Bob Fraser shows a 59-year-old couple how cutting their 401(k) contributions from $70,000 to $10,000 (employer match only) frees up $60,000 yearly for Roth conversions. Converting $45,000 from a traditional IRA builds a $150-200k Roth balance that outgrows the extra 401(k) savings over 5-6 years, with more flexibility and tax-free growth.
Let's say you got somebody who's 59 years old. They got $2 million in a 401. They're not going to retire for a while. They've drank the Kool-Aid. They put all their money into their 401, which is very typical. And they're thinking, well, I'd love to convert, but I don't have any money. Okay. So follow me on this. When we saw this lay out in black and white, it was like an epiphany. So the couple can go this year, they can go put another $70,000 into their 401. And at the end of the year, what are they going to have? Another $70,000 in their 401 that is going to be taxable at some point down the road. Or what if they just reduce their contributions to the 401 to only what the company matched. And so now they put in $10,000 instead of $70,000. That's $60,000 minus some taxes is cash flow that they can use to go start converting some of that IRA money. So let's say they end up with $45,000 that was going to go into the 401 and instead they use that $45,000 to convert some of the other IRA, which is totally like, why would I ever do that? But at the end of the year, what are they going to have? They're going to have converted enough to use up $45,000 $45,000 of taxes in conversion. So depending on their tax rate, they're going to have $150,000 to $200,000 now sitting over in the Roth instead of an additional $45,000 sitting in the IRA. And the way that math works out after just 5 or 6 years is incredible of what you allow them to do differently. And then it also gives them another pot to go manage.
