5 Reasons Why Roth Conversions are Critical to Your Plans for Retirement

Welcome to another edition of the what's Next Retirement Podcast with Craig Weir. Life is full of transitions that have a financial impact now and in your future. When finances are affected, there are always questions to ask and choices to make. As an independent certified financial planner for well over 30 years, Craig has helped Americans make decisions that give them their best financial futures. The experiences with so many clients has given him a unique perspective to help with with what's next for you as you navigate the unknowns of your own life. What's next? Answers to the retirement issues on your mind.

Hi there. This is Craig Weir. Welcome back to another episode of what's Next for Retirement. It's a podcast that I've been doing here for a little while that we're trying to just kind of help you anticipate and manage those transitions in life that have financial implications for your retirement. Today I've got an interesting podcast that I've entitled 5 Reasons why Roth conversions are critical to your retirement plans. You know, Roth conversions have hit the news the last year or so. A lot of people have started just jumping on the bandwagon on a subject I've been covering for about 13 years. But we got to be kind of careful with letting the, I don't know, the, the tag, the tail wag the dog, so to speak. Today I want to just kind of go through, why are Roth conversions or why can they be so critical to your overall retirement plan? Yes, they can avoid a lot of taxes and yes, they can be really cool to talk about, but I want to really kind of dig into why is it important as part of your retirement plan or why can't it be. First of all, for those of you that don't know me or been a part of the information that I cover and what I go through, let me just kind of give you by way of introduction. You know, I, I got to be a financial planner, a cfp, many years ago because I really wanted to help people make better decisions with their life. I used to have the classic financial planning full service, little boutique practice in a small town in Texas and sold that business several years ago to a guy that had been with me for a dozen years ago or so. You know, even back in that practice, one of the things that we did is we required our new clients to kind of do comprehensive financial planning before we engage with them to manage any assets or implement any of our financial products that we used to offer. And the reason was I really felt like we needed to understand the effects of inflation on their life and spending decisions on their life and what rates of return were going to be and how they were going to impact their future. We wanted to know all those things before we could really help advise them what to do. And of course, as you know, probably from having gone through the financial planning process, just being asked the questions by somebody who really does financial planning caused you to really think about what you want your future to look like. And we wanted that. I also had a talk radio show about retirement planning, and we used to do that in the city of Houston way before there were. Everybody and their brother were selling annuities on Saturday morning on talk radio. So I guess the reason I went through all that is I have a pretty unique perspective and that my focus has always been and still remains on financial planning, trying to help you put all the pieces of the puzz together in the most advantageous way. I mean, gosh, you know, you worked and saved your whole life and struggled to put away money and maybe had some matching happening for you. So let's just make sure that we do the absolute best that we possibly can and then kind of punt and go with the flow as things change. And things do change. You know, Congress just passed the new Secure 2.0 act that now is going to delay required minimum distributions a little bit longer. And they did some other things, too, that we'll talk about a little bit more as we get into the podcast. So why should you consider Roth conversions? Why could they be important? Well, the first thing I want to do is to clear the air, because a lot of people when I talk about Roth conversions, they think about Roth contributions, and they're two different, totally different things. You have to have earned income to do Roth contributions, and you're limited by the amount that you can do every year in a Roth conversion. It's currently an unlimited dollar amount you can do anytime you want to, as many times you want to. The benefit is the money that gets into the Roth IRA is income tax free for life, and it's income tax free at your death to your heirs. You still may have some estate taxes, depending on the state that you live in and how large your estate is on the federal level, but you avoid an incred amount of tax. But I also want to say that there are conditions in which you probably will not benefit from doing Roth conversions. And in fact, it might even diminish your financial position if you did those conversions. I'll do a separate podcast about that. I know I've done articles before on the four reasons why you probably shouldn't do Roth conversions. But I'll do a podcast on that here soon and it'll be interesting for people to kind of just see as well. But I will say this. If you are an what I call an IRA millionaire, which the definition should be obvious, then the only thing that's keeping you from saving a million dollars or more in taxes are your false paradigms that you've come to believe or misguided advice that you've had about Roth conversions. In the show notes on this podcast, we'll include a link to my website where you can pick up one of my books that these false paradigms and all that stuff was covered in my second book called Roth Conversion Secrets. And I hope if you haven't read that, I hope you'll pick