I love and have followed Ed Slott's teachings for 20+ years. I am not that savvy about doing the math computing to know if a conversion is a good thing or not at any given moment, but we have finally converted about 85% of our IRA's to Roth and RMD's start next year at about $6k/year. So far after 17 years in retirement, we haven't had to tap our IRA's a penny yet. Yep, I probably over prepared for our retirement, but I was clueless what my spouse would be entitled to and when. As time went by, we saw what longevity ran in out families. My spouse's mother passed at 74 and father at 93, while both of mine passed at 85. So much for clear research. Well I retired at 55 and my spouse at 56.5. I think very highly of Roth IRA's to the extent that I have opened Roth accounts for our 2 adult employed children and a part time working grandson. I would love to greatly increase their Roth accounts by doing in-plan Roth 401k conversions. Not sure my kiddos understand the value of such a conversion, but I keep trying to help set them up for a good life/retirement. Thank you so very much, Ed!
In general, one should never convert to a point their RMDs are below the standard deduction. For married couples, this would be $29,000 where taxes are 0%.
No one EVER talks about spending the money before RMD’s kick in, or perhaps a good percentage of it. Just delay Social Security while you’re spending down the account. Why all of the beneficiary talk? Do we owe our heirs a bunch of money? Are they entitled to it?
Good video as always. There are several good reasons to convert to Roth including the widow tax, avoiding IRMAA etc but I wish you didn’t focus on the compounding growth of the accounts as that is one area I disagree with you. It does not matter what the growth rate is since your traditional IRA growth will be with a higher starting point by investing the tax savings. If you pay the same % of tax on the RMDs than you did on the conversion you come out the same whether your account grows by 5% or 15% annually. Yes you pay more tax if you defer and the account grows 15% vs 5% but your after tax result will be the same as converting in both examples, all other things being equal. If your account loses money instead of growing you always come out ahead by deferring. By the way, the 10 year rule has worked out for me. I inherited a large IRA in 2020 while working and in the highest tax bracket and since RMDs have been waived from 2020 to 2024 I have come out ahead vs the stretch to this point. Now I am retired and in a low tax bracket and I have 6 years to empty the account while in low tax bracket (12%). I plan on living on this money allowing me to defer SS.
I plan on using my Roth for any yearly expenses that may cause tax bracket jumping. I will be deep in 12% soon to be 15% in retirement why would someone pull from pretax at 22 to 25% fed tax IF they can cover it w Roth monies?
1. Deferred account compounding is not against you. That is a silly statement. Yes the tax increases as the account grows but the tax is paid on a larger balance than if you converted. The only thing that matters is the tax rate paid when it’s withdrawn. Any other variables are just noise. 2. The more educated I get the less positive I am on conversions. The math just does not work. Happy to expand. 3. I agree with your views on life insurance. 4. The widow tax is legit as is the chance of higher tax rates. Those are the only ways I can make the math to convert get even close to making sense.
Converting into the same tax rate as the future is a tax wash. The only hope is the the tax % paid today will be less that the tax % later. THings that can make a difference is paying the tax from a taxable account (turns more money into tax free). The second is one spouse dieing early, Single tax rates are higher. Just my thoughts
I can’t disagree with your comments. One thing no one talks about on these Roth conversion videos is the increased risk in converting. Let me explain. When you defer, RMDs don’t kick in until age 75 and don’t ramp up until your mid 80’s. At that point you have few years left to fund, therefore paying a few % more tax or a market downturn will not be devastating. If you convert aggressively between ages 60 and 65 when you may have 25+ years to fund, and pay a chunk of tax, a big market pullback will have a much greater impact. Also, some people just may not need a Roth. If you can live on you tax deferred IRA and SS and have a paid up house, a big life insurance policy and brokerage account that will all go to your heirs tax free, a Roth provides little value. You can just withdraw from your IRA and put any excess in your brokerage account where you can defer gains and harvest $3k of losses per year against ordinary income (which you cannot do with a Roth).
IRAs are only bad if the beneficiaries are still working. If beneficiaries are retired or have low income, inherited IRAs are not bad. In general, Slott gives good advice, but one can't apply most of what he says in most cases. Low IRA balances should not be converted as aggressively as he proclaims, while high balances should be aggressively converted. Everything depends on age and income of individual and age, income and number of beneficiaries. Large IRA balances with 5 beneficiaries becomes a no tax issue and should not have been converted. Sounds like these guys apply a formula to all individuals, but their advice is better than nothing but will have many holes.
I don't think taxes are that much of a problem if you have a decent income. OK, you reach age 73, you have to take RMDs, your income is $300K, you pay $100K in tax. You still have plenty of money to live on, and you can't take it with you. If you are only taking RMDs, you won't run out of money.
