In this episode of Left Brain’s Fundamentals of Investing series, Director of Research Brian Dress interviews CEO and CIO Nolan Langford about Roth Individual Retirement Accounts (IRAs) and Roth conversions. They begin by defining a Roth IRA as a retirement account where contributions are made with after‑tax dollars, allowing tax‑free growth and qualified withdrawals, contrasting it with traditional tax‑deferred accounts that require required minimum distributions (RMDs) at age 72. They explain that converting traditional IRA or 401(k) assets to a Roth triggers taxable income in the conversion year, using a $100,000 example to illustrate the immediate tax bill. The conversation then outlines two primary strategic reasons to convert: (1) tax arbitrage—paying tax now at a lower rate than expected in retirement, and (2) avoiding RMDs, which provides greater flexibility and prevents a “tax bomb” later. They discuss timing tactics, such as converting when market prices are depressed (e.g., a 50% drop in a stock like NVIDIA) so taxes are paid on a lower valuation, and converting during a year of reduced income (e.g., after a layoff) to benefit from a lower marginal tax bracket. Practical steps include consulting a financial professional, using Left Brain’s Roth conversion calculator, and contacting the firm for personalized analysis. The segment concludes with contact information for Left Brain Wealth Management, emphasizing their willingness to assist via Zoom or in‑person meetings.
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Welcome again to our Fundamentals of Investment series. These videos are designed to explain important concepts you need to know as you grow your retirement nest egg and build and preserve your personal wealth. I'm Brian Dress, Director of Research here at Left Brain, joined by our CEO and Chief Investment Officer, Nolan Langford. Nolan, thanks for joining us.
Brian, I'm excited. Fantasy football drafts are coming up and we're talking Roth IRAs, favorite topics. All right.
Well, when we work with clients and prospective clients, one of the issues that comes up most often is taxes. Understandably, investors want to minimize the portion of their savings that they end up paying to Uncle Sam. One of the tools that you may have heard about is Roth conversions. That's Roth IRA conversions in which we can convert tax-deferred traditional IRA money into a new or existing Roth IRA. Offering tax-free growth. So, Nolan, just the first question, what is a Roth IRA?
Yeah, thank you, Brian. So most people or most investors have a traditional retirement arrangement that is a pay tax later. So if I contribute money to a 401(k) or deductible IRA, I put money in today, I get a tax deduction on my 1040 when I file my taxes. However, that money grows tax-deferred, and at some point I have to take that money out. The current rules are required minimum distributions at 72. I have to start pulling the money out. It then becomes taxable. So tax deduction today, but I pay tax later. The Roth IRA is different. I don't get a deduction when I put money in my Roth IRA today. It continues to grow tax-deferred. And as long as I take qualified distributions, the money comes out in the future tax-free. So it's almost the exact opposite of normal retirement arrangements.
Right. So just to emphasize that growth is all tax-free once you get that money into the Roth IRA. So that's the major benefit of doing so. So, Nolan, why would someone want to convert money from that traditional IRA to that Roth IRA?
Yes, it is. Two big, two big reasons to do it. So let's talk about the— let's talk about the downside of doing it. If I move money from my— I call it from my left pocket to my right pocket. So if I move money from a traditional retirement arrangement that's deferred, I do have the ability to convert, move that money to a Roth. IRA. However, when I do so, the money's taxable to me. So let's put some numbers around it. I have $100,000 in either a 401(k) or a traditional IRA, and I'd like to move that money to a Roth IRA. I could do that. There's no income limitations. There used to be, and then the IRS did away with them. So it doesn't matter how much money you make, you're able to convert. And so let's say out of the $100,000, I decide I want to move $50,000 from my traditional IRA to my Roth. That $50,000 that I convert is taxable on my 1040 at the end of the year. So my wife and I, we make $100,000 and then we did a $50,000 conversion. When we get to April, we're going to pay taxes on $150,000. And so that would be the big downside for doing a conversion. My tax bill in this year, it hits me in this year because I have to pay taxes. In exchange for that, I have money that's going into a tax-free account for later. And so you have to think about the trade-off. So why would somebody want to do that? Well, there would be two big reasons. One, it's tax arbitrage. So if my tax rate in the future is higher than my tax rate today, I benefit. So for example, if I convert that $50,000 today and my tax bracket— I'm in the 12% tax bracket, my wife and I— and I convert, and then later the money's tax-free, but I'm in a higher income tax bracket, 20, 24%. Then I've benefited, even if my securities don't go up. So, that would be one of the reasons. Another one is most investors that, at least the ones we see, if you take a look at their net worth, their biggest asset really is that retirement account. It's— that even dwarfs their home. And all of that money is subject to taxation later. It's a ticking tax bomb. And so, at 72, they need to start taking that money out. And so you get Social Security, that becomes taxable. And a lot of people that think if they have a lot of money in the plan that we're thinking they're going to retire and be in a lower tax bracket, actually they can be in a higher tax bracket because of the minimum distributions. However, if that money is in a Roth account, Roth accounts don't trigger required minimum distributions. There is no such thing. So then I can take that money. I don't have the required minimum distributions. I can be more strategic about if when I want to take the money out. And so it gives me a lot more flexibility.
