope I don't screw this up. Thank you so much.
Thank you for another great video. My wife and I are using these strategies in our retirement and our 4 children in their 20s and 30s are on board saving great too. I am blessed.
I am a retired tax/finance professional and understand these rules very well. I love how you approach these topics with simplified discussions to provide good information for people who don’t understand the complexities of these rules.
I have been doing conversions for three years, with amounts that take me to the top of the 12% tax bracket, mainly for the reasons you stated. One additional reason, specifically, is basically insurance against the widows tax trap. At some point, one of us will be left alone, hopefully later in life, but if it happens, the remaining spouse will see their standard deduction cut in half, and the tax rates advance much more quickly.
I just did my first large Roth conversion in November. It was easier than I thought but I had to pay a lot of estimated taxes to do it. Since I am 59.5, I did it using a distribution followed by the rollover. Just getting the money out of my deferred account is very satisfying. My goal is to unwind much of my taxable accounts, using that money to pay the taxes and lost harvesting to offset the gains so I can have most of my money in a Roth by the time Social Security hits. I think I am going to have to pay the full IRMAA penalty though to get it done.
Began my conversion Dec. 2020 at age 70. Decided to jump to the 32% tax bracket. Hard to swallow the large tax bills......but I finished converting Dec. 2023. I now am convinced more than ever that my strategy was correct for me. Especially after the market returns I enjoyed these past two years. Oh, my IRMMA deductions are GREATLY reduced. Thanks to Craig Wear for all his help.
While we are not doing a direct Roth conversion, we inherited an IRA that over the 10 years we need to distribute all of it. My employer offers a Roth 401K. So, we are maxing the the contribution, and the catch up since I'm over 50. We take the portion of the distribution to replace the Roth contribution and deposit it in our checking account and put the rest into our investment account account. Indirect back door conversion of an account we couldn't otherwise convert.
Excellent video today, and you look very nice. We are still working but did a $25K Roth conversion in December, as we calculate about $250k of our deferred account is going to be moved at our current tax bracket. I was planning on moving another $25K the next two years before retiring, but my wife was just diagnosed with cancer. So now we may decided to move a higher amount the next two years to help avoid a widow’s tax if something happens sooner than expected. Hopefully everything goes well and we can just continue our plans. Last year I ran scenarios with one of us dying early, like late 60’s. Never thought to run a scenario of one of us dying in our 50’s. 🤷♂️
I have been on the fence about converting one of my IRAs to Roth. At 62 many say it may not be a good move. We are right at the 22% - 24% line and conversion would most certainly put us over. But, I think it is only 2% and may still be worth it. Especially when it comes to RMDs later on. Not a bad idea to think about my kids rather than myself and set up the Roth as a legacy fund. Thanks for the info Erin. You are really good at giving me more pieces to my puzzle. If you ever decide to start a wealth management firm, you have at least one client.
Great information- we’re in our early 60’s and recently retired and looking ahead to RMD avoidance. I have pensions and my wife’s SS more than cover our living expenses (no mortgage) so we’re doing our conversions now before I draw my SS and RMDs.
Thanks Erin. And yet another amazing information delivery and explanation. You have armed me with a few questions to take to my financial and tax advisors. Really appreciate you and what you do for us. Your out takes are equally awesome. 🤪
Great video, Erin! I am a tax accountant and I've helped clients with tax projections for Roth conversions in 2024 more than I ever have in the past! One big factor this year for the spike in Roth Conversions is the scheduled sunsetting of the 2017 Tax Cuts Jobs Act after 2025 wherein these historically low income tax rates are scheduled to revert back to their pre-2018 rates. A Roth conversion is a great idea and I love your comment about starting them very early so that taxpayers can chip away a little bit each year for a long time before reaching age 63 when IRMAA might become a factor!
Super video Erin! Just what I needed to make a decision about ROTH conversions during my retirement starting 7 months from now at the age of 62. I have close to $3 million in pretax retirement accounts and expect my income to drop significantly next year. I am slightly worried about converting with the high stock market, but it seems like the perfect time to make conversions before starting SS at the age of 70, even if the stock market could take a tumble between now and then. I love your educational videos and I share them with tons of family and friends.
My wife took 2 years off in the 1998-2001 tax years, which was right when Roth IRAs were first allowed. I took advantage of that opportunity to convert all of my deductible IRAs into Roths in the (then) 15% tax bracket during those years.
My 86 year old father is STILL mad that he didn’t bite the bullet and convert back then, especially since they let you spread the tax over 3 years. Now he gives his RMDs as QCDs.
Did our first conversion in early December 2024. I am in a minority and will have an excellent pension. That tied with SS for both my husband and I and the fact that we have saved well is going to kill us when RMDs kick in. We could only convert about $30K this year to max our bracket, but plan to do as much as we can each year going forward. And yes - we saved first in a regular brokerage account to pay the taxes on conversions.
I retired a couple years ago and have done a small conversion one of those years. One other point people need to understand is the impact on your long-term capital gains and dividend taxes. Every dollar that comes in as ordinary income pushes a dollar of long-term capital gains and dividends up in its bracket. Let's say you maxed out your 0% bracket for long-term. One more dollar in ordinary income will get taxed at 12% but also a dollar of long-term moves from 0% to 15%. That effectively taxes that extra dollar at 27%.
Good video. Yes - I plan on doing Roth conversions this year. I recently retired and I’m caught up in the max IRMAA storm. Trying to keep my income low this year so I can do Roth conversions. I also need to do IRMAA challenges to try to reduce that hit. Thx.
Everyone finds this entertaining ... and you do provide good information. We are in the sweet spot to do Roth conversions. We did a Roth conversion last year and are planning to do more over the next 10 years. Another factor to consider when entertaining a Roth conversion is what your spouse's tax rate will be when one of you passes away. If one spouse is younger than the other or one of you are in poor health this could be a significant tax savings.
im doing the same thing....presently I am doing a 20 k roth conversion with a 12k rmd......I did earlier roth conversions when I retired but before taking social security....taking as much as I couild without affecting my medicare bill.....chances are you need to take conversions too.....ed slott is a great guy to follow...
Erin, Another great video. I have been retired now for 3+ years and have been doing Roth conversions for the last 4 years. At this point I will draw the balance of my IRA down over the next 2-3 years then moving forward i will be drawing from our Roth accounts. This will greatly reduce taxes since provisional income ( formula to determine amount of SS that is taxable) will result in zero tax liability after my IRA is gone. I will then only have to watch my total capital gains moving forward. It is really advantageous to have a long term spending plan and evaluate taxes from a 20-30 year perspective. RSB in NC
Hi Erin, good to see you this morning! For the record, I do find the out takes entertaining and enjoy them a lot 😉 Your timing with this topic is perfect as that is exactly what I am working on planning out in the next couple of days. I'm retired 13 years, starting at 62 and been dealing with RMDs a few years now. I got started late with Roth conversions and initially shot myself in the foot with IRMAA penalties. I've been doing conversions a few years now, filling up but not exceed the 22% bracket in an effort to get better balance between tax deferred and tax free, and now mainly for my legacy planning. My son makes better income than my daughters husband so that factors in also from an heirs standpoint and the 10 year distribution rule on taxable. I'm also planning on what I'm leaving to my grandkids but that is easy as they are just starting out so earnings are low. BTW , I wish I could get internet for that, I pay $86.24 here in Ca. Great content as usual Erin, on an important topic. Your conversation and presentation of the data and facts was very effective, as you always do so very well. Your advise is spot on, start early with this process!! Have a blessed week and I'll see you on the next on Erin. Larry, Central Valley, Ca.
