Craig Wear, CFP® explains four primary situations where Roth conversions may not be advisable: (1) you’re under age 59½ and lack outside funds to pay the conversion tax; (2) you’re well into your 70s (mid-70s+) so there may be insufficient remaining lifespan to recoup the tax cost unless the main goal is to reduce heirs’ tax burden; (3) your IRA balances are modest (example cited: ~$400,000 → ~first-year RMD ~$16,000) so RMDs alone may not trigger worse taxation or Medicare surcharges; and (4) most IRA assets are in large annuity contracts that insurers may only permit converting as an entire contract. He emphasizes case-by-case math rather than rules of thumb and warns against vendor/advisor conflicts of interest.
Questions this video answers
August 31, 2022.
Under age 59½ (concern about accessing outside funds to pay taxes).
Mid-70s and older.
Example: $400,000 IRA → first-year RMD around $16,000.
Mentions roughly 22%–24% tax bracket and uses a 25% (1/4) illustrative figure: $10,000 redirected could support converting roughly $40,000.
Chapters
Well, hey, this is Craig again. So in this video, I just kind of wanted to get some information in your hands of some situations that I've identified that probably indicate that you're not a good candidate to do Roth conversions. As you know, I'm a huge proponent of doing it. We've built an entire business model around helping people to get more educated and offer consulting to them to be able to kind of optimize their best Roth conversion outcome. But through the course of doing thousands of those conversion game plans, we've determined some circumstances that indicate that it's probably not a good deal. And the hard part on this is that most people like to default to the oh, well, I shouldn't do Roth conversions because of X, Y, or Z. And normally X, Y, or Z are not good reasons. So I'm going to lay out for you what I think are good reasons to not do, to consider not doing Roth conversions. And the reason I'm kind of hedging there is there are so many variables that go into doing this right that I want you to understand that just because I'm going to lay out these four doesn't mean it's hands down. It means that you need to look at it probably further. I guess I'm just enough of a purist on this to believe that you really need to run the math each time and that rules of thumb don't work, in my opinion, because I've watched rules of thumb get destroyed week after week after week. So it really is very unique about all the circumstances related to your life. So I want to say this too, that, you know, since I wrote my first book about Roth conversions, there's just become an overabundance of firms, RIA firms and CPA firms marketing Roth conversions. And most of those are really just an ad as a tool to get you to switch advisors or to sell you a financial product. You know, the ultimate objective of selling you a life insurance or an annuity, or to convince you that their firm is right for you and earn their tens of thousand dollars a year for managing your investments. So we focused on Roth conversions for almost 15 years now in one way or the other. And we've just learned a ton about it. As I've mentioned many other times, we don't sell any financial products. We don't manage any money. We just simply do education, consulting work in the Roth conversion field. So let me just kind of jump into these four reasons. We'll start with the easy ones. The first one is age being too young. So if you're under age 59 and a half and you do not have money outside of your IRA with which to pay the taxes, then you're probably not a good candidate yet to do conversions. Unless you get creative and you have cash flow, you have extra cash flow. And one of the things that I've done emails about and other videos about is just this concept of being a little bit creative with what you're doing. So if you're, let's say your company matches your first, I don't know, 3% of your contribution, your 401k, but then maybe you're putting in an extra 10% that's not being matched and it's still going back into your tax deferred pot. Well, take that 10%. Don't make any contribution towards your 401k above the matching you can get. I mean, if you can get free money, get free money all day long. But if there's a, let's say that 10% number, use that as cash flow and redirect it to your bank account and use that money to pay taxes. So if you had $10,000, for example, of 401k contributions that you're redirecting into savings to use to pay taxes on Roth conversions, and I don't want to get too deep here, but let's just say you're in around the 22% or 24 tax bracket, that means if you do the math, you can basically convert four times whatever the tax bill is, right? Say 25% is 1/4 of a whole. So if you had $10,000 of extra money you were not putting into your 401k that now is coming into the checkbook, then that $10,000 could be used to convert generally and roughly speaking, $40,000. So if you're under 59 and a half and you don't have the cash just sitting in a brokerage account or money market or savings, and that's one way to start