that up if you're into it. It's less than 125 pages. I wrote it telling a lot of stories, so it's easy to read, not a lot of deep financial stuff. So ch out the show notes and go pick that up if you want to get more details on that. So, so we got to ask the question, what role do optimally strategize Roth conversions play in retirement planning? And I use those words on purpose because just any Roth conversion strategy will not do that has to be the optimal one. It has to be optimized to get the best one for you. So the question we're going to talk about, what are the reasons? Why are they? Why are they critical? What can. What's. What can be such a big deal? So I got five reasons here. We'll try to cover these in the next 15 or 20 minutes. Try to keep things moving through. You can always pick up the books or listen to some of the other podcasts or connect with one of us if you want to get some more information. So reason number one of why Roth conversions can be so critical to your overall retirement plan is you're going to avoid paying an incredible amount of unnecessary income taxes during your lifetime. And if you don't pay unnecessary income taxes, then that's a good thing for everybody involved, right? Except for the irs. So in reason number one, avoiding these unnecessary taxes, you're going to decide you're going to have to pay them sooner. So the only way to really avoid a lot of income tax into retirement through Roth conversions is to pay at pay sooner than what you probably think and probably at a higher tax bracket than you probably think. But you want to do it where you can pay it at your pace and what your optimal rate is instead of what the IRS tells you through their tables. And if you do this, you'll avoid a tremendous amount of tax later. Again, if you're the IRA millionaire, the only way to save a lifetime of taxes to, as I've already said, choose to pay tax sooner rather than later. There's a lot of paradigms of, well, it's just tax now or tax later doesn't really matter. And that's not really true. When you do the math on it, you take everything into consideration. It's not just a matter of letting it grow, tax deferred and being the same thing down the road. The problem though is if you're an IRA millionaire, the RMD is the required minimum distributions that you're going to, that, that those large IRA balances are going to create are probably going to be two, could be to even much as three times the value of your existing IRA. What I mean by that is if you're say, 65 years old and you've got 1.5 dollars sitting over in your big IRA that you rolled over from your company, then my experience is you're going to have about three to four and a half million dollars of required minimum distributions just kind of put into your tax return over the rest of your lifetime, in addition to still having the million and a half left if you're the typical IRA millionaire and you're not taking big distributions out of your ira. So, yeah, the other thing you need to know is that amount of income from those RMDs could be the tipping point that causes most of your Social Security to be taxed if you don't already have large pensions that are doing that also. So those are big. That's a big reason that can really benefit your overall retirement plan. The second reason is you want to create some tax diversification in your current retirement plan. You know, most people are, they're just stuck with taxable decisions for the rest of their life because they saved everything inside their 401k or their IRAs. A Roth creates options for you. We're sitting here at our income tax rate still being the lowest in 50 years. But listen up, three years from now, all that changes at the end of three years, at the end of 2025, the tax cut Job act goes away and we go back to higher tax rates. Some would say yeah, but it's not much. 22% goes back to 25%. Just 3%. Well, 3% of that original 22% is. What is that, 12, 13% increase in taxes. So if you don't get busy with Your, your conversions now, you're going to pay at least 13% more tax. Just if you just didn't do anything, the 24% tax brackets going to 28%, that's a huge increase. So if you diversify the buckets that you have your money in and you have more tax diversification, what you've really done is you're open to yourself up to having a lot more options in your life. Imagine being in a. In a place where you have, where everything that you want to do isn't dependent on taxes you got to pay. You want to buy a car and you take it out of the Iraq, you got to pay tax on it. You want to take the family on a vacay, got to pay taxes on it. If all your money's sitting in the IRA and if you still have money outside in your brokerage account and you think, well, not me, I've got this big wad sitting out in my brokerage account, yeah, well, if you want to go take a trip, spend 30 grand, take the whole family someplace, you got to sell something, and that's either a capital gain or a capital loss, right? So there's still taxes. So all I'm really saying is we can, I mean, we can argue the finer points, but having more diversification in the tax strategy that you use is a really big reason to really consider getting the Roth conversion in addition to being able to save a ton of money in income taxes. Number three. Reason number three, you'll have a much more sophisticated income plan for your future if you do Roth conversions. It's related to the other two. They're all kind of related, but it's sophisticated in that it requires you paying some taxes up front. So that means you really got to get the math right. But what that will allow you to do is eliminate a million or more of taxes over your lifetime. You know, our average client is in their mid-60s and somewhere between a million to 2 million of IRA money. And our average client is avoiding $2.1 million of income tax at least over the last 12 months. That's what