3 Common Mistakes Roth Conversion You Need to Avoid

Hey there. Welcome back to this channel. This is Craig Weir and I hope to give you some great info today. You know, planning for retirement involves making smart financial decisions, especially when it comes down to the subject of converting your IRAs and 401ks over to Roth IRAs. However, we've found that even the smartest and the wealthiest of retirees, or soon to be retirees often make mistakes when it comes to this subject of doing Roth conversions. So what I want to do today is I want to cover the three most common mistakes that we watch people make. Whether they're totally financially fit or whether they're just trying to figure out kind of what money's all about. Whether you've got big detailed spreadsheets that highlight in detail multi year strategies, or whether you're just kind of winging it and trying to figure this stuff out. There are three mistakes that we watch people make over and over and over, regardless of their financial background, regardless of their net worth and their wealth. So what we're going to cover are the mistakes that apply to mainly the people that are what I call IRA millionaires. And if you got less than a million dollars, you're tempted to make the same mistakes. And some of these can be made, but specifically with IRA millionaires, I can make some blanket statements that I know to be true 99.9% of the time. And in this video, that's what I'm going to do. Also, at the end of my comments about the three mistakes, I'm going to add some bonus. At the end, I'm going to give you the three critical questions that need to be answered anytime you're doing any Roth conversion situation. So mistake number one, a lot of people make the mistake of converting only enough to get to the top of their current tax bracket. Many people really limit their conversions to just below the top of that current tax bracket, believing that it's the most tax efficient strategy. So is that you somebody you know? I will tell you this. If you're an IRA millionaire, that approach is going to result in you paying a lot more taxes later when tax rates might be higher. But regardless of whether tax rates go up or not, our research and our experience shows that you're going to pay a lot more tax. And I'm talking about $1 million more tax, not just a little bit of chump change. We meet with hundreds of people every single month. Many of those engage us through our CFPs that are strict pure fiduciary CFPs. And what we have discovered is this is probably the Single biggest mistake. Now many people are told to do that by their advisor, whether they're an investment advisor or a financial advisor. That's kind of the, the party line within the industry, so to speak. Just go to the top of your tax bracket with a lot of CPAs and tax preparers also tell their client just go to the top of your current tax bracket. While that seems logical, it's going to subject you to a lot more tax over your lifetime. So you have to consider your overall long term tax situation, income sources, future requirement of distributions and your net worth implication in the overwhelming majority of the cases. If you're an IRA millionaire, it's most likely worth it to go into a much higher tax bracket now to save more money in the long run. I want to let that sit in for just a second. We have seen from doing the math and using programs that you're better off if you're an IRA millionaire, you're better off to pay a higher tax now on this, on the sum that you have today than even a lower tax rate later over a long period of time. And in our webinars that we do, I show you why that is. The crux of it is that that million or 2 million that you have right now is going to generate so much taxable forced income through required minimum distributions that you're better off to develop a multi year strategy today that moves you to a higher tax bracket. So stopping at the top of your current tax bracket is likely going to subject you to more tax. And I know there's some really smart people out there and your spreadsheets show differently. I'm just going to humbly submit you've missed something. Whether it's an inflation rate, whether it's taking out, taking into consideration rising expenses, whether it's your RMD tables, whether it's in the net present value and the cost of money, I don't know what it is. But if you're not finding that you're maybe that 1/10 of 1%, that is that it doesn't apply to and if you're that 1/10 of 1%, the only way you qualify for that is if you're already taking more than 4 or 5% of your IRA out for living expenses. And on top of that, you have to take all the money from your IRA to pay the taxes while you're taking care of all your living expenses. The fact that you have to take money out of your IRA to pay the taxes on conversions doesn't bother me. We see the overwhelming majority of our clients, 70, 80% of them have to do it that way and it works just great, saves a lot of money. Our average client is probably got a million million and a half in IRAs and they're going to save $3 million or avoid over $3 million over their lifetimes and an estimate for what their kids are going to save as well. So if you want to make sure that you don't just leave a lot of money sitting at the doorstep of the irs, you've got to get to higher tax brackets and you got to do it sooner. You got to do more than what you probably think or are comfortable