3 Steps To Future-Proof Your Roth Conversion Plan

Hey there. So if you've got a million or more in an IRA and you've started Roth conversions, great job.

Definitely. Roth conversions can be a great way to protect not just yourself, but your entire family against huge tax bills. But if you find yourself worrying that your conversion plan just isn't completely future-proof, then you know what? You're not alone. This is something our team talks about with IRA millionaires every day, just like you. And so far, we've helped them avoid over $10 billion in projected lifetime taxes. So let's future-proof your plan so it still works no matter what. change his life brings.

Isn't that crazy? $10 billion. That's a lot.

That's with a B too. $10 billion.

All right. So let's get into it. So there's 3 steps most people's plans are missing out on, starting with one called the double date. Now, nobody has a crystal ball to predict the future, but this strategy helps people stay ahead more often than not. You put 2 dates on the calendar every year. The first one is in January. That's your first conversion date. Before you move a dollar, you got to answer one question. Where do you want this year's growth to happen? In the IRA? Or in the Roth? Because whatever grows inside that traditional IRA, you're going to pay tax on eventually. Whatever grows in the Roth, well, you never will. You already paid the tax to get it out of there. Look, we've done extensive study around the best timing for making conversions. Actually, we've developed a separate service that we offer to clients for just this one thing. But what we learned from that study was that converting early in the year adds significant value to your accounts compared to waiting until later in the year. Or when most people do at the end of the year, which is what their advisor tell them to do. So you've got to convert early and you've got to convert the right things. You move your growth assets first and you leave the conservative side behind. Your overall mix doesn't change at all. You've just relocated the growth to the side the IRS isn't going to touch. Now look, if markets are volatile, you can spread conversions through the year and pile in on a big downturn, which is really smart. But if you don't want to mess with that, then January is a great option. Check, get it done.

Question is, how much should you convert?

Well, the standard advice is to fill whatever room is left in your current tax bracket and stop right there. Sadly, this usually doesn't work as well for people with over $1 million in their IRAs. If you want a plan that actually protects your family in the future, you're most likely going to have conversions that push you above your current bracket.

There's a lot of people and even CPAs out there who won't like that idea, don't like that idea, and will never like that idea.

True. We've spoken to many of them, and we're patient, but we just show them the numbers. But look, the idea of paying higher tax taxes and the implications it can bring in the short term feels counterintuitive. And most CPAs are great at their job, which is to look one year at a time, maybe the next year, but a future-proof strategy requires looking a lot further out. In fact, it reminds me of a client named Nancy. You remember the story about Nancy?

I definitely remember her story. She was 70 when she came to us and still had over $1 million in her IRAs. 5 years earlier, she'd asked her CPA about converting, but he told her to convert just enough to reach the top of her bracket and stopped there. And she said that something about it didn't sit right with her. But, you know, since he was the expert, he's the CPA, she went along with it. You know, by the time she called, required distributions were about to start and the window she needed had already closed right behind her. I mean, we still built her a plan. It just cost a great deal more to start it at 70 than it would have at 65. Remember when she said that she wasn't angry at the CPA for doing their job? She was just angry at herself for never asking him to prove it.

Yeah, I do. I remember that. Unfortunately, we didn't see a lot of those circumstances, but that's such a great question to ask anyone when making a plan this big.

Now, what about the tax payment for this January conversion?

Well, look, there are what are called safe harbor rules that dictate how much needs to be paid, especially after your very first year of conversion. If you're not working with a CPA, I like to suggest that you default to always making the estimated payment at the same time that you do the conversion with money from outside the IRA. That habit keeps most people out of trouble with underpayment penalties, but you need to check the specifics with your own tax preparer and CPA. But you don't convert the whole year's number in January. You need to hold a piece back.

Yeah, and that's what brings us to date number 2.

That's right. That's one that probably happens in the fall. So by the fall, you have a good picture of the whole year, what your investments threw off in dividends and capital gains, any income you didn't maybe plan on, and where you're sitting against that Medicare surcharge threshold. Not that that really needs to be something that you fixate on, but it's part of what you bring into the equation. And then you just convert the piece that you held back, make any adjustments for the year.

So why not just do the whole thing, you know, in December when you know everything then?

Well, that's what a lot of people do, but the reason is because you're going to give up an entire year of growth. I mean, don't forget the study I mentioned earlier. You know, we've done the homework on this. Converting early in the year adds significant value to your accounts compared to waiting until December. Plus, every month those dollars sit in that traditional IRA, if the markets do what they normally do, it's just another another month of growth that you're going to owe taxes on. And that's why the double date strategy covers all the bases.

