HUGE Roth Conversion Planning Mistake!!! 😱 🚫
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Moran Wealth Management, LLC is a registered investment adviser. This content or the content on this channel prior to February 26, 2024 was published by Secure Your Retirement Now LLC and not by Moran Wealth Management, LLC. Trent Grzegorczyk was the owner of Secure Your Retirement Now LLC. Mr. Grzegorczyk was also the owner of Resilient Financial Planning, LLC, a Michigan registered investment adviser and any advisory services were provided by Resilient Financial Planning, LLC. As of February 26, 2024, the content is provided by Moran Wealth Management, LLC and any reference to advisory services would be provided by Moran Wealth Management, LLC. Moran Wealth Management, LLC is not responsible for the content created prior to February 26, 2024.
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I respectfully disagree with this video. With Roth conversions, the break even point is day #1. Your break even point is based on actual dollars. BUT - that is comparing apples to oranges. The break even point must be compared in purchasing power, not actual dollars. A $1M traditional IRA is not worth $1M in purchasing power because part of that is actually owned by the IRS. With someone in the 24% bracket, a $1M traditional IRA is actually worth $760K in purchasing power.
Thanks for sharing your feedback.
I take your point, on the difference between roth and IRA money. However, Trent's point is still valid. In my case, if I look at the cumulative taxes paid for a roth conversion case vs a non-roth-conversion base case, I find that the break-even is at age 82 on a nominal basis and at age 86 on a real (inflation adjusted basis). Said another way, I would have to pay more total taxes with the roth conversion case until age 82 (or 86 on a real basis). The "purchasing power" left in your retirement accounts is inversely related to the amount of money withdrawn from those accounts to pay taxes. Not saying that roth conversions are bad, only that you may need to know that you may not see an advantage for a long time. I used New Retirement and dumped the yearly values into Excel to do my analysis.
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You are correct Trent, with regards to a Legacy (moving the Roth to your heirs) is different. My two children are over the 30% tax bracket. I am currently in the 10 to 12% tax bracket. I am willing to convert up to the maximum of IRMAA and keep within the 24% tax bracket. Currently at FRA and not going to take SS until 70 (giving my spouse the largest possible amount once I pass). My goal is not to have any RMDs by the time I reach 72. I will either convert all my 401K over to a Roth or use the 401K for expenses for the last two years prior to taking SS, I will no longer be working past 68. I have had to argue with accountants over the fact that I do not care about larger tax brackets, if I burn down my 401K accounts to zero. Keeping RMDs at zero will limit the amount of taxes when just on SS. I do not want the government forcing my heirs to make RMDs over a 10-year period while they are on the top of their earning career.
Many people overlook the fact that traditional IRA withdraws are taxed as ordinary income which also impacts social security provisional income causing social security income to become taxable and can have impacts on IRMAA not to mention the possibility of it creating a tax torpedo. And on top of all that they have RMDs.
Taxes on ordinary income vs capital gains are vastly different! Ordinary income tax rates are far higher than capital gains tax rates. Taxable accounts (where withdraws older than 1 year are taxed as capital gains and not ordinary income) do not have RMDs and allow withdraws at any time can easily be tax free. In fact, a married couple can take over $100k of cap gains and pay $0 tax so long as there is no other income since cap gains taxes stack on top of ordinary income taxes.
Stop and think about this for a second. You can take ONE HUNDRED THOUSAND DOLLARS per year TAX FREE in capital gains! (The 2023 0% cap gains tax bracket is up to $89,250 with a standard deduction of $27,700). You can make this happen with a little strategic planning ahead of time.
Point being, investments that you have saved for your retirement should not continued to be taxed as if they were income for the rest of your life. Yet this is what happens in traditional IRAs and 401ks. Instead, they should be taxed as capital gains which is what ROTH and taxable accounts do.
ROTH accounts have no taxes on withdraws and no RMDs and they dont count towards any of the traditional IRA downfalls. This is can be a major consideration in the decision on whether or not to convert.
Its likely better in many scenarios to bypass traditional IRAs and go with taxable and ROTH accounts in the first place.
You do not mention IRMAA. You also do not talk about a spouse that might live longer, paying taxes as a single-filer.
Thanks for feedback. Yes, those factors could also be important for calculating the breakeven of a conversion strategy.
Great video! Thanks! I love that my question was featured! 🙂
I think that the video was a little confusing as to when the conversions are taking place! Is the example showing conversions all the way to the 80's for the person being modeled or is that strictly the break even point? If so, when are the conversions occurring? The print on the screen is hard to see clearly.
Thanks for your feedback. 7/10 of the conversions in the hypothetical example are occurring from 61-67, and range from ~135k-160k
Great job Trent!
Thank you!
Obviously $1 in a traditional IRA and $1 in a ROTH IRA do not have the same value (the government owns part of the traditional IRA). Are you considering this difference in value when you determine the break even point? If so, by what percentage do you devalue the traditional IRA?
Does the Roth conversion analysis include the effect on the premium tax credit when you get health insurance under the ACA?
when i go to the planning club, all it shows is a "contact me" link, nothing else. ???
Give it another go > secureyourretirementnow.com
Great content Trent. I think these Roth conversions got so trendy that many (not all) are doing them just because everyone else is. Always appreciate your thoughtful analysis!
I've been watching a lot of Roth conversion videos and like you've said they all present them as no-brainers and everyone should be doing them. I never really believe them and try to run my portfolio through NewRetirment and try to scrutinize the results. I hadn't seen this crossover issue and appreciate you pointing this out. Thank you.