I have a smallish IRA as I stopped contributing in 1997 and switched to the Roth. Good move for me. I'm doing conversions for my heirs. I do enough to put me towards the top end of the 12% bracket. I do this planning based on my spreadsheets. I do "predict" my future RMDs too, but everything is good no matter what I do. But my non IRA assets go tax free with a stepped up basis, whereas my IRA could cause them a tax problem. My IRA has nearly all short term Treasuries. My heavy lifting in in my Roth and taxable accounts. This was a planning step I missed earlier.
love your channel. 63 retired. Been running a dozen roth conversion scenarios in many programs including boldin. none of them seem to decrease my taxes by any substantial amount. only affect i see in my own spreadsheets are increase in roth funds by the time i am 80 to 90. i am struggling to see real worth compared to the non-conversion strategies. Gonna do small conversions unless we have a real bear market and then i will get more aggressive. Ignoring IRMMA because it really only affects a couple years early on.
One thing to consider with Roth conversions is if you are married and one spouse dies, the single tax rates tend to significantly hit the surviving spouse. No one likes to think about that possibility, however, more than likely either my wife or I will spend some time in the single tax bracket. I want to leave her in the best financial situation. RSB
Erin - thanks for another insightful post. My wife and I are both on Medicare, and don't have RMDsfor another few years. I have struggled with the Roth conversions, using my Boldin account to model them. It keeps coming back as something that doesn't gain me a lot. Then I listen to Ed Slott, who essentially says will never have taxes this low again, so do as much as you can. My biggest concern is when either my spouse or I pass and the remaining person goes from MFJ to single filer. THAT is a big tax bomb. As far as potential inheritors go, they'll have some Roth but most likely more IRA to inherit. If it's a big tax hit for them, they are still inheriting money they weren't planning on. I've always told them I intend to die broke! I'll only be able to look at the past over time to know what benefit they might have been, or if I did better by doing minimal conversions.
We're all in that boat! None of us know what the future holds so we do the best we can now, with the best information available to us at the time..... And yes, I agree with you, Do the Roth Conversions to benefit you. If it can also benefit your heirs...That's a Bonus! If you have the means to purposely plan reduce their tax burden then so be it but it's found money, they can pay the taxes out of their inheritance
A lot of folks overlook the change in tax bracket status when one spouse passes away. You are corrct, it is indeed a huge "tax bomb" that catches many people unaware.
I like the idea of ROTH conversions for all the reasons you mentioned. Now is an especially good time for people to do ROTH conversions because of the tax cuts and jobs act that may expire soon.
Great info. Another idea instead of Roth conversions is take the money you would have paid for the roth conversion (example let's say the taxes on $10k conversion is $2,800) and continue to fund your 401k or IRA accounts. I've done Roth conversions and they are a powerful tool. Everyone's situation is different. Just another idea. If you maxed everything out and want to Roth convert i fully support it. Keep the videos coming and Hello from Wisconsin.
I tried, unsuccessfully, to do a Roth conversion (from TSP to Fidelity) during the last week of 2024. I found out that I had to update my TSP account profile with Fidelity's address in the financial institutions section -- and then, WAIT 7 DAYS to do the transfer! Even dumber, the TSP does transfers by MAILING A CHECK to the destination institution! I spoke to a TSP rep on the phone. When I told her I wanted to do a Roth conversion, she had no idea what that was. We live in the age of the Internet. Financial transaction should be instantaneous and happen electronically.
Before you start taking Social Security. I think that for at least some people, delaying Social Security and using that time to convert to Roth in appropriate size increments is a great strategy. Note that you may be living off the IRA in the bridge years between retirement date and the day you start taking Social Security. Social Security benefit grows from age 62 till 70 because you delay and if you can get IRA down so that RMD's won't cause all your Social Security (85% of it) to be taxed. Also, if converting, watch what your Long term capital gains are being taxed at. The best tool for evaluating Roth conversions is the Forward Looking Tax Plan. It lets you see those holes that can be filled with conversion and the effect on the plan. Note: don't maximize tax savings but the after tax value of your nest egg.
Great info. To answer the video questions. You convert when you can afford to do so. And wealthy people don't live complicated lives. So convert to get rid of RMDs. Your $3 million example is a great example. Those RMDs also trigger IRMA. Then to reduce RMDs and IRMA you'll start converting to Roth anyway. Roth = easier finances in retirement.
The tax calculator I found shows that US federal income tax on $125000 for somebody married filing jointly is $12026.50. it looks like these distributions are not subject to FICA. Depending on how your assets are distributed you can look at other strategies like taking IRA distributions before RMDs kick in to reduce your tax burden over the remainder of your life. Lots of people talk about Roth conversions, but as mentioned in the video, take a look at your situation. You may have other alternatives that work out as well, or nearly as well, over your lifetime that require less overhead.
I converted my IRA to a Roth when I was in my 40s. Great forward planning I thought. But I did it in early 2000. As soon as I did the conversion the tech bubble burst and my new Roth's value plummeted but I was taxed on the much-higher conversion amount. Yes, I could have done a re-conversion but I just let it ride.
It is true that you will pay less tax on a conversion when the market is "down" and the value of your Traditional IRA is lower; however, the less you convert, the difference is that much less you can begin "compounding" within your new Roth IRA as the market recovers. The tax-free earnings associated with a higher compounding value might (and are likely to) exceed the one-time increased taxes during the year of conversion. Bottom line, it is sometimes okay to convert when the market is up since a higher amount converted will earn more via compounding than a lower amount. Also, paying the related taxes during the year of conversion from an outside source (rather than your Traditional IRA) makes even more money available for compounding earlier. Time is money! Erin, if I'm missing something here, please let me know.
RMD's are definitely doing Roth conversions every year. 56 now and retired for a year and we have already done two conversions. I probably will have to ignore IRMAA levels and continue after age 63 all the way to 73. Did everything right in saving and investing for an entire career but now wishing I had held back on the pre-tax and did more brokerage saving.
I'm retired. Currently 59. Been doing partial Roth conversions the last couple years. Balancing everything in order to keep my MAGI around 40k to qualify for ACA subsidies. This is my plan until age 65, assuming ACA continues.
