Excellent presentation! One of the best yet on the topic. I have been doing ROTH conversions for several years (66 yo) but now the IRMMA is costing me. We continue to work as we are both self employed and we love our work. We will not take our SS until we are 70 1/2. Our business pays part of our MEDICARE insurance (as per our CPA). Currently our retirement is >50% in ROTH but we will be unable to convert the IRAs and 401ks completely over to the ROTH accounts (which is my goal but tax rates are too high) Plan to make our children beneficiaries (either partial or full) of the IRAs and 401ks of each parent to avoid the widow's penalty. Have been investing since my early 20s. My mother taught me about the power of compound interest and doubling of assets. She passed last year at 94 yo. She taught me a "saving mentality" which most people do not get. Thank you so much for your cerebral and highly intelligent discussion. I have things pretty much under control, but you are doing a great service to many. Keep up the great work!
I was responding to Larry who said the latest you can take it is 70. I was just pointing out that is the latest to get delayed credits so there is no benefit for further delay but you could still claim later
One other issue to consider with a married couple is the death of one spouse, the surviving spouse switches to single for tax purposes, and the RMD factor table also switches to single. So the tax rate basically doubles and the RMD amount also increases significantly. This pretty much removed a break even point, because you are ahead with the very first conversion. The only question in this scenario is how big is the conversion.
I believe it is called the widow's penalty because the surviving spouse files as a single filer and not under the joint tax rates. The way around it would be to make sure you have the maximum in a ROTH, and the children are the partial or full beneficiaries of the IRAs and 401k plans for each spousal account. The deceased ROTH would go to the surviving spouse.
True about the tax table, but incorrect about the RMD factor table. The surviving spouse would use the same table, but if she is younger (assuming husband dies first), the RMDs would be lower.
@@chrisg.b.2095 I think I am correct, look at publication 590-B. The following is a direct quote from that publication. "Surviving spouse. If you are the owner's surviving spouse and sole designated beneficiary, you will also use Table I for your required minimum distributions." Note this is a different table than Table III - Uniform Life Table. I am speaking from experience here as POA for my Mother-In-Law, her 403B account is definitely using Table I three years after her husband died.
Wow, this video is what I have been doing now for 3 years, moving all my IRA/401K into Roth. I have a few more years to go, however, working well for me. The goal is at 72 is not to have any RMDs. Thank you for the video.
Thanks for another informative and thought provoking video. I probably need to include this in my discussions with you guys, but also I probably should think about how my parents passing away and leaving me IRA funds should impact my strategy as well (i.e. need to think about my heirs and also my parents )
Can you or have you made a video on inherited iras? My understanding is that the IRS has put out an interpretation that RMDs must be taken out each of the 10 years (non spouse). How are these RMDs calculated? Based on how old the decedent would have been? Or based on the individual inheriting (no tables for younger individuals)? The IRS page also discusses basis and deducting estate tax caused by RMD. Am I reading this correctly? How does this work?
Although Roth conversions can make sense, it is important to specify who,it is better for. You touched on it, but it is often unclear. Clearly people that have large investment accounts will likely benefit. But, this is often not true for those with smaller portfolios. If I contributed almost all my money in the 30% brackets, but have a 1.5 million dollar IRA, then my RMD’s will only push me into the 25% bracket at the margin, and much of it will be at 15%. If before I get there I use my portfolio to delay SS, again I’m taking money at 12-15%, and it makes little sense to convert and push my marginal rate too high. Also RMD’s of $40-60k are just not going to cause that much trouble other than increasing the portion of SS that gets taxed. IRMAA requires nearly $200k of income to cause trouble. I commonly see people recommending, especially in the comments, to convert ALL money to Roths, even when portfolios are smaller, and when conversions push people to 24% and beyond. This may not be such a good strategy. In the end the government is going to get some kind of cut. Trying to avoid all taxes isn’t realistic for the average person, and shouldn’t be allowed for the wealthy, but that is a whole other topic.