Just to sum up again, Nolan, from what you said. So we've got the tax benefits and then we've got the no required minimum distributions, the RMD. So you get tax benefits in a number of different ways as you, as you work your way into a Roth IRA relative to other retirement accounts. So, Nolan, we know kind of the downsides. We know the upsides to it. How does someone go about making the conversion?
Yeah, so you should be working with a financial professional to help you do a calculator. I know here for our clients, we do a, a Roth calculator, and we'll be happy for any of the viewers to run that scenario with you to make sure this strategy works for you. But they should reach out to their custodian, their financial professional where their IRA is held, and go through that exercise and have that discussion.
And then I wanted to talk about this. So we're talking in 2022 here, the market's down, and you've heard many people people say that sometimes when the market's down, a Roth IRA is actually even more advantageous. Can you talk a little bit through that?
Yeah, there's two things I think in this economic and market environment that would make somebody want to think about an IRA. Let's— Roth IRA. Let's call these IRA strategies. And so the one that you're talking about is pretty straightforward. I have securities in IRA 1, which is my traditional IRA. and I'd like to move or open a convert to a Roth IRA, IRA2. And to imagine I have some stock in my IRA. In this example, let's use NVIDIA, and let's say I'm an NVIDIA bull, and, um, NVIDIA is down a lot this year, over 40%, it may be 50%. Well, if I have it in my IRA and I'm optimistic that shares are temporarily down, but they're going to rebound in the future. It might make sense for me to convert those shares today. Again, in January, if they were 10,000 in my example today, if they're down 50%, they're 5,000, but I still have the same number of shares. So if I move them from my normal IRA to my Roth IRA at today's lower price, then I pay taxes at today's lower price. If, however, a year from now those shares are back to where they were before, then I've gotten that 100% increase tax-free. And so that's the theory behind converting securities in the down market. That would be strategy number one. Strategy number two, in this economic environment, we have started to hear anecdotal evidence about layoffs, companies starting to lay employees off. And so if you're in a temporary situation where you're in a job change because of economic circumstances, it's possible that you're in a lower tax bracket this year. And so you may want to think about using some tax bracket arbitrage. So if your normal tax bracket is 24% and this year you're going to be in a 12% bracket because of economic situations, it may make sense to do a conversion or convert some money this year. We have that temporary dip in your income tax bracket before you get back to full employment.
Okay, Nolan, that's all really interesting and I think helpful for the viewers out there. We haven't covered everything that relates to Roth IRAs by any means. Nolan, can you speak to how the viewers at home can get in touch with us and engage us so that we can help them through the entire process?
Yeah, we have a lot of tools to help. We're more than happy to jump on a Zoom, see you face to face. We're in two offices in Naperville and in Miami. We Zoom everywhere. And so we're happy to run this analysis specifically for you. We have some tools and calculators that can help and see if the numbers work for you. You can go to our URL, leftbrainwm.com, and then click on the Contact Us button. And we'd be happy to— we'd be happy to speak with you, take a look at your circumstances to see if a Roth conversion is right for you.
Thank you so much, Nolan. Thank you so much to the viewers. The Roth IRA is one of the most powerful tools available to investors out there right now. We really think every investor should at least consider taking advantage of it. So if you are considering it or you need some help, make sure you reach out to us. Either Nolan or myself or our colleague Freddie Garcia will get back with you and we can discuss the topic. With that, thank you so much for being with us and we'll see you again next time on Fundamentals of Investing.