A few weeks ago I did a 401k in-plan conversion of all the traditional funds (matching contributions) in from my previous employer's 401k for a number of reasons. That 401k is about 20% of my overall retirement savings. My previous employer went through bankruptcy and is in very rough financial shape, so I'm preparing for the possibility that the 401k plan could cease to exist and I'll be forced to move the funds elsewhere. I'm currently a contractor at my new job, so I don't have access to a 401k at the moment so I can't roll my old 401k into another 401k. I'm close enough to the income limit for Roth contributions that I want to maintain the ability to do backdoor Roth conversions, which means I want to not have an traditional IRAs. Now that it's all Roth I can leave it in the old 401k so I can roll it into my next 401k if I want and if I have to or want to roll it into an IRA it won't cause me an issue with the pro-rata rule if I end up needing to do the backdoor.
As I understand if one goes to a Nursing home (20% of us) the state can take all your ROTH funds but cannot access your Traditional IRA funds. Suggest ROTH conversions be in balance with your Traditional IRA portion.
Medicaid asset and income limits are determined by your state. Typically, IRAs and 401ks are both considered assets for Medicaid calculations. If you are taking RMD, the RMD is considered income. These can all affect Medicaid eligibility. If you are not Medicaid eligible, nursing home costs are all on you. I found that out when my mother and mother-in-law went into assisted living several years ago.
Thanks for the videos. 52 retiring with pension, Roth, pretax accounts. Going down the path of withdrawing to max out 22% tax bracket for Roth conversion. By the time RMD, SS, and Medicare hits, all funds in the Roth. Wish there was a 16/18% tax bracket. Going from 12 to 22 hurts, but hopefully in the end I’ll have the last laugh.
The other factor to consider for a Roth conversion is the potential NIIT. The conversion amount is added to the NIIT calculation that may cause an additional 3.8% tax to be paid.
At 68 and 69 we have more income now than when we were working. In anticipation of RMDs we are converting IRAs to Roth up to the IRMAA limit. We don't want to pay more for medicare. I wish we had started conversations earlier. My wife's ira's will be all converted by the time she is 73 and my ira's will be significantly reduced. I plan to keep converting until all ira's are Roth and stay under IRMAA limits. Thanks for the video.
This is exactly my situation but I am single. I have done two years at age 66 and 67. I have not started social security, holding off until 70. Right now is taking less than 50,000 between investment and taxes every year before I hit Irma’s. Because I have a pension and have moved cash to high yield govt money market. So I only have 2 more good years. Once I start social security I’ll hardly be able to move anything.
Qualified Charitable Distributions (QCDs) are worth considering if you intend to make charitable contributions in your 70s, or you intend to leave some money to charity when you pass.
RMD starts kick in when we reach 73 and for male life expectancy is 88 and so we have 15 years of withdrawal. If you have substantial nest egg then yes, you need to plan accordingly. But if our nest egg is not much, there is not too much to worry about except for legacy planning. Note that, even if we are in 22% tax bracket, we don’t pay 22% percent of the total income, we only pay 22% of marginal income.
Just to note there is another variable for IRMAA. The magic age isn't really 63, it's two years before you start Medicare. For those who continue working (or whose spouse works) for a "large" (>= 20 employees) employer covered by a reasonable health plan, they can defer Medicare to any age over 65.
My husband started Roth conversions two years ago, at 66. He's still working, and plans to work until 73. He's trying to stay within the tax bracket we're already in, but not go over the next IRMAA threshold. I started small Roth conversions much earlier than my husband did. We both have pensions, so I don't know if these conversions are going to help us much in future taxes, but we're trying. Part of me wants to give up and just acknowledge we're going to be paying a lot in taxes, but will have enough so who cares about converting. We have no heirs, but have had to help our parents.
A 5th reason to maximize your ROTH IRA, the withdrawal in your retirement years does not count as taxable income. Therefore, the government does not use your ROTH distributions in determining whether or not to tax your social security payments. 👍
I'm 61 and retired, and I'm converting as fast as I can without boosting my tax bracket. Here's a couple reasons I've thought of on my own to do so. I've never heard either of them from any planner or advisor. However, I find them to be compelling reasons to convert now, and I'm convinced they are accurate. 1. By converting and paying the taxes, the size of my estate is smaller but still has the same purchasing power. That means lower or no estate taxes will be due, but the amount in the ROTH account, though seemingly smaller, will purchase just as much. 2. When I or my spouse passes, the surviving spouse will have to take the RMDs which will be subject to individual tax rates at that time. However, we can convert now using the much lower married filing jointly rates. This saves tons in future taxes. Converting and paying taxes now is a very tough emotional hurdle for me. After all, I know I could avoid that very high tax bill for many years. However, I'm convinced it's the right move for most married couples in the long run.
It's a progressive tax system, so even though we say you are pushed into a higher tax bracket, that doesn't necessarily mean much overall. If a $1 of your conversion is taxed at the higher tax rate, that is far from you'll go bankrupt because you are in a higher tax bracket. I agree, people seem to ignore that their investments grow when they talk about not doing a roth conversion. Case in point, my inherited IRA tripled since I inherited it, which forces me into a higher tax bracket having to take RMD on it starting this year.
most of my savings is roth. but i do have a portion in tradional. i'm 10 years from retirement + another 8 years from rmd. so my plan is to convert a small portion every year for the next 18 years. by the time rmd arrives, the amount in the traditional ira account should be low enough that the rmd amount is below the standard deduction.
Never wanted a Roth earlier in life because of the taxation. I just didn’t think I could swing it. Now I’m about to retire with nearly everything in a 401k and IRA. So, thinking about Roth conversion but also realizing the tax thing really doesn’t seem to matter, unless the rates go up. I guess the best reason to do it for me would be reduction of RMDs. One question is, would it make better sense to delay Social Security to “make room” for Roth conversions? We still will need money to live on and pay for health care, so that’s going to subtract from the Roth contributions.
One of the problems with doing Roth conversions earlier in your life is that it increases your tax liability while you are working and it creates a conflict / tension with collecting ACA Premium Tax Credits if you have retired early. I retired in my 50s and have done conversions every year since I retired. I'm now 60 and it seems likely that I just won't have headroom to do a Roth conversion this year because it will have significant impact on my marginal tax rate because of lost ACA Premium Tax Credits.
Reason No. 5 for Doing a Roth Conversion: Emergencies. Unexpected large emergency expenditures can have terrible tax consequences if you need to withdraw the funds from your traditional IRA account. OTOH, the tax consequences of withdrawing a large sum from a Roth account is zero ... you've already paid the taxes on those funds. (I had to take a $250K emergency withdrawal a couple of years ago. It cost me $8K more in taxes, over and above what I would have paid for withdrawing the money normally.)
Compound interest is a remarkable force of nature, creating assets seemingly out of thin air. Whether or not you should do Roth conversions, presuming you currently have a sizable principle balance, boils down to a single question: do you want to pay your current marginal tax rate on that principle balance or do you want to pay a higher tax rate on the principle balance AND all future growth, at some point in the future? Given that growth from compound interest is often the preponderance of your account balance, in the future, the answer is pretty clear...convert enough of your tax-deferred balances to Roth that you stay in the lowest marginal tax bracket during retirement. Whether that is 12% for those who are debt-free and frugal, or 22% for those who a taking a more traditional approach to finance$.
