Don't Overdo Roth Conversions
ฝัง
- เผยแพร่เมื่อ 30 มิ.ย. 2024
- Don’t convert to Roth? Why not? You don't need to avoid the strategy altogether, but it's nice to follow a well-designed plan as you more forward.
Roth conversions can help you secure tax-free income in retirement. If you have significant savings in pre-tax accounts, prepaying taxes and converting to Roth may be appropriate.
You can potentially smooth out your income, manage RMDs, avoid the highest costs for health coverage in retirement (although that gets complicated), and more. But there are situations where Roth conversions don’t make sense. You can have too much of a good thing, so it’s important to convert the right amount each year.
🌞 Subscribe to this channel (it's free): / @approachfinancial
Get free retirement planning resources: approachfp.com/2-downloads/
🔑 9 Keys to Retirement Planning
🐢 6 Safest Investments
It’s understandable to find the strategy alluring. You can change your future, reduce taxes, and end up with more resources in retirement with a well-designed conversion strategy. But there may be several reasons not to convert to Roth, or at least to limit conversions to amounts that you estimate are appropriate.
Why not convert to Roth? For starters, you can’t predict the future, so you can’t be sure that you’ll have a higher tax rate later. Yes, tax diversification can be helpful, and converting isn’t necessarily a bad idea. But you might not need to convert everything. Plus, you might use up cash that could go toward paying down debt or spending on life experiences.
If you give to charity, converting everything to Roth might not make sense. That’s because you can potentially give pre-tax assets to qualifying charities, which could benefit both you and your favorite causes.
Ultimately, it comes down to figuring out a reasonable amount to convert. As with buying a home, you don’t necessarily need to spend as much as your lender allows-you might be just fine with less.
Related Resources:
What taxes do you pay in retirement? • Taxes in Retirement: W...
AARP Tax Estimator (verify with your CPA): www.aarp.org/money/taxes/1040...
States that don’t tax Social Security: www.kiplinger.com/slideshow/r...
Read more here: www.approachfp.com/why-not-co...
Learn about working with me at approachfp.com/
✔️ Flat-fee and hourly advice options
✔️ One-time projects available
✔️ Investment advice (optional)
CHAPTERS:
00:00 Too Much of a Good Thing?
00:38 Partial Roth Conversions in Retirement
01:33 Benefits of Tax-Free Income
01:48 Tax Diversification
02:25 Smooth Out Income (RMDs, etc.)
03:50 Social Security Taxation
05:32 Widow’s Penalty
06:23 Higher Tax Rates in the Future
07:52 Pitfalls: Will Your Rate Really Be Higher?
09:26 Cash Required for Tax Payments: Opportunity Cost
10:47 Issues With Higher Income
11:29 Bigger Impact for Charity?
13:18 Don’t Convert to Roth?
Justin Pritchard, CFP® is a fee-only fiduciary advisor who can work with clients in Colorado and most other states.
IMPORTANT:
It's impossible to cover everything you need to know in a video like this. The only thing that's certain is that you need more information than this. Always consult with a CPA before making decisions or filing a tax return. This is general information and entertainment, and is not created with any knowledge of your circumstances. As a result, you need to speak with your own tax, legal, and financial professional who is familiar with your details. This video is not a substitute for individualized, personal advice. Please verify with your plan administrator when employer plans are involved. This information may have errors or omissions, may be outdated, or may not be applicable to your situation. Investments are not bank guaranteed and may lose money. Opinions expressed are as of the date of the recording and are subject to change. “Likes” should not be considered a positive reflection of the investment advisory services offered by Approach Financial, Inc. The Comments section contains opinions that are not the opinions of Approach Financial, Inc., and you should view all comments with skepticism. Approach Financial, Inc. is registered as an investment adviser in the state of Colorado and is licensed to do business in any state where registered or otherwise exempt from registration.
First Roth video I’ve seen that mentions how ACA punishes you if you move too much money from pretax to Roth. Thks
Great presentation on the Pros and Cons of Roth conversions. It is done in a very organized way. As he says, once you get a basic understanding of Roth conversions, to save the most in taxes you really have to "Run the Numbers" with a professional like him.
Great job. Adding you to the financial sites I subscribe to. I was always a little skeptical of the non-stop cheerleading for conversions and this video confirmed my thinking.
@Approach Financials - Justin, great presentation! Conversions can be complex decision. ThankU! Nice job.