So step 1 for a future-proof Roth plan is about when you convert. So then what's step 2?

Step 2 is about who you're converting for. It's called forward forecasting. By the way, I'm making up these labels. These aren't like technical terms, just for everybody to know. Everybody worries about tax laws changing. And at some point it will. We've had a lot of changes, but there's one change that we all know is coming without a doubt. So if you're married, you're filing joint. And One day, one of you will be filing alone with narrower brackets and a smaller standard deduction. And after that, it's your kids. Probably they'll be in their highest earning years with required distributions landing right at the top of their own paycheck or disturbing their own tax or retirement plan that's put in place. And too many people think their IRA only affects them. That's simply not true.

Well, you know what? That reminds me of a client named Tom. He was in his late 70s when he finally converted. At that age, the math barely works in your own favor. I mean, Nobody would have blamed him for leaving it alone and just not touching it. But he converted anyway and he converted all of it.

Gosh, I love Tom's story. I mean, he really got it. In fact, he was one of the very first clients that we brought in the door 16, 17 years ago. He had 3 kids. He just wasn't willing to hand them this bag of money with a lifetime of taxes already attached to it. He wasn't just planning for 1 taxpayer. He was planning for 5. And I'm sure his wife and all the grown kids are grateful now.

Yeah. And I bet on paper, converting in his late 70s, you know, it probably looked like a bad move.

Oh yeah, on paper it did. You should have heard the conversations I had with a CPA, sure.

Okay, so we've covered the double date and forward forecasting.

Right.

Do you have another alliteration for us, Dad? Maybe the tax triangle, the Roth rhombus, the savings square.

Okay, cute, cute. So the last step that future-proofs a plan is measuring the right thing. How about we call it counting what counts, smart aleck?

You know what? I think that's perfect.

Look, most conversion reports focus on one number, tax saved. And just looking at that can get people in trouble. We measure it, we calculate it, but tax saved isn't necessarily money in your pocket. It's a comparison. What you would have paid if you'd left everything alone. So let me show you what I mean. Our team has run projections a few months back based on a married couple with like $1.5 million in their IRA. We modeled 2 ways to convert it. The first is what most people are told to do. Fill the top of the 22% bracket year after year until the account is empty. For them, that ran about 9 years and it moved about $1.3 million. The second one opened with a single $350,000 conversion that pushed them up into the 24% tax bracket. Then 4 small conversions behind it, it moved about $700,000.

So the 9-year plan saved more tax then?

Right. About $80,000 more in savings.

So that's probably the one you'd want.

Well, that's what the tax saving number says. Now, look at what the family actually keeps. Take everything they own and adjust for the tax still owed on whatever's left in the IRA best you can. The 5-year plan leaves them $8.1 million. The 9-year plan, the one that saved more tax and moved nearly twice the money, leaves $7.3 million, almost $750,000 left.

I mean, how does that even happen? I mean, how do you save more tax and end up with less afterwards?

Well, because tax saved doesn't tell you when you paid it what it cost you to pay it, or maybe what those dollars would have done if they'd have stayed invested. And notice what made the difference. It wasn't how much they moved, it was when. One hard year up front instead of 9 years of holding their income up. Most people never catch this because they aren't counting what counts. They're only focused on their tax savings number.

So then what should people be looking at then?

Well, where the plan ends, right? What's left after every tax is paid? Yours, spouse's, your kids'. People don't like this at first, but a good plan will usually look worse before before it starts looking better. The year you convert, you write a real check. Your Medicare premiums go up, more of your Social Security gets taxed, but that's not the plan going wrong.

Sounds more like the price of admission.

Yeah, I like that. So in fact, you remember the name of my first book was Paying the Piper. So it's kind of just time to pay the piper. So plan isn't future-proof if it saves taxes and leaves the family with less at the end. You need to understand that. That doesn't mean that every plan you implement has to have more money at the end because there are so many variables. You have to bring all this into, uh, really a lens and evaluate all the options that are available to you.

Yeah. So if you're sitting on $1 million or more, here's your first step. We built an RMD calculator informed by over 3,000 real client situations, clients just like you. It will give your projected required distributions based on your actual information and your projected lifetime taxes. It'll also show you how much of that tax you can avoid.

Yep. And once those numbers are in front of you, the next question is how you pay the tax on those conversions without draining the account you're trying to protect. And we cover that in this video right here. Hopefully we'll see you there.