Two key points that need to be addressed regarding Roth and IRA accounts: 1) As you age, you generally should increase your bond holdings. Having the majority of your bond holdings in your 401k or IRA will mitigate the potential of excess growth in your IRA account (lowering RMD requirements) while keeping the majority of your equity holdings in your Roth account where RMD's are not affected. Also, as a retiree, I perform 50% of my annual conversion amount in January and 50% in December. Since I am very bad at forecasting market returns, this allows me a lot of flexibility and will mitigate tax issues whether the market goes up or down in any particular year.
Your 40s and 50s tend to be your peak earning years, so any conversion gets taxed at the marginal tax rate, which would suck. I feel like a good time is when you retire. Since your income is lower you'll either use the money or convert it.
If you plan to give generously in retirement, check out qualified charitable distribution's for your traditional. If you follow a few rules, you can give tax free as a distribution directly from your IRA- tax free in, tax free out. Depending on your mix of tax sheltered accounts and your plans for the future, letting the traditional dog lie may be a better tax and growth option for you.
I would have liked to see you discuss how to pay the taxes on the conversions and the implications of these different scenarios (I know you are limited in time/content per video - maybe this is a subject for the future?). I, personally, would have to pay the conversion taxes from the tax deferred account itself. Given this, I'm not sure if conversions are the best strategy for me!
Doing Roth conversions is a good idea if your plan is to leave an inheritance to people. However, if your plan is to donate to charity, then qualified charitable distributions is a better idea. You avoid paying taxes on a Roth conversion, reduce or eliminate your RMD, and reduce your taxable income (which reduces or eliminates things like the IRMAA surcharge).
Here is what keeps me from making Roth conversions. If you started with $1M of investable assets and decided to convert to Roth paying $200,000 in taxes. Along comes another decade like 1999-2008. If you convert then start $40,000 (4% 0f $1M) withdrawals five years later, by the end of 2008 your portfolio would be 444,000. If you didn't convert it would be $753,000.
I've been just starting to look at the idea of a Roth conversion. What I haven't looked into and haven't heard anyone else on this platform mention is whether there are income limits for a Roth IRA conversion (we are way past those limits) and whether there are contribution limits for a Roth 401K conversion. We max out the Roth 401K, so does that prohibit us from even thinking about a Roth conversion? We also max out the traditional 401K.
There’s no limit on Roth conversions. Just make sure you have enough withheld or make an estimated tax payment in that quarter. Don’t wait until April 15 or you’ll get hit with interest and penalties.
Great video and I fit the situation you're profiling here, Erin. My question is that it seems no matter when I do conversions, even between time I early retire and before I turn 65, I'm looking at 24% tax bracket no matter what I do. So do conversions make sense for that situation? Crazy as it sounds, I'm thinking I might as well spend/enjoy the money I would have to use to pay for the taxes on the conversion since my braket at RMD time is not going to be any better than it is now or in early retirement.
Thank you. I'm going to start conversions this year from my traditional IRA. Are the stocks sold out of the traditional then bought in the Roth? Because if I convert when equities are down wouldn't I be losing money?
Can you do a video of the theme song of the 80s with women? That is Madonna's Material Girl. You can talk how you differ than the older women who grew up in the 80s.
Years ago, I documented the internet outages and deducted them from my internet payment. They actually accepted my modifications. I'm not sure that would generally work.
I’d hypothesize that the rise in Roth conversions is owing to the expiry of the 2018 tax cuts at the end of this year. If congress doesn’t renew those cuts, many will see their top marginal brackets shift higher. It makes sense to move money at 22% if you’re going to be paying 25% in the near future.
_to the expiry of the 2018 tax cuts at the end of this year._ That seems unlikely given that Trump was responsible for the tax cuts and is back in office. In fact, he's made it a priority to continue those tax cuts.
@ The outcome of the election wasn’t known until November and it isn’t a guarantee that the tax cuts will be extended even with the incoming administration. Many people were probably hedging their bets on future tax rates.
Nope, its for ACA credit and getting within the lower tax brackets. People are tying to get within the gray area of avoiding tax. At least it's not people running around in campers paying everything in cash to avoid taxes.
Great breakdown of a complex topic! It’s so helpful to understand the pros and cons of a Roth conversion, especially in today’s market. This video really clears up a lot of questions-thanks for the thoughtful analysis!
Coming from your channel, What’s the core goal of your work, and are there any upcoming projects sparking excitement?
I’ve heard good things, but does this platform genuinely stand out for remote job seekers?
I learnt on there web they are remote company hiring various workers also sell unrefined oil at competitive prices while emphasizing quality
The channel bio probably has details on connecting with the recruiting team-worth a look!
The idea of remote work this year has me buzzing with anticipation! I’d love to contribute to a company like yours and see where it takes me
"Seamless"... I was watching the bloopers when you got to laughing about making things seamless. All joking aside, you are one of my favorite TH-cam channels to watch, partly because most of your videos have very little splicing and dicing. Keep up the great work E!
Agreed - the bloopers are quite entertaining!
I retired in 2021 at 59 years old. I have become pretty savvy in finances, but was not always so. I had a large amount of money in my traditional 401k so I built a spreadsheet that showed how much I would have in the future (I have a pension which covers my expenses). I quickly realized that when my wife and I start taking SS, along with my pension, and future RMDs, we would be thrust into higher tax brackets! So I started doing conversions. Thank you for validating my concerns. It took me a lot of research to learn all this. I wish you would have put out this video 4 years ago!
One thing that I am not completely sure about is deliberately going past the first IRMAA cliff, and possibly the second, while still staying in the 24% tax bracket.
In 2024, we were 63 and 64 years old, so we stayed below the first IRMAA cliff. This year I will have to do a little more analysis!
Lintakas.. Lithuanian or Estonian?
@@ArmageddonIsHere Lithuanian, first generation.
I had never thought about the tax benefits of passing down a Roth IRA, but that is a very good point! Great video Erin! Also, we love the bloopers!
Thanks, I converted in 2000, 2010, and 2014. Today, I’m so grateful I did. I had no idea what my tax bracket would be decades ago. However, I knew that I wanted access to my money at 59.5 years old and tax free growth for decades.
Planning on doing a Roth IRA conversion soon thanks to you and your videos. I only wish I had found you sooner. I am 76 and my wife is 72 and have roughly $2,000,000.00 in traditional IRA's. I hate getting this late a start. I just hope I don't screw this up. Thank you so much.
I have never heard someone break down social security so well! Thanks Erin! Also, every video I am reminded how fit you are! Keep up the hard work!💪
Thank you for another great video. My wife and I are using these strategies in our retirement and our 4 children in their 20s and 30s are on board saving great too. I am blessed.