I love and have followed Ed Slott's teachings for 20+ years. I am not that savvy about doing the math computing to know if a conversion is a good thing or not at any given moment, but we have finally converted about 85% of our IRA's to Roth and RMD's start next year at about $6k/year. So far after 17 years in retirement, we haven't had to tap our IRA's a penny yet. Yep, I probably over prepared for our retirement, but I was clueless what my spouse would be entitled to and when. As time went by, we saw what longevity ran in out families. My spouse's mother passed at 74 and father at 93, while both of mine passed at 85. So much for clear research. Well I retired at 55 and my spouse at 56.5. I think very highly of Roth IRA's to the extent that I have opened Roth accounts for our 2 adult employed children and a part time working grandson. I would love to greatly increase their Roth accounts by doing in-plan Roth 401k conversions. Not sure my kiddos understand the value of such a conversion, but I keep trying to help set them up for a good life/retirement. Thank you so very much, Ed!
In general, one should never convert to a point their RMDs are below the standard deduction. For married couples, this would be $29,000 where taxes are 0%.
Yes which if you are a few years away from RMDs is over $1m balance.
No one EVER talks about spending the money before RMD’s kick in, or perhaps a good percentage of it. Just delay Social Security while you’re spending down the account. Why all of the beneficiary talk? Do we owe our heirs a bunch of money? Are they entitled to it?
Well said
Good video as always. There are several good reasons to convert to Roth including the widow tax, avoiding IRMAA etc but I wish you didn’t focus on the compounding growth of the accounts as that is one area I disagree with you. It does not matter what the growth rate is since your traditional IRA growth will be with a higher starting point by investing the tax savings. If you pay the same % of tax on the RMDs than you did on the conversion you come out the same whether your account grows by 5% or 15% annually. Yes you pay more tax if you defer and the account grows 15% vs 5% but your after tax result will be the same as converting in both examples, all other things being equal. If your account loses money instead of growing you always come out ahead by deferring. By the way, the 10 year rule has worked out for me. I inherited a large IRA in 2020 while working and in the highest tax bracket and since RMDs have been waived from 2020 to 2024 I have come out ahead vs the stretch to this point. Now I am retired and in a low tax bracket and I have 6 years to empty the account while in low tax bracket (12%). I plan on living on this money allowing me to defer SS.
I plan on using my Roth for any yearly expenses that may cause tax bracket jumping. I will be deep in 12% soon to be 15% in retirement why would someone pull from pretax at 22 to 25% fed tax IF they can cover it w Roth monies?
because your roth money is building...your ira is also building but you pay for the increase...
1. Deferred account compounding is not against you. That is a silly statement. Yes the tax increases as the account grows but the tax is paid on a larger balance than if you converted. The only thing that matters is the tax rate paid when it’s withdrawn. Any other variables are just noise.
2. The more educated I get the less positive I am on conversions. The math just does not work. Happy to expand.
3. I agree with your views on life insurance.
4. The widow tax is legit as is the chance of higher tax rates. Those are the only ways I can make the math to convert get even close to making sense.
Converting into the same tax rate as the future is a tax wash. The only hope is the the tax % paid today will be less that the tax % later. THings that can make a difference is paying the tax from a taxable account (turns more money into tax free). The second is one spouse dieing early, Single tax rates are higher. Just my thoughts
I can’t disagree with your comments. One thing no one talks about on these Roth conversion videos is the increased risk in converting. Let me explain. When you defer, RMDs don’t kick in until age 75 and don’t ramp up until your mid 80’s. At that point you have few years left to fund, therefore paying a few % more tax or a market downturn will not be devastating. If you convert aggressively between ages 60 and 65 when you may have 25+ years to fund, and pay a chunk of tax, a big market pullback will have a much greater impact. Also, some people just may not need a Roth. If you can live on you tax deferred IRA and SS and have a paid up house, a big life insurance policy and brokerage account that will all go to your heirs tax free, a Roth provides little value. You can just withdraw from your IRA and put any excess in your brokerage account where you can defer gains and harvest $3k of losses per year against ordinary income (which you cannot do with a Roth).
IRAs are only bad if the beneficiaries are still working. If beneficiaries are retired or have low income, inherited IRAs are not bad. In general, Slott gives good advice, but one can't apply most of what he says in most cases. Low IRA balances should not be converted as aggressively as he proclaims, while high balances should be aggressively converted. Everything depends on age and income of individual and age, income and number of beneficiaries. Large IRA balances with 5 beneficiaries becomes a no tax issue and should not have been converted. Sounds like these guys apply a formula to all individuals, but their advice is better than nothing but will have many holes.
I don't think taxes are that much of a problem if you have a decent income. OK, you reach age 73, you have to take RMDs, your income is $300K, you pay $100K in tax. You still have plenty of money to live on, and you can't take it with you. If you are only taking RMDs, you won't run out of money.