Have been doing large chunks of ROTH conversions for several years so that now my ROTH is >50% of total Retirement Funds. Problem is the IRMMA expense. Highly recommend anyone with substantial tax deferred retirement funds to convert before age 63 so that they avoid IRMMA. My plan is to reduce my IRAs/401ks to a target of 1MM just before RMDs are required as our SS benefits will be adequate for the 2 of us. The reasons for my ROTH conversions are to avoid the "widows penalty" and provide a Tax Free Roth Inheritance for my children and grandchildren. Not your typical client/investor.
IRMAA-Income Related Monthly Adjusted Amount. Just a minor correction. Great points, I wish I had your dilemma.
This was so helpful. Thank you!
Thanks for watching and letting me know!
Thanks, Justin, for the excellent video! One can certainly get caught up in the momentum of TH-cam videos touting the benefits of the Roth conversions but stepping back and looking at what your level of tax diversification already is can slow that roll.😀 I am doing small conversions until we are done with the A.C.A. Advanced Premium Tax Credits then reevaluate the decision each year, considering breakevens based on I.R.A. holdings. Thanks again; I look forward to my TH-cam alerts letting me know you have produced another great video of essential financial learning points. 🎯
Thanks David! Your plan sounds very reasonable, not surprisingly. And yes, there's nothing TH-cam loves more than Roth conversions.
I do think taxes will rise and I already paid enough.
Thank You so much for the education you provide. I am 63 and I have been converting funds into Roth to avoid having to pay high taxes later if the tax rates do change when I get older. is it wise to convert knowing that Irma tax may affect me soon when I file for Medi care at 65? Ur help is very appreciated, thank u n blessings to u.
Thank you, and great question. That’s one that you’d want to look at with the big picture in mind, and I don’t have a simple blanket answer, unfortunately. Consider things like how much you might pay on assumed higher taxes vs. premiums, and for how long. Also, see how your cash flow is looking and other aspects of your taxes and overall plan. You could also look at dialing down the conversions at this stage and see if that makes sense.
I think it is better to get into the lowest retirement tax situation, avoid IRMAA as well as the SAA tax torpedo.
I would rather pay a bit more now while I have the cash flow and am working.
Is it a good idea to transfer 401K / 457 to convert into different CDs & also to keep some money in money market account for monthly expenses while retiring?… this question is because; instead of taking any risk in this market; better to save whatever you have; IF ITS ONLY THE SAVINGS YOU HAVE TO SURVIVE THE REST OF YOUR LIFE
It can certainly be prudent to keep some money in a safe place during (and leading up to) retirement. The question is always how much.
It often makes sense to keep some assets invested for long-term growth so you can offset inflation and maintain your purchasing power over the decades to come, although you don't necessarily need to be aggressive with those investments. For example, you might have some cash reserves for bad times and some money invested for longer-term growth (whether those investments are conservative, middle-of-the-road, or something else). That said, if a catastrophic crash occurs, you can potentially suffer steep losses, and moving everything into cash would have been better-only time will tell.
As you note, these savings need to last for the rest of your life. One way to think about that problem is the question of withdrawal rates. While I don't love the concept because it's not always realistic, you can learn more about withdrawal rates here: th-cam.com/video/Z6znOGTduME/w-d-xo.html.
I should also mention that you might already have some relatively safe options within your existing 401(k)/457/etc. For example, money market funds and stable value funds tend to have less risk than stock funds. They're not entirely free of risk, and an FDIC- or NCUSIF-backed CD is safer from default risk, so you'll need to evaluate how much safety is right for you.
By the way, "buckets" are another (imperfect) way of looking at this, and you can learn more about retirement buckets here: th-cam.com/video/UZYVUn6V_34/w-d-xo.html
@@ApproachFinancial
Thanks for the information. I think; it should be enough withdrawal linked to SS & pension to survive & rest contributions (of 401K / 457) should be kept in CDs for one year & to change the required amount considering the inflation.
What is the break even amount for Roth conversions because you are taking money out of the market to pay taxes?
That is the million-dollar question, and unfortunately, there's no perfect answer. If we could predict how much you'll earn on investments, future tax rates, what inflation will do (and resulting inflation adjustments), and other factors, it would be a straightforward calculation. But without that knowledge, we can only make some educated guesses.
This video goes over some of the things to look at as you pick the amount (th-cam.com/video/xWt7QGw9toI/w-d-xo.html ), but it's focusing on a different problem-you're withdrawing to pay off a loan instead of paying the taxes to convert. For instance, it probably ignores future RMDs, but it's reasonably close to what you'd look at when figuring out how much to convert.