I am a retired tax/finance professional and understand these rules very well. I love how you approach these topics with simplified discussions to provide good information for people who don’t understand the complexities of these rules.
Thanks so much! 🙏
Thinking about beneficiaries is a great way to frame Roth conversions for many people.
I have been doing conversions for three years, with amounts that take me to the top of the 12% tax bracket, mainly for the reasons you stated. One additional reason, specifically, is basically insurance against the widows tax trap. At some point, one of us will be left alone, hopefully later in life, but if it happens, the remaining spouse will see their standard deduction cut in half, and the tax rates advance much more quickly.
What amount would be for the 12% bracket please?
@@elcheapofl For 2024, for married filing joint return it's $123,500. $94,300 taxable plus $29,200 Standard deduction.
I just did my first large Roth conversion in November. It was easier than I thought but I had to pay a lot of estimated taxes to do it. Since I am 59.5, I did it using a distribution followed by the rollover. Just getting the money out of my deferred account is very satisfying. My goal is to unwind much of my taxable accounts, using that money to pay the taxes and lost harvesting to offset the gains so I can have most of my money in a Roth by the time Social Security hits. I think I am going to have to pay the full IRMAA penalty though to get it done.
Began my conversion Dec. 2020 at age 70. Decided to jump to the 32% tax bracket. Hard to swallow the large tax bills......but I finished converting Dec. 2023. I now am convinced more than ever that my strategy was correct for me. Especially after the market returns I enjoyed these past two years. Oh, my IRMMA deductions are GREATLY reduced. Thanks to Craig Wear for all his help.
While we are not doing a direct Roth conversion, we inherited an IRA that over the 10 years we need to distribute all of it. My employer offers a Roth 401K. So, we are maxing the the contribution, and the catch up since I'm over 50. We take the portion of the distribution to replace the Roth contribution and deposit it in our checking account and put the rest into our investment account account. Indirect back door conversion of an account we couldn't otherwise convert.
Excellent video today, and you look very nice.
We are still working but did a $25K Roth conversion in December, as we calculate about $250k of our deferred account is going to be moved at our current tax bracket. I was planning on moving another $25K the next two years before retiring, but my wife was just diagnosed with cancer. So now we may decided to move a higher amount the next two years to help avoid a widow’s tax if something happens sooner than expected. Hopefully everything goes well and we can just continue our plans. Last year I ran scenarios with one of us dying early, like late 60’s. Never thought to run a scenario of one of us dying in our 50’s. 🤷♂️
I have been on the fence about converting one of my IRAs to Roth. At 62 many say it may not be a good move. We are right at the 22% - 24% line and conversion would most certainly put us over. But, I think it is only 2% and may still be worth it. Especially when it comes to RMDs later on. Not a bad idea to think about my kids rather than myself and set up the Roth as a legacy fund. Thanks for the info Erin. You are really good at giving me more pieces to my puzzle. If you ever decide to start a wealth management firm, you have at least one client.
Great information- we’re in our early 60’s and recently retired and looking ahead to RMD avoidance. I have pensions and my wife’s SS more than cover our living expenses (no mortgage) so we’re doing our conversions now before I draw my SS and RMDs.
Just remember that IRMAA looks back two years not just one.
Thanks Erin. And yet another amazing information delivery and explanation. You have armed me with a few questions to take to my financial and tax advisors. Really appreciate you and what you do for us. Your out takes are equally awesome. 🤪
Had a great conversation today with our “Guy” we will be following up in a couple days.
Great video, Erin! I am a tax accountant and I've helped clients with tax projections for Roth conversions in 2024 more than I ever have in the past! One big factor this year for the spike in Roth Conversions is the scheduled sunsetting of the 2017 Tax Cuts Jobs Act after 2025 wherein these historically low income tax rates are scheduled to revert back to their pre-2018 rates. A Roth conversion is a great idea and I love your comment about starting them very early so that taxpayers can chip away a little bit each year for a long time before reaching age 63 when IRMAA might become a factor!
Super video Erin! Just what I needed to make a decision about ROTH conversions during my retirement starting 7 months from now at the age of 62. I have close to $3 million in pretax retirement accounts and expect my income to drop significantly next year. I am slightly worried about converting with the high stock market, but it seems like the perfect time to make conversions before starting SS at the age of 70, even if the stock market could take a tumble between now and then. I love your educational videos and I share them with tons of family and friends.
This is one of the more clear and concise descriptions of the main issues around Roth conversions. Well done.
My wife took 2 years off in the 1998-2001 tax years, which was right when Roth IRAs were first allowed. I took advantage of that opportunity to convert all of my deductible IRAs into Roths in the (then) 15% tax bracket during those years.
My 86 year old father is STILL mad that he didn’t bite the bullet and convert back then, especially since they let you spread the tax over 3 years. Now he gives his RMDs as QCDs.
Did our first conversion in early December 2024. I am in a minority and will have an excellent pension. That tied with SS for both my husband and I and the fact that we have saved well is going to kill us when RMDs kick in. We could only convert about $30K this year to max our bracket, but plan to do as much as we can each year going forward. And yes - we saved first in a regular brokerage account to pay the taxes on conversions.
I retired a couple years ago and have done a small conversion one of those years. One other point people need to understand is the impact on your long-term capital gains and dividend taxes. Every dollar that comes in as ordinary income pushes a dollar of long-term capital gains and dividends up in its bracket. Let's say you maxed out your 0% bracket for long-term. One more dollar in ordinary income will get taxed at 12% but also a dollar of long-term moves from 0% to 15%. That effectively taxes that extra dollar at 27%.
Good video. Yes - I plan on doing Roth conversions this year. I recently retired and I’m caught up in the max IRMAA storm. Trying to keep my income low this year so I can do Roth conversions. I also need to do IRMAA challenges to try to reduce that hit. Thx.
I didn't realize the 10-year rule applied to Roth IRAs for inherited IRAs. Great content, thanks!
Everyone finds this entertaining ... and you do provide good information.
We are in the sweet spot to do Roth conversions. We did a Roth conversion last year and are planning to do more over the next 10 years. Another factor to consider when entertaining a Roth conversion is what your spouse's tax rate will be when one of you passes away. If one spouse is younger than the other or one of you are in poor health this could be a significant tax savings.
im doing the same thing....presently I am doing a 20 k roth conversion with a 12k rmd......I did earlier roth conversions when I retired but before taking social security....taking as much as I couild without affecting my medicare bill.....chances are you need to take conversions too.....ed slott is a great guy to follow...
Or, if you relocate to a higher taxed state. 😉
Erin, Another great video. I have been retired now for 3+ years and have been doing Roth conversions for the last 4 years. At this point I will draw the balance of my IRA down over the next 2-3 years then moving forward i will be drawing from our Roth accounts. This will greatly reduce taxes since provisional income ( formula to determine amount of SS that is taxable) will result in zero tax liability after my IRA is gone.