How about pairing Roth conversion with tax reduction strategies such as short-term rental real estate bonus depreciation to offset tax liabilities 🤑 that’s what I found resonates with my clients😊
Another excellent analysis and presentation in this video Eric. There are a lot of little details to consider that really make sense. Thank you for these videos I continue to learn a great deal. Larry Oman
Suggestions for those who only want a plan, ie just run the monte carlo and give one time advice, not ongoing money management like you do.. where to go? Thanks
I love my kids and they will inherit more than they can imagine, most of which will be tax free or get a step up in basis. If we both die before fully draining the tax deferred accounts, will they pay more tax than planned, absolutely. Will that tax be paid because they inherited more than expected because we died early. Yes. I am not going to pre pay tax so they save some tax on money they are not excepting to receive.
My intention is to spend down my tax deferred accounts during my lifetime, followed by my cash accounts, then brokerage accounts and ultimately cash value life insurance. The last 3 are all either tax free or my heirs will get a step up in basis. These accounts are more than they could imagine and set them up for life. If I have an early death before I can withdraw all the funds, that will be gravy to them and they won’t be worried about the taxes.
Actually they are separate decisions. The decision to convert has to do with your current and future tax rates not the tax rate you were in when you contributed. Example. You are in the 28% bracket when contributing and now in a lower bracket, let’s say 22%. If you can later take out RMDs at 12% you should not convert even though in a lower bracket than when you contributed. Conversely if you contributed in the 15% bracket and now in 22% bracket, it can make sense to convert if you will be in 28% bracket during RMDs.
Great point. I’ve learned a lot from your videos. Thank You. But one area of the Roth Conversion strategy I’m struggling with is how to calculate “break even” when conversion taxes are paid from taxable account assets. I understand there isn’t a break even when taxes are paid by the Traditional IRA using the communitive property of multiplication. But does that really apply when I pay taxes from taxable account. I’d really appreciate a deep dive into this. Thank you!
I've seen a few of your videos which are very good. I've started looking at Roth conversions in a new light. Thanks! But what about the issue of using today's cash (value) for Roth conversions vs paying taxes with money that is worth less in the future due to inflation? Is that factored in anywhere? Thanks in advance!
I don’t see the contradiction. My plan is based on living a long time and draining the tax deferred and not touching anything else. If I am wrong and die early I have life insurance as a hedge. Conversely if I convert to Roth but live longer than planned, I will need to draw down other assets later in life. If markets tank, that draw down will be starting even earlier. It’s risk management 101.
In my opinion doing a Roth conversion for heirs is silly. They did nothing to earn it and whatever they inherit is "found" money. Paying $75,000-$100,000 in taxes to get out of a potential tax liability when I'm 85 just doesn't make sense to me. What if I spend five years converting and turn my $1M nest egg into $800,00 then suffer through a 2022 and watch it turn into $600,000? If the plan was to withdraw 4% the resulting withdrawal rate is 6.66%.And RMD on $1M wouldn't get you into the 22% tax bracket until age 85. Most of us are dead by then.
Well said on all fronts. I recently inherited almost $1m from my dad mostly in tax deferred accounts. I had no idea he had any money and was certainly not expecting anything. I have never given any thought to the tax or said to myself I wish he would have put this in a non taxable account. This guy is one of the better ones on the internet by the way. Very clear and no biased.
Guess what - a downturn affects both. Your $1M doesn’t magically remain while a converted Roth falls $200k. In fact, if the market fell 25%, you lost $250,000 instead of losing $200,000. Is that better? And you still owe taxes on it.
@@keithmachado-pp6fvYou prefer paying taxes on the inheritance rather than not? You’d rather have $1m and pay 20% taxes on it than getting $850k tax free? Most people would prefer more money after everything is settled.
You are correct. Two points regarding your example of losing 25%. . 1. You paid $200k tax on the $1m to convert and after the drop you now have $600k tax free vs $750k deferred so you are in no better position
Good video, thank you. It also argues for making gifts to your heirs while you are still alive.
Excellent presentation! One of the best yet on the topic. I have been doing ROTH conversions for several years (66 yo) but now the IRMMA is costing me. We continue to work as we are both self employed and we love our work. We will not take our SS until we are 70 1/2. Our business pays part of our MEDICARE insurance (as per our CPA). Currently our retirement is >50% in ROTH but we will be unable to convert the IRAs and 401ks completely over to the ROTH accounts (which is my goal but tax rates are too high) Plan to make our children beneficiaries (either partial or full) of the IRAs and 401ks of each parent to avoid the widow's penalty. Have been investing since my early 20s. My mother taught me about the power of compound interest and doubling of assets. She passed last year at 94 yo. She taught me a "saving mentality" which most people do not get. Thank you so much for your cerebral and highly intelligent discussion. I have things pretty much under control, but you are doing a great service to many. Keep up the great work!