with today. All right, so that's mistake number one. Mistake number two, it's similar, but it's the mistake of stopping doing conversions at a dollar amount that puts you into higher Medicare premiums. So let me explain in case you aren't aware by the. When you enroll for Medicare, Medicare premiums, Part B and D are income based premiums and they have thresholds of different brackets established of how much income you can have before you go into paying higher Medicare Part B and Medicare Part D. And you can get up to an extra $500 a month for each of you on Medicare Part B premiums at higher income levels. And so logically people think, well, I, I don't want to convert more. That's going to put me into that once I'm 65 years old. And just like the other one, while it seems very logical, it probably is not the most beneficial long term strategy. Again, we do, we develop custom strategies for hundreds and hundreds of people every single year. And the math proves out that this Medicare issue is the smallest piece of the puzzle, of the savings puzzle. So you're, you're, you're stopping short because of Medicare when really Medicare isn't the point, Medicare premiums isn't the point. And I'm not going to say it's nothing, but if you're, if you're going to save a couple million dollars over your lifetime in income taxes, what's an extra 500 bucks a month for three or four years while you do your conversion strategy, compared to that, it's, it's peanuts. But most of the time we find that if you accelerate the Roth conversions and you do them at a higher tax bracket, push yourself into higher IRMAA brackets, if you're already 65 years old while you're going to pay more premium on the front end by the time that's finished, two years later, it's going to drop off. And now you're going to pay the minimums for the rest of your life. If you're the average person, if you're the one that, that we typically see come in and out of our business, and you will have insulated yourself from higher taxes, higher tax brackets because of taxable income, higher RMD because you didn't convert as much as you needed to or should have, and higher Medicare premiums. Our average client will save at least $80,000 of Medicare Part B and D premiums by accelerating their conversions as opposed to trying to hit some self imposed ceiling that the media or another advisor tells you is the right way to do it. So again, you have to just consider the longer term benefits. The higher Medicare premiums are probably a very small price for a short period of time, are probably a very small price to pay for all the tax free growth that you're going to get by having it in a Roth. The tax free withdrawals that you're going to have from Roth, the avoidance of required minimum distributions that you're going to have in a Roth, and for the next generation, what happens for them as well. And if you're in your 60s still or early 70s, there's far more benefit for you than there's going to be for your heirs. And all of this. Okay, so the first mistake we watch people make is they stop converting at the top of their current tax bracket. The second is that they is similar in that they stop doing conversions that might push them to a higher IRMAA threshold. IRMAA is just the acronym for this Medicare premium thing that we're talking about. Mistake number three is kind of similar and it's going to a ceiling that says, hey, I'm going to stop the conversions because if I do any more, my Social Security benefits are going to be taxed more. As you probably are aware, once you start taking Social Security, you can only have so much taxable income before Social Security benefits are taxed. Now some of you have pensions that are already going to put you there. You've got other investments that are going to make the Social Security higher tax. And so this, I know this doesn't apply to everybody, but to a big majority of the folks that we work with, well, not majority, but big number of the people that we work with. Halting doing conversions because it may cause your Social Security benefits to be more is kind of similar to the other two, which is in the South. We had an old saying that said stepping over $100 bills to pick up dimes and that's what you're doing is you're focusing on the dime, which is the small savings of the Medicare, the Social Security, all those things when, when you're avoiding, you're not getting all the benefits of the tax savings that can be millions of dollars. So what you have to do again is you just have to evaluate the entire landscape. You have to look at all these pieces put together. You have to have an integrated holistic plan that you can look at different time frames, you can look at different tax brackets, you can look at how it all comes together in your particular life. I mentioned at the, at the front that in addition to these three mistakes we watch people make, I wanted to give you three critical questions to consider that really need to be answered fully, I mean fully, before you really embark on a Roth conversion strategy. The first is you need to figure out how much of the total IRA 401k money that you have should you convert. Not all of it needs to be converted necessarily. That depends on your income. It depends on whether you have charities or, or churches that you like to give to and maybe you're going to continue to give to. It has to do with this then the size of your, your RMDs