I will then only have to watch my total capital gains moving forward.
It is really advantageous to have a long term spending plan and evaluate taxes from a 20-30 year perspective.
RSB in NC
Hi Erin, good to see you this morning! For the record, I do find the out takes entertaining and enjoy them a lot 😉 Your timing with this topic is perfect as that is exactly what I am working on planning out in the next couple of days. I'm retired 13 years, starting at 62 and been dealing with RMDs a few years now. I got started late with Roth conversions and initially shot myself in the foot with IRMAA penalties. I've been doing conversions a few years now, filling up but not exceed the 22% bracket in an effort to get better balance between tax deferred and tax free, and now mainly for my legacy planning. My son makes better income than my daughters husband so that factors in also from an heirs standpoint and the 10 year distribution rule on taxable. I'm also planning on what I'm leaving to my grandkids but that is easy as they are just starting out so earnings are low. BTW , I wish I could get internet for that, I pay $86.24 here in Ca. Great content as usual Erin, on an important topic. Your conversation and presentation of the data and facts was very effective, as you always do so very well. Your advise is spot on, start early with this process!! Have a blessed week and I'll see you on the next on Erin. Larry, Central Valley, Ca.
Erin is Great
I have a smallish IRA as I stopped contributing in 1997 and switched to the Roth. Good move for me. I'm doing conversions for my heirs. I do enough to put me towards the top end of the 12% bracket. I do this planning based on my spreadsheets. I do "predict" my future RMDs too, but everything is good no matter what I do. But my non IRA assets go tax free with a stepped up basis, whereas my IRA could cause them a tax problem.
My IRA has nearly all short term Treasuries. My heavy lifting in in my Roth and taxable accounts. This was a planning step I missed earlier.
love your channel. 63 retired. Been running a dozen roth conversion scenarios in many programs including boldin. none of them seem to decrease my taxes by any substantial amount. only affect i see in my own spreadsheets are increase in roth funds by the time i am 80 to 90. i am struggling to see real worth compared to the non-conversion strategies. Gonna do small conversions unless we have a real bear market and then i will get more aggressive. Ignoring IRMMA because it really only affects a couple years early on.
One thing to consider with Roth conversions is if you are married and one spouse dies, the single tax rates tend to significantly hit the surviving spouse. No one likes to think about that possibility, however, more than likely either my wife or I will spend some time in the single tax bracket. I want to leave her in the best financial situation.
RSB
Great information Erin! I love how you can laugh at yourself with your blooper section. You're too funny sometimes. Be well!
Erin - thanks for another insightful post. My wife and I are both on Medicare, and don't have RMDsfor another few years. I have struggled with the Roth conversions, using my Boldin account to model them. It keeps coming back as something that doesn't gain me a lot. Then I listen to Ed Slott, who essentially says will never have taxes this low again, so do as much as you can. My biggest concern is when either my spouse or I pass and the remaining person goes from MFJ to single filer. THAT is a big tax bomb. As far as potential inheritors go, they'll have some Roth but most likely more IRA to inherit. If it's a big tax hit for them, they are still inheriting money they weren't planning on. I've always told them I intend to die broke! I'll only be able to look at the past over time to know what benefit they might have been, or if I did better by doing minimal conversions.
We're all in that boat!
None of us know what the future holds so we do the best we can now, with the best information available to us at the time.....
And yes, I agree with you, Do the Roth Conversions to benefit you. If it can also benefit your heirs...That's a Bonus!
If you have the means to purposely plan reduce their tax burden then so be it but it's found money, they can pay the taxes out of their inheritance
A lot of folks overlook the change in tax bracket status when one spouse passes away. You are corrct, it is indeed a huge "tax bomb" that catches many people unaware.
I like the idea of ROTH conversions for all the reasons you mentioned. Now is an especially good time for people to do ROTH conversions because of the tax cuts and jobs act that may expire soon.
Great info. Another idea instead of Roth conversions is take the money you would have paid for the roth conversion (example let's say the taxes on $10k conversion is $2,800) and continue to fund your 401k or IRA accounts. I've done Roth conversions and they are a powerful tool. Everyone's situation is different. Just another idea. If you maxed everything out and want to Roth convert i fully support it. Keep the videos coming and Hello from Wisconsin.
I tried, unsuccessfully, to do a Roth conversion (from TSP to Fidelity) during the last week of 2024. I found out that I had to update my TSP account profile with Fidelity's address in the financial institutions section -- and then, WAIT 7 DAYS to do the transfer! Even dumber, the TSP does transfers by MAILING A CHECK to the destination institution! I spoke to a TSP rep on the phone. When I told her I wanted to do a Roth conversion, she had no idea what that was.
We live in the age of the Internet. Financial transaction should be instantaneous and happen electronically.
I think managing income strategies, tax plans, and investments will be a full-time job when i retire!😅😅😅 Great content and video!
Before you start taking Social Security. I think that for at least some people, delaying Social Security and using that time to convert to Roth in appropriate size increments is a great strategy. Note that you may be living off the IRA in the bridge years between retirement date and the day you start taking Social Security. Social Security benefit grows from age 62 till 70 because you delay and if you can get IRA down so that RMD's won't cause all your Social Security (85% of it) to be taxed. Also, if converting, watch what your Long term capital gains are being taxed at. The best tool for evaluating Roth conversions is the Forward Looking Tax Plan. It lets you see those holes that can be filled with conversion and the effect on the plan. Note: don't maximize tax savings but the after tax value of your nest egg.
Great info. To answer the video questions. You convert when you can afford to do so. And wealthy people don't live complicated lives. So convert to get rid of RMDs. Your $3 million example is a great example. Those RMDs also trigger IRMA. Then to reduce RMDs and IRMA you'll start converting to Roth anyway. Roth = easier finances in retirement.
You make black sleeveless tops look great. Definitely your look.
The tax calculator I found shows that US federal income tax on $125000 for somebody married filing jointly is $12026.50. it looks like these distributions are not subject to FICA.
Depending on how your assets are distributed you can look at other strategies like taking IRA distributions before RMDs kick in to reduce your tax burden over the remainder of your life.
Lots of people talk about Roth conversions, but as mentioned in the video, take a look at your situation. You may have other alternatives that work out as well, or nearly as well, over your lifetime that require less overhead.
I converted my IRA to a Roth when I was in my 40s. Great forward planning I thought. But I did it in early 2000. As soon as I did the conversion the tech bubble burst and my new Roth's value plummeted but I was taxed on the much-higher conversion amount. Yes, I could have done a re-conversion but I just let it ride.
It is true that you will pay less tax on a conversion when the market is "down" and the value of your Traditional IRA is lower; however, the less you convert, the difference is that much less you can begin "compounding" within your new Roth IRA as the market recovers. The tax-free earnings associated with a higher compounding value might (and are likely to) exceed the one-time increased taxes during the year of conversion. Bottom line, it is sometimes okay to convert when the market is up since a higher amount converted will earn more via compounding than a lower amount. Also, paying the related taxes during the year of conversion from an outside source (rather than your Traditional IRA) makes even more money available for compounding earlier. Time is money! Erin, if I'm missing something here, please let me know.
