6 Critical Things to Know About RMDS and Roth Conversions

Hey there you guys. You know, using Roth conversions to manage required minimum distributions is a really strategic way to reduce your future taxable income and minimize the impact of required minimum distributions on your retirement tax situation later. You know, 15 years ago I began specializing in this area and as you can imagine, I've learned a lot about how to optimize Roth conversions for our clients. And I hope the information that I'm about to share with you is valuable to you. So also because we get asked so frequently, please know that we do not sell any financial products and we don't manage client portfolios. We only offer strategic tax and comprehensive financial planning advice. So my motivation in this video is simply to educate you with concepts and some strategies that we find have worked really well for our IRA millionaire clients. If you have much less than a million dollars in your IRAs, the standard industry recommendations are probably going to work really well with you, but not so much for those of you that have larger IRA balances. So here's how I would approach managing your RMDs by doing Roth conversions. We got five or six basic points that I'd like to give to you. Number one, convert traditional IRA assets to a Roth IRA. Your required minimum distributions only apply to traditional IRAs, 401s and similar types of pre tax retirement accounts. When you convert money from your traditional ira and Roth IRA, those funds are no longer subject to RMDs. Roths don't require RMDs during your lifetime or for your benefit your spouse beneficiary, and they allow your investments to continue to grow totally tax free. So the strategy tip here is by gradually converting portions of your traditional IRA to a Roth, you can reduce the balance of your traditional IRA and that lowers your future RMDs. One really strong and prevalent misleading belief is that you should only convert if you think that tax rates are going to increase in the future. So our study and our experience of over 15 years of doing this and literally thousands of iterations and calculations proves that if you're an IRA millionaire, you generally are going to make a huge mistake by following that traditional advice and you'll leave millions of dollars of unnecessary taxes at the doorstep of Uncle Sam. Tip number two, Control your taxable income through Roth conversions. That will also control your rmd. So Roth conversions are taxable in the year the conversion. But the advantage is that you get to control how much you convert each year and you can convert an unlimited amount of your IRA every year. Now, some people can confuse conversions with contributions. Contributions are different and they do have limitations, but we're talking about conversions today from taking money from the IRA and moving it to a Roth. By doing partial conversions, meaning not the whole thing at once, you can spread out the tax liability over multiple years. So the traditional strategy on this says, hey, just convert enough each year to reduce your future RMDs, but not so much that you push yourself into higher tax bracket. Again look, the optimal strategy is not that you will probably convert your accounts faster than you currently may believe is reasonable and more likely at a higher tax bracket than you're currently being advised to convert, but you end up, if you get the optimal strategy, you end up with less tax over your lifetime and for your heirs and you end up with the same or better net worth. So tip number three, start early before you hit RMD age. Starting Roth conversions well before you turn 73, or at least under the new law, 75 for some people can give you a lot of years to manage the size of your pre tax accounts. Once you reach the age for RMDs, you can no longer convert your RMD amount for that year. You can convert the balance of it, but you have to take the RMD first as taxable income and then you convert beyond that. So it's not undoable, it just is that you've got to take the RMD and that takes up room in any tax break that you're going to convert and it's just not as efficient. We, we do it all, we recommend it all the time for people, but it makes the calculations a little bit different and the benefits come down quite a bit. So the strategy in this is, look by, by planning your Roth conversions and doing them in your late 50s and your 60s and you can reduce your total IRA balance well in advance and that's going to result in some smaller RMD later when you reach that mandatory distribution age. If you're in your mid-70s, you just need to know that it's worth doing. But the benefits you're going to get during your lifetime are not going to be anywhere near what you're going to create in benefits for your heirs. So if you don't have any heirs or you don't really care, then once you get into your mid-70s, you probably don't need to do as aggressive of conversions. Now if you still have a large balance and you don't want to leave your heirs with this big tax mess, then there still is a lot of reason to consider it. Just know that they probably are going to get the bigger benefit than you are. And if you're in your 80s or above in age, man, congratulations. You've made your savings last for a long, long time and you're still got plenty of money. But probably Roth conversions