and your living expenses, all those kinds of things in all your other income streams, all that kind of comes in there. To come to the answer of how much should I convert? I've done a podcast about donor advised fund and using charitable donations. At the same time you're doing Roth conversions to minimize the taxes. So you might go out to our website q3adv.com and hit the podcast button and it's in there somewhere. But it's an important one to look at. If you are charitably minded and you you expect to continue to give away to charity, there are things that you can do. At the same time you're doing these big conversions that will mitigate the taxes and get some of those donations pre funded. So that's the first question is how much of the total to convert. The second is when should you begin? At the time I'm making this video, we're just a few months from the end of the year and if you haven't already come up with an optimal plan, now is an incredible time to get with that. I know our CFPs that do the work for our clients, their calendars are already starting to get booked up and you want to make sure you have your strategy in place, ready to go and ready to pull the trigger on it before the end of the year. And it takes a little while to get this done. So don't wait till December 15 to try to figure out whether what you're doing is the absolute best or not. The third question is which tax bracket is going to provide you the optimal tax avoidance while also allowing you to at least maintain and hopefully grow your net worth. So those are three really critical questions. I guess as a bonus, I'll say, look, the unintended consequence of not getting this right is that you leave a lot of you leave too much money in your IRA at your death, which makes the IRA a pretty significant error instead of maybe other organization or people that you care about. And more importantly, if you're, especially if you're in your 60s and early 70s, you're going to leave millions of dollars at the doorstep of the irs. And you probably don't even aren't even aware of it if you don't. If you haven't had an opportunity to get a comprehensive quantitative evaluation of your situation and a game plan of what works best, you maybe are going to pick the best of the both worlds, go with the best spreadsheet option that you have, and just run with it without ever knowing that maybe it was not the best option for you. So I guess, in summary, there's really three big mistakes that people make, and I don't want you to make those. There's an easy way to avoid that. They are a really big pitfall for folks that go it alone or trust an advisor that maybe is great in another area of your life and you've known them for a long time and you trust them with different areas. But they maybe haven't done Roth conversion strategies to very much degree. They rely on the old standard comments of just go to the top of the tax bracket or these three mistakes that I've just talked about. But proper planning a little bit of time can ensure that you maximize your wealth and minimize your tax burden. So if you need some help with your Roth IRA conversion game plan, we have a team of fiduciary certified financial planners who work from all over the country. We do not sell any financial products. We don't manage investment assets. So we're not a threat to your existing advisors at all. We just do this one thing first, and we do it, I think, better than anybody else in the country, and that is come up with an analysis of what's the best Roth conversion strategy for you. We have a lot of things written into our program that allow people to really know for sure that they're going to get the best out, best outcome. So I would suggest that, you know, if you're, if you want some insurance to know that your spreadsheets are right or that you're heading the right direction, set up a time. There will be a link below that will let you go to our, our website, go to our scheduling page and do that. You know, we work with people that are between 59 and 74 that have got at least a million in IRAs. We work with people under 59 who've got a lot of income that they can use, pay taxes or a lot of assets outside of their 401ks that they can use to pay taxes. And we work with people that are 75 and older that have also got a million dollars in their IRAs who understand that the big benefits are probably going to go to their kids. While they'll get some during their lifetime, they're really doing it to make sure they're not leaving their heirs with a mess. So those are the folks that we work with. And if that fits you and you want some insurance to know you got the right game plan, then schedule a time and talk to one of our advisors and see kind of what happens with you in any regard. If you like information like this from a source that isn't trying to pedal financial products at you, then we'd like you to click the like button on the video. They help us a lot to continue to keep this channel going. Subscribe to this. If you'd like to know when new stuff comes out that you can just kind of consider for your own benefit, then do that. We've got a host of podcasts@q3adv.com that I would welcome you to take a listen to and watch it and see if there's anything in there that resonates with you. So this is Craig Weir again. I appreciate you spending a few minutes with me. I hope that this information was helpful and have a great day. God bless you.