our numbers have been. So there's this huge amount of avoidance that you can get by just choosing to pay the taxes now strategically, in an optimized way. The other issue, you know, if you're listening to this and you're in your late 50s or 60s or even early 70s, you're in the distribution phase of your savings career, right? You saved all the money accumulating it, and now you got to figure out what's the most practical and optimal way of distributing those assets. And you got 20 or 30 years Lord willing to be able to have to deal with all that income that's going to be coming your way. How many people do you know who've arranged their financial lives in a way where the last season of their life is pretty much tax free? Not many. Maybe they came to see us a few years ago. But we'd like you to be one of those folks that are able to do that. And if you'll get Roth conversions right, you can really set yourself up to do that. Reason number four, man, you could get ahead of the tax man for your heirs. Imagine that, you know, 100% of your IRA is going to be taxed within 10 years of your heirs receiving it. I'm reading that Congress is even making whispering about developing a schedule that has to be followed by your heirs to make sure that they get their money instead of somebody waiting till the last time. But the least amount of taxes that your heirs are ever going to pay is if they pay the taxes all at once. What do I mean by that? Well, if they let it grow and grow, they're just going to pay more taxes, right? If they delay it by 10 years, they're just going to pay more, more taxes. So your heirs may have no options at all. If you don't get the Roth conversions, they may be just down again to an IRS table that they got to follow for the rest of their life. You know, your IRAs are going to be depleted anyway by tax. So you either decide to get some planning done on the front end, or you just leave it to the heirs. And if they're good earners, they're going to get slammed by taxes because of what dear old dad or Uncle Joe left them. You know, in a lot of the work that we've done with our clients of evaluating the impact of income taxes on what their heirs are going to receive, we find that if you have more than two kids, the heir, the IRS could very easily get more in taxes than any one of your heirs receives because you don't do something ahead of time. So those are all really good reasons. You just, you know, there, I mean, if the IRS is going to get the money anyway from your IRAs, then why not do it? Why not take the time and structure in a way where you. You receive the biggest benefit during your life and your heirs receive as much as they possibly can instead of just making your donation to the US Treasury? Reason number five, I'm cranking through these pretty Quick. I'm glad to be making it, making time so quickly for you guys. Look, I've said it before. Options. You just want to have options in your life. Either you convert now on your own terms at the optimal rate over the optimal number of years, or you subject yourself to whatever the IRS plan is for your retirement. You have no options at all. If you do that, you just take whatever comes along in the tax codes, not only what they are today, but whatever they decide they're going to be in the future. And a lot of the things have happened in the last several years that indicate that taxes are probably going to go up, not go down. So those are my five reasons. I'll give you a real quick review just to make sure that I made my point fairly well. The five reasons why Roth conversions are critical to your future retirement plans. Number one, you can avoid a ton of unnecessary taxes. Totally avoidable. If you just develop a game plan, you can avoid an incredible amount of taxes. Number two, create tax diversification in your assets and your life. Number three, have a much better income plan for the distribution phase of your life. I mean, hey, if it's tax free, that's better than taxable, right? And number four, beat the tax man away from your heirs. Win the battle for them. And number five, just find options, man. Develop options for whatever happens next in your life and taxes. So, hey, thanks for listening in. You know, if you want to get kind of up to date notifications when I create more information that you may think is useful or not, just simply subscribe to the podcast and as soon as a new one comes out, you'll get a little pop up on your phone or your or your browser and it'll tell you that we got a new one up there. You know, a lot of additional resources can be found by the links in the show notes to craig weir.com I've got books, I got webinar replays, there are guides, I've created all that kind of stuff. You know, my new book was just out toward the end of last year, hit number one bestseller in less than a week, which just blew me away. That's the same thing the very first book did, Paying the Piper. Amazon offers our book for $19.95. But since there's really no money in writing books, we make available for just 3.95 off of our website. And you can find the links there to the new book is called Roth Conversion Secrets. The first book was titled Paying the Piper. If you haven't read both of those, those are a great place to start. On the other hand, there's also a link in the show Notes where if you just really want to talk to somebody about whether you're a good candidate to do Roth conversions, and I provided that for you as well. We'd love to have a conversation with you if you feel like you're ready for that. So take care. Have a great rest of your week, whatever day you happen to be listening to this, and tune in for more podcasts on what's next in your retirement.

Investment Advisory services offered through Q3 Advisors, this presentation is for educational and informational purposes only and is not intended to be individualized financial, tax, or investment advice.