are not a good financial trade off for you or for your heirs. Okay, so my fourth point, that you also need to manage your Medicare premiums. You know, large required minimum distributions are going to likely push you into higher IRMAA premiums for Medicare. So that's an acronym that just is income related monthly adjustment amount. Because Medicare part B and D are income based and they look back every two years and they determine what your premiums are going to be for those based on your income. So when you're reducing your RMD through Roth conversions, it can actually help you avoid these additional charges later in your life. You're going to pay higher premiums while you're doing the converting, but the math works out so that you pay much less in total Medicare premiums over your lifetime by actually getting the conversions done sooner. So it's kind of like ripping off the band aid. Over a period of several years, you pay a lot higher Medicare premiums, but then once the band aid's off, you go down to the minimum amount for the rest of your lifetime. So the strategy here is really you need to calculate the impact of your future RMDs on a number that they use called Modified Adjusted Gross Income. And that's that number is used to determine what your Medicare premiums are going to be. Lowering your RMDs through conversions now could save you on both income tax and Medicare costs. Tip number five and only one more after this. If you're charitably inclined, you can combine qualified charitable distributions with Roth conversions to manage your RMDs. These QCDs is what the acronym is allow you to donate up to $100,000 a year directly from your IRA to a charity which counts toward your RMD without being included in your taxable income. The strategy here is use those QCDs to satisfy part or all of your RMD later in life. Convert now down to that calculated amount. That's going to spit out the QCD amount in a range that is what you want to give. And of course you want to bring the QCD down for contributions, but you also want to bring it down below any standard deductions that may exist on the tax law at the time. All right, my sixth and final point. Review your tax bracket management opportunities. So work with a tax professional or a certified financial planner to create a multi year Roth conversion plan. You Need a game plan. I really encourage you, don't wing it on this. Don't go with just somebody's opinion. But. But if you work with the right people that are used to doing this, and they do it all the time, they can help you decide when to convert, how much to convert, and how to optimize the process based on your unique financial situation. But here's a big strategy tip for you, and this is probably the most important one of all. Only work with tax and financial advisors who have considerable experience of actually doing Roth conversion calculations. And if you're going to trust the information that they give you, ask them to show you the results from every tax bracket, especially those brackets that are higher than your current bracket. And be aware that a lot of financial planning software has built into its assumptions back in the coding that you should not convert above your current tax bracket with that baked in assumption that that financial advisor may have all the right motivations in the world, but they're going to leave you short because the tools they're using are tools that put limitations on what's actually best for you. And by the way, this isn't just a tax decision, right? Make sure they've included equitable calculations of the after tax impact on your net worth. By effectively managing your Roth conversions, you can really reduce the impact RMDs, you can potentially lower your overall tax burden in some really enormous ways, lower your Medicare premiums and create a lot more flexibility in your retirement income strategy. So if you have somebody telling you that you should only convert to the top of your current tax bracket, then if you're an IRA millionaire, that probably is bad advice, unless you're taking a whole lot of money out of your ira. And there's a couple other circumstances, I guess, that are really kind of far out there for most people that we work with. But generally speaking, you are much better off to get the conversions done much sooner than later. Now, if you have a more modest IRA balance, then probably, as I said at the beginning, the traditional advice is probably good for you just to find a tax bracket and to convert a little bit over a long, long period of time. But we have found, and this is really important, we found with people that are IRA millionaires and kind of have that IRA millionaire next door approach to life, you actually will pay more tax over your lifetime by converting at just your current tax bracket. In most every case we've run, it turns out to be a really better situation for you and at the end of the day to convert much more aggressively. So if you like these kind of videos, hit the like button. Give me a thumbs up, let me know that the content was good. If you like this kind of stuff coming to you whenever we put out new information, which we try to do a couple times a week, then hit the subscribe button and it'll pop up immediately for you. So you'll be one of the first to know. Hope that is helpful to you. Have a great day. God bless you.