The latest you can take social security is 70.
Correct you maximize SS at 70 so there is no reason to delay further, however it is not required and you can still take it later if you mess up.
@@keithmachado-pp6fv What would the advantage be to taking it later? Thanks
I was responding to Larry who said the latest you can take it is 70. I was just pointing out that is the latest to get delayed credits so there is no benefit for further delay but you could still claim later
One other issue to consider with a married couple is the death of one spouse, the surviving spouse switches to single for tax purposes, and the RMD factor table also switches to single. So the tax rate basically doubles and the RMD amount also increases significantly. This pretty much removed a break even point, because you are ahead with the very first conversion. The only question in this scenario is how big is the conversion.
I believe it is called the widow's penalty because the surviving spouse files as a single filer and not under the joint tax rates. The way around it would be to make sure you have the maximum in a ROTH, and the children are the partial or full beneficiaries of the IRAs and 401k plans for each spousal account. The deceased ROTH would go to the surviving spouse.
True about the tax table, but incorrect about the RMD factor table. The surviving spouse would use the same table, but if she is younger (assuming husband dies first), the RMDs would be lower.
@@chrisg.b.2095 I think I am correct, look at publication 590-B. The following is a direct quote from that publication. "Surviving spouse. If you are the owner's surviving spouse and sole designated beneficiary, you will also use Table I for your required minimum distributions." Note this is a different table than Table III - Uniform Life Table. I am speaking from experience here as POA for my Mother-In-Law, her 403B account is definitely using Table I three years after her husband died.
Wow, this video is what I have been doing now for 3 years, moving all my IRA/401K into Roth. I have a few more years to go, however, working well for me. The goal is at 72 is not to have any RMDs. Thank you for the video.
Excellent information and production. Nicely done!!!
Thanks for another informative and thought provoking video. I probably need to include this in my discussions with you guys, but also I probably should think about how my parents passing away and leaving me IRA funds should impact my strategy as well (i.e. need to think about my heirs and also my parents )
Can you or have you made a video on inherited iras? My understanding is that the IRS has put out an interpretation that RMDs must be taken out each of the 10 years (non spouse). How are these RMDs calculated? Based on how old the decedent would have been? Or based on the individual inheriting (no tables for younger individuals)? The IRS page also discusses basis and deducting estate tax caused by RMD. Am I reading this correctly? How does this work?
Give your IRA to a charity and tell the tax man to pound dirt.
What was the point of opening the IRA then? That makes zero sense, and just to avoid fulfilling your obligation as an American citizen.
Excellent, yet again. Thank you.
Although Roth conversions can make sense, it is important to specify who,it is better for. You touched on it, but it is often unclear.
Clearly people that have large investment accounts will likely benefit.
But, this is often not true for those with smaller portfolios.
If I contributed almost all my money in the 30% brackets, but have a 1.5 million dollar IRA, then my RMD’s will only push me into the 25% bracket at the margin, and much of it will be at 15%. If before I get there I use my portfolio to delay SS, again I’m taking money at 12-15%, and it makes little sense to convert and push my marginal rate too high.
Also RMD’s of $40-60k are just not going to cause that much trouble other than increasing the portion of SS that gets taxed. IRMAA requires nearly $200k of income to cause trouble.
I commonly see people recommending, especially in the comments, to convert ALL money to Roths, even when portfolios are smaller, and when conversions push people to 24% and beyond. This may not be such a good strategy.
In the end the government is going to get some kind of cut. Trying to avoid all taxes isn’t realistic for the average person, and shouldn’t be allowed for the wealthy, but that is a whole other topic.
How about pairing Roth conversion with tax reduction strategies such as short-term rental real estate bonus depreciation to offset tax liabilities 🤑 that’s what I found resonates with my clients😊
Another excellent analysis and presentation in this video Eric. There are a lot of little details to consider that really make sense. Thank you for these videos I continue to learn a great deal. Larry Oman
Loved the video🌞
Would be great to see this analysis for those sans heirs…..