RMD's are definitely doing Roth conversions every year. 56 now and retired for a year and we have already done two conversions. I probably will have to ignore IRMAA levels and continue after age 63 all the way to 73. Did everything right in saving and investing for an entire career but now wishing I had held back on the pre-tax and did more brokerage saving.
Perfect, thanks for covering conversions Erin.
How large my RMD would grow to was something I failed to plan for. At a later age I converted some IRA funds to Roth. Thanks.
I'm retired. Currently 59. Been doing partial Roth conversions the last couple years. Balancing everything in order to keep my MAGI around 40k to qualify for ACA subsidies. This is my plan until age 65, assuming ACA continues.
A few weeks ago I did a 401k in-plan conversion of all the traditional funds (matching contributions) in from my previous employer's 401k for a number of reasons. That 401k is about 20% of my overall retirement savings.
My previous employer went through bankruptcy and is in very rough financial shape, so I'm preparing for the possibility that the 401k plan could cease to exist and I'll be forced to move the funds elsewhere. I'm currently a contractor at my new job, so I don't have access to a 401k at the moment so I can't roll my old 401k into another 401k. I'm close enough to the income limit for Roth contributions that I want to maintain the ability to do backdoor Roth conversions, which means I want to not have an traditional IRAs. Now that it's all Roth I can leave it in the old 401k so I can roll it into my next 401k if I want and if I have to or want to roll it into an IRA it won't cause me an issue with the pro-rata rule if I end up needing to do the backdoor.
As I understand if one goes to a Nursing home (20% of us) the state can take all your ROTH funds but cannot access your Traditional IRA funds. Suggest ROTH conversions be in balance with your Traditional IRA portion.
Medicaid asset and income limits are determined by your state. Typically, IRAs and 401ks are both considered assets for Medicaid calculations. If you are taking RMD, the RMD is considered income. These can all affect Medicaid eligibility.
If you are not Medicaid eligible, nursing home costs are all on you. I found that out when my mother and mother-in-law went into assisted living several years ago.
Thanks Erin. This was incredibly helpful!
Thanks for the videos. 52 retiring with pension, Roth, pretax accounts. Going down the path of withdrawing to max out 22% tax bracket for Roth conversion. By the time RMD, SS, and Medicare hits, all funds in the Roth. Wish there was a 16/18% tax bracket. Going from 12 to 22 hurts, but hopefully in the end I’ll have the last laugh.
Another great video! This answered a lot of questions for me, thanks Erin.
The other factor to consider for a Roth conversion is the potential NIIT. The conversion amount is added to the NIIT calculation that may cause an additional 3.8% tax to be paid.
At 68 and 69 we have more income now than when we were working. In anticipation of RMDs we are converting IRAs to Roth up to the IRMAA limit. We don't want to pay more for medicare. I wish we had started conversations earlier. My wife's ira's will be all converted by the time she is 73 and my ira's will be significantly reduced. I plan to keep converting until all ira's are Roth and stay under IRMAA limits. Thanks for the video.
Thanks for watching!
This is exactly my situation but I am single. I have done two years at age 66 and 67. I have not started social security, holding off until 70. Right now is taking less than 50,000 between investment and taxes every year before I hit Irma’s. Because I have a pension and have moved cash to high yield govt money market. So I only have 2 more good years. Once I start social security I’ll hardly be able to move anything.
Qualified Charitable Distributions (QCDs) are worth considering if you intend to make charitable contributions in your 70s, or you intend to leave some money to charity when you pass.
RMD starts kick in when we reach 73 and for male life expectancy is 88 and so we have 15 years of withdrawal. If you have substantial nest egg then yes, you need to plan accordingly. But if our nest egg is not much, there is not too much to worry about except for legacy planning. Note that, even if we are in 22% tax bracket, we don’t pay 22% percent of the total income, we only pay 22% of marginal income.
Just to note there is another variable for IRMAA. The magic age isn't really 63, it's two years before you start Medicare. For those who continue working (or whose spouse works) for a "large" (>= 20 employees) employer covered by a reasonable health plan, they can defer Medicare to any age over 65.
My husband started Roth conversions two years ago, at 66. He's still working, and plans to work until 73. He's trying to stay within the tax bracket we're already in, but not go over the next IRMAA threshold. I started small Roth conversions much earlier than my husband did. We both have pensions, so I don't know if these conversions are going to help us much in future taxes, but we're trying. Part of me wants to give up and just acknowledge we're going to be paying a lot in taxes, but will have enough so who cares about converting. We have no heirs, but have had to help our parents.
Well spoken and understood! ❤😍🤪 Bloopers!
A 5th reason to maximize your ROTH IRA, the withdrawal in your retirement years does not count as taxable income. Therefore, the government does not use your ROTH distributions in determining whether or not to tax your social security payments. 👍
Pub. 915 has a worksheet to calculate how much of your S.S. Benefits would be taxable. There is also at least one online calculator that will do this.
This is entertaining!!! Plus thank you for the great advice you give
I moved some TSLA from a SEP (per-tax) to a Roth this year. Within a month, the SEP was higher than before I moved it ;)
I'm 61 and retired, and I'm converting as fast as I can without boosting my tax bracket. Here's a couple reasons I've thought of on my own to do so. I've never heard either of them from any planner or advisor. However, I find them to be compelling reasons to convert now, and I'm convinced they are accurate.
1. By converting and paying the taxes, the size of my estate is smaller but still has the same purchasing power. That means lower or no estate taxes will be due, but the amount in the ROTH account, though seemingly smaller, will purchase just as much.
2. When I or my spouse passes, the surviving spouse will have to take the RMDs which will be subject to individual tax rates at that time. However, we can convert now using the much lower married filing jointly rates. This saves tons in future taxes.
Converting and paying taxes now is a very tough emotional hurdle for me. After all, I know I could avoid that very high tax bill for many years. However, I'm convinced it's the right move for most married couples in the long run.
I came for the bloopers and I learned something
I’m 69 and have just started to consider Roth Conversions.
That’s a great topic! Definitely something to think through…
It's a progressive tax system, so even though we say you are pushed into a higher tax bracket, that doesn't necessarily mean much overall. If a $1 of your conversion is taxed at the higher tax rate, that is far from you'll go bankrupt because you are in a higher tax bracket. I agree, people seem to ignore that their investments grow when they talk about not doing a roth conversion. Case in point, my inherited IRA tripled since I inherited it, which forces me into a higher tax bracket having to take RMD on it starting this year.
most of my savings is roth. but i do have a portion in tradional. i'm 10 years from retirement + another 8 years from rmd. so my plan is to convert a small portion every year for the next 18 years. by the time rmd arrives, the amount in the traditional ira account should be low enough that the rmd amount is below the standard deduction.