doing something about the challenge that you got. So that's reason number one. When you're too young and you don't have any outside funds or you don't have any discretionary income, probably don't need to worry about it. The other is on the other end of the scale, still related to age. When you're too old, if you are well into your 70s, it's probably not a good idea to do conversions. If your real objective is to save you your spouse taxes during your lifetime. Once you get into your mid-70s, there just simply isn't for most of us, there's just simply not enough mortality left to be able for us to be able to justify that it was a good deal for you. However, if you're in your mid-70s or older and your real objective is how do I make sure that I don't subject my heirs to having to dilute my IRA by paying a ton of taxes, then it can still be a good deal. As long as you understand that the primary benefits are going to be going to your heirs and that you're not leaving them with a huge tax bill because they have to pay the income taxes for receiving your IRAs that have not had any taxes paid on them. So the third reason is really a recognition of when you have a problem with the Iraq. So if you have big balances in your IRAs, you're definitely a good candidate to do conversions. But when your balances are more modest, they're not going to cause as big a problem. So the problem comes from the required minimum distributions being so large that they cause all of a sudden your Social Security to be greater, taxed greater, or they're so large that you now have to pay Medicare Part B and D premiums, or that they're so large that all in their own they're going to create a big tax problem. So, so when you have a more modest balance, $400,000 comes to mind. Your first year's required minimum distribution is going to be around $16,000. So if that 16,000 is not going to cause your Social Security to be taxed greater, or if it's not going to cause you to go into a higher Medicare surcharge threshold, or it's not going to punch you into another higher tax bracket on those RMDs, then you probably don't have a problem, probably just need to leave it alone. And maybe your Roth conversion strategy is to just maybe convert to the top of the bracket that you're already in. However, again, I have seen many, many cases where just converting to the top of your tax bracket will actually cause you to pay more taxes over your lifetime than if you'd have just done nothing and paid taxes on the rmd. So again, I can't give you rules of thumb because we've just watched, we've seen many different things. A lot of it has to do with age, what your lifestyle expenses are, what your other sources of income are. It just requires a lot of diligence in really figuring out what's best for you. So the other one is maybe not as prevalent for everybody. But the last reason that We've seen that is probably not a good reason to do conversions, is if most of your assets in your IRAs are large annuities. And the reason for that isn't because it's an annuity necessarily. It's normally because the insurance companies place specific limitations on your ability to do a lot of conversions out of those contracts. So if you do have a lot of annuity money, you want to make a telephone call to the insurance company that you purchased the annuity from, and you need to ask a couple of questions. You need to find out if the contract you have can be converted to a Roth IRA at their company and can it be done in any amount that you want to. And the reason I asked, the reason I say that is because although the insurance company is getting more lenient in the past, the only way that you could do a conversion is if you converted the entire contract. So if you have a half a million dollars sitting in an annuity, you have to do the whole thing. That may not be the best Roth conversion strategy. Right. Depending on how much money you have and the other things. So you want to ask those two questions on the annuity front. You know, a lot of people believe that there are a lot more reasons not to convert. They believe a lot of the financial press and the media and financial advisors have printed that, well, you don't want to convert if you have to go over your current tax bracket, which is whoi, and you don't want to convert if you get to another Medicare premium surcharge threshold, which is also whoi, and a variety of different reasons that just don't make sense. The four that I've just laid out are really the primary four that we have seen in thousands of people that we've helped with this. So I hope that helps a little bit and I hope you focus on those are the reasons I didn't include the others, because I don't believe that they're reasons not to do IRA to Roth conversions. So check out the links below. Subscribe to the channel if you're not already. So that new stuff like this and new information I put out that you'll get it directly into your inbox and notification that it's there when you get into YouTube again. Okay, hope that was helpful. This is Craig Weir signing out. Have a great day. Take care.