Suggestions for those who only want a plan, ie just run the monte carlo and give one time advice, not ongoing money management like you do.. where to go? Thanks
Wish you had also discussed estate tax here.
Link to video about unconventional tax strategies at the end missing.
Thanks this is great!
I love my kids and they will inherit more than they can imagine, most of which will be tax free or get a step up in basis. If we both die before fully draining the tax deferred accounts, will they pay more tax than planned, absolutely. Will that tax be paid because they inherited more than expected because we died early. Yes. I am not going to pre pay tax so they save some tax on money they are not excepting to receive.
My intention is to spend down my tax deferred accounts during my lifetime, followed by my cash accounts, then brokerage accounts and ultimately cash value life insurance. The last 3 are all either tax free or my heirs will get a step up in basis. These accounts are more than they could imagine and set them up for life. If I have an early death before I can withdraw all the funds, that will be gravy to them and they won’t be worried about the taxes.
Paying 10% tax on a Roth conversion rather than 28% while working is already a huge win.
Actually they are separate decisions. The decision to convert has to do with your current and future tax rates not the tax rate you were in when you contributed. Example. You are in the 28% bracket when contributing and now in a lower bracket, let’s say 22%. If you can later take out RMDs at 12% you should not convert even though in a lower bracket than when you contributed. Conversely if you contributed in the 15% bracket and now in 22% bracket, it can make sense to convert if you will be in 28% bracket during RMDs.
Great point. I’ve learned a lot from your videos. Thank You. But one area of the Roth Conversion strategy I’m struggling with is how to calculate “break even” when conversion taxes are paid from taxable account assets. I understand there isn’t a break even when taxes are paid by the Traditional IRA using the communitive property of multiplication. But does that really apply when I pay taxes from taxable account. I’d really appreciate a deep dive into this. Thank you!
Median 401K is only 82K. I wouldn't about converting unless you have very large account. Break even is different for everyone.
I've seen a few of your videos which are very good. I've started looking at Roth conversions in a new light. Thanks! But what about the issue of using today's cash (value) for Roth conversions vs paying taxes with money that is worth less in the future due to inflation? Is that factored in anywhere? Thanks in advance!
I don’t see the contradiction. My plan is based on living a long time and draining the tax deferred and not touching anything else. If I am wrong and die early I have life insurance as a hedge. Conversely if I convert to Roth but live longer than planned, I will need to draw down other assets later in life. If markets tank, that draw down will be starting even earlier. It’s risk management 101.
In my opinion doing a Roth conversion for heirs is silly. They did nothing to earn it and whatever they inherit is "found" money. Paying $75,000-$100,000 in taxes to get out of a potential tax liability when I'm 85 just doesn't make sense to me. What if I spend five years converting and turn my $1M nest egg into $800,00 then suffer through a 2022 and watch it turn into $600,000? If the plan was to withdraw 4% the resulting withdrawal rate is 6.66%.And RMD on $1M wouldn't get you into the 22% tax bracket until age 85. Most of us are dead by then.
Well said on all fronts. I recently inherited almost $1m from my dad mostly in tax deferred accounts. I had no idea he had any money and was certainly not expecting anything. I have never given any thought to the tax or said to myself I wish he would have put this in a non taxable account. This guy is one of the better ones on the internet by the way. Very clear and no biased.
I.e. “screw you, kids”.
Guess what - a downturn affects both. Your $1M doesn’t magically remain while a converted Roth falls $200k. In fact, if the market fell 25%, you lost $250,000 instead of losing $200,000. Is that better? And you still owe taxes on it.
@@keithmachado-pp6fvYou prefer paying taxes on the inheritance rather than not? You’d rather have $1m and pay 20% taxes on it than getting $850k tax free? Most people would prefer more money after everything is settled.
You are correct. Two points regarding your example of losing 25%. .
1. You paid $200k tax on the $1m to convert and after the drop you now have $600k tax free vs $750k deferred so you are in no better position
2:32 All after-tax account capital gains disappear through a stepped-up basis at death, no? Taxes just go away?