Never wanted a Roth earlier in life because of the taxation. I just didn’t think I could swing it. Now I’m about to retire with nearly everything in a 401k and IRA. So, thinking about Roth conversion but also realizing the tax thing really doesn’t seem to matter, unless the rates go up. I guess the best reason to do it for me would be reduction of RMDs. One question is, would it make better sense to delay Social Security to “make room” for Roth conversions? We still will need money to live on and pay for health care, so that’s going to subtract from the Roth contributions.
One of the problems with doing Roth conversions earlier in your life is that it increases your tax liability while you are working and it creates a conflict / tension with collecting ACA Premium Tax Credits if you have retired early. I retired in my 50s and have done conversions every year since I retired. I'm now 60 and it seems likely that I just won't have headroom to do a Roth conversion this year because it will have significant impact on my marginal tax rate because of lost ACA Premium Tax Credits.
Reason No. 5 for Doing a Roth Conversion: Emergencies.
Unexpected large emergency expenditures can have terrible tax consequences if you need to withdraw the funds from your traditional IRA account. OTOH, the tax consequences of withdrawing a large sum from a Roth account is zero ... you've already paid the taxes on those funds. (I had to take a $250K emergency withdrawal a couple of years ago. It cost me $8K more in taxes, over and above what I would have paid for withdrawing the money normally.)
Compound interest is a remarkable force of nature, creating assets seemingly out of thin air. Whether or not you should do Roth conversions, presuming you currently have a sizable principle balance, boils down to a single question: do you want to pay your current marginal tax rate on that principle balance or do you want to pay a higher tax rate on the principle balance AND all future growth, at some point in the future? Given that growth from compound interest is often the preponderance of your account balance, in the future, the answer is pretty clear...convert enough of your tax-deferred balances to Roth that you stay in the lowest marginal tax bracket during retirement. Whether that is 12% for those who are debt-free and frugal, or 22% for those who a taking a more traditional approach to finance$.
I did one this year
Well done Erin!
Two key points that need to be addressed regarding Roth and IRA accounts: 1) As you age, you generally should increase your bond holdings. Having the majority of your bond holdings in your 401k or IRA will mitigate the potential of excess growth in your IRA account (lowering RMD requirements) while keeping the majority of your equity holdings in your Roth account where RMD's are not affected. Also, as a retiree, I perform 50% of my annual conversion amount in January and 50% in December. Since I am very bad at forecasting market returns, this allows me a lot of flexibility and will mitigate tax issues whether the market goes up or down in any particular year.
Your 40s and 50s tend to be your peak earning years, so any conversion gets taxed at the marginal tax rate, which would suck. I feel like a good time is when you retire. Since your income is lower you'll either use the money or convert it.
As usual, one more great presentation.
Great summary and those bloopers… bwahaha! 😂
If you plan to give generously in retirement, check out qualified charitable distribution's for your traditional. If you follow a few rules, you can give tax free as a distribution directly from your IRA- tax free in, tax free out. Depending on your mix of tax sheltered accounts and your plans for the future, letting the traditional dog lie may be a better tax and growth option for you.
Great explanation- thank you!
It has more to do with your tax rates being lower "now" and higher "later", and/or if RMDS will push you up to the next bracket.
I would have liked to see you discuss how to pay the taxes on the conversions and the implications of these different scenarios (I know you are limited in time/content per video - maybe this is a subject for the future?). I, personally, would have to pay the conversion taxes from the tax deferred account itself. Given this, I'm not sure if conversions are the best strategy for me!
I'm hoping they do away with tax on social security really will help with the Roth conversions at a 12% tax
Doing Roth conversions is a good idea if your plan is to leave an inheritance to people. However, if your plan is to donate to charity, then qualified charitable distributions is a better idea. You avoid paying taxes on a Roth conversion, reduce or eliminate your RMD, and reduce your taxable income (which reduces or eliminates things like the IRMAA surcharge).
Here is what keeps me from making Roth conversions. If you started with $1M of investable assets and decided to convert to Roth paying $200,000 in taxes. Along comes another decade like 1999-2008. If you convert then start $40,000 (4% 0f $1M) withdrawals five years later, by the end of 2008 your portfolio would be 444,000. If you didn't convert it would be $753,000.
Retired and converting $40k a year…. Like the bloopers!
Does a conversion trigger a new 5-year rule for tax status to beneficiaries?
I've been just starting to look at the idea of a Roth conversion. What I haven't looked into and haven't heard anyone else on this platform mention is whether there are income limits for a Roth IRA conversion (we are way past those limits) and whether there are contribution limits for a Roth 401K conversion. We max out the Roth 401K, so does that prohibit us from even thinking about a Roth conversion? We also max out the traditional 401K.
There’s no limit on Roth conversions. Just make sure you have enough withheld or make an estimated tax payment in that quarter. Don’t wait until April 15 or you’ll get hit with interest and penalties.
Yay - more Erin bloopers!!!
Can you covert your traditional 401k in a TSP to a Roth?
What about IRMMA
Doing In Kind conversion when a specific stock drop below my Avg Cost
Great video and I fit the situation you're profiling here, Erin. My question is that it seems no matter when I do conversions, even between time I early retire and before I turn 65, I'm looking at 24% tax bracket no matter what I do. So do conversions make sense for that situation? Crazy as it sounds, I'm thinking I might as well spend/enjoy the money I would have to use to pay for the taxes on the conversion since my braket at RMD time is not going to be any better than it is now or in early retirement.
Thank you. I'm going to start conversions this year from my traditional IRA. Are the stocks sold out of the traditional then bought in the Roth? Because if I convert when equities are down wouldn't I be losing money?
Can you do a video of the theme song of the 80s with women? That is Madonna's Material Girl. You can talk how you differ than the older women who grew up in the 80s.
You are entertaining. Keep smiling
love the b roll!
Years ago, I documented the internet outages and deducted them from my internet payment. They actually accepted my modifications. I'm not sure that would generally work.
I’d hypothesize that the rise in Roth conversions is owing to the expiry of the 2018 tax cuts at the end of this year. If congress doesn’t renew those cuts, many will see their top marginal brackets shift higher. It makes sense to move money at 22% if you’re going to be paying 25% in the near future.
_to the expiry of the 2018 tax cuts at the end of this year._
That seems unlikely given that Trump was responsible for the tax cuts and is back in office. In fact, he's made it a priority to continue those tax cuts.
@
The outcome of the election wasn’t known until November and it isn’t a guarantee that the tax cuts will be extended even with the incoming administration. Many people were probably hedging their bets on future tax rates.
@teekay_1 well no one knew he was going to be president for the first 10.5 months of 2024
Trump definitely wats to extend the tax cuts but with the deficit out of control and the bond market driving rates higher, he might not get it.
Nope, its for ACA credit and getting within the lower tax brackets. People are tying to get within the gray area of avoiding tax. At least it's not people running around in campers paying everything in cash to avoid taxes.
The conversion doesn't count against your contribution limit?