Actually the math is a wash if Roth and pretax are invested the same. The only thing that matters is what your tax rates are. Secondary effects like ACA, IRMAA, and SS taxation effects are more complicated.
All my research shows that Roth Conversions have little value if your portfolio is less than $500k. From there to $1 million it depends. Over $1m it can be useful. This also applies to drawing down your portfolio before RMDs. Also Roth CONTRIBUTIONS make a lot of sense if your tax brackets are low.
I’m converting approx $200k per year to the top of the 24% bracket. It really hurts to cut the $40-45k tax pmts out of my dwindling investment account each year. I’m playing the long game and hoping this makes for a much lesser tax burden for my wife as a single widow and then for my kids who inherit what’s left.
That "widow's penalty" is certainly something to consider: A surviving spouse can end up in single tax filing brackets with an income that suddenly seems high.
Are you getting hit with state tax, IRMAA & NIIT, in addition to federal tax, on your Roth conversions?
Wow, that is big tax drag and is what has me a bit apprehensive to do this even after 59.5. On the other hand, I’d rather endure the tax implications than to pass that off to my children once I bequeath what remains. With a pension, SS, dividend income…I anticipate my taxable income will still be pretty high into retirement so it’s gonna hit hard when those conversions are being made. I don’t love not being able to touch the Roth until 5yrs either which I believe is applicable for each conversion separately.
If you have over $1M in a traditional IRA, and don't convert to a Roth, want you eventually have to pay all of the IRMMA, Social Security and Medicare taxes and premiums once RMDs start?
Good question, and it depends. As you withdraw money from pre-tax accounts, you generally increase your taxable income. But whether or not it will affect your Social Security taxation, cause IRMAA to kick in, put you into high tax brackets, etc. depends on how high your income gets. With $1MM, there's a decent chance you could face higher costs somewhere, especially if you wait as long as possible-until RMDs-to withdraw from those accounts (assuming you have resources elsewhere to fund all of your spending until then). But I can't say for certain what the consequences would look like without knowing details.
Just a few points contrary to the advice in the video. 1) You will have to wait 5 yrs before you can touch a Roth conversion, and 2) time is against you, in terms of the number of active years left to enjoy tax-free spending! All this talk of waiting till 70, for lower taxes (not for me). I'm 61, and still earning at my peak earning years. Logically, now is the time I should be swallowing the bitter pill of paying for taxes on Roth conversions. Because I can tighten spending, while still earning at peak salary. This year I forked over $43k, from my emergency fund, to pay taxes on $130k, in my Vanguard IRA. Next year I will probably convert $170k, but put aside $50k of that to pay taxes. There is also the matter of your new Roth account accruing gains, making back some/all of the taxes you paid. I refuse to wait till I'm superannuated before drawing on Roth accounts.
I don't think (1) is the case if you are over 59.5.
@@alphamale2363
No, you cannot touch your IRA/ 401k without a 10% penalty before 62. That's in addition to the huge tax cost.
@@Borat_Kazakh You can take any contributions you made out of a Roth IRA without a penalty and with no age restriction. It's the growth of the fund that is subject to the penalties.
@@Borat_KazakhWrong. Look up the 5-year withdrawal rule for withdrawing prior to 59 1/2.
I agree I am taking the same approach convert now while I have peak available money and salary
I hate IRMAA, also the SS Tax Torpedo. If one saves early in life, does well, they get penalized more. Folks: some pay about 40% taxes on SS, did you know that? Remember: "Money Doesn't Grow on Fees".
Psychologically, don't Roth accounts ecourage you to never withdraw and grow it as much as possible? What is the point of dying with the most money?
Your brain your thoughts to control 😅 it just gets taxes out of the way so retirement is tax free
Being able to make Roth withdrawals in order to avoid the higher tax brackets is very motivating to me. I'm avoiding $2.3 million in future taxes. My goal is to deplete my savings by age 95, and I will always have a mortgage. If I live past 95, then I'll take out a reverse mortgage. My goal: Die broker; as you say, 'what is the point of dying with the most money?'
If someone wants to create generational wealth, inheriting a Roth is a great way to help do that.
@@larryjones9773 I wonder what will happen people who retired at like 40 if in the next 55 years some invention comes along that allows people to easily live to 150, but they only planned for a max of 100