A Day Late and A Dollar Short in Roth Conversions?

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.

Well, hi, this is Craig Weir. Hey, thanks for listening in today. You know, the American idiom a day late and a dollar short has its origins back way back to the depression era. It's used to state regret for being late to do something and maybe having come up short financially for not have done it. So it's used by most of those folks down here in the South. But it may apply to you if you don't already have an aggressive game plan for converting your large IRAs to Roth IRAs. So in the show, what I'm gonna do is kind of break it down for you, show you that there's a ton of false paradigms and a lot of bad information out there that really hold people back a day late and a dollar short. All right, so let's talk about a day late first. No, you were not wrong for having saved diligently into your 401k or 403b or whatever type of pre tax retirement plan you had. You know, a lot of people that we talked to, they really express remorse for having saved so much in their company retirement plan and they even kind of beating themselves up kind of self flagellating. Man, I wish I hadn't done that. And I guess I really messed up by putting so much money in the plan. No, that's not really the case. I mean, I think you did a great job. You know, bear in mind the contribution that you made over the past likely saved you taxes at an income tax rate that you were paying then that was higher than it's going to cost to get the funds over to a Roth by paying taxes now. And by the way, rarely do we suggest that you convert everything at once. I'll talk about that in just a minute. But just think about it. You made contributions when the tax rate was probably higher than what it is now. And so now you just kind of have to change a little bit in the way you think about it. So, you know, think about this back while you were Earning and putting money into these IRAs, you were probably in your peak earning years when you were really stacking it away. And because tax rates are at 50 year lows right now, probably most of that money that you actually made of your contributions went in and saved you taxes at a higher rate than what they are today. You know, the rates today don't necessarily change with less income. So bear in mind that your contributions of the past likely saved you taxes at an income tax rate that was higher than what it's going to cost you today to get the funds over to a Roth by paying taxes now. And you know, one example of that, if you think about it, in your higher earning years, the tax rate that you were paying was probably higher than what you have to pay now to get it converted over to a Roth. You know, why might it cost less today? Well, for a couple of reasons. One is your income may just be lower, but the biggest reason is this thing called the Tax Cut and Jobs act that we had in 2017. It gave most middle income wage earners a really big tax cut. You may remember that, you know, the 15% tax bracket went down to 12 and 28% bracket went down to 24%. So there's a 12, 15% decrease depending on what tax bracket you're in. So, you know, when they actually did that Tax Cut Job act, that was probably the perfect time that you should have started or could have started conversions. We correspond with a lot of people that they started a decade ago, but if you hadn't already been doing so, that probably was the perfect time because it was at the lowest cost and really created the greatest amount of benefit to you. But you know, the advantages of Roth conversions, they were, and they were part of my songbook way back in 2009, where we were helping clients way back then do conversions. And that was, think about that. And that was well before the lower tax rates when the Tax Cut Job act came in in 2017. So tax brackets were higher back then. And just think about that. Shazam. The numbers made a lot of sense even then. I mean, we did it longhand with very rudimentary Excel spreadsheets that we soon figured out just are not dynamic enough to get it all done. But we did dozens and dozens of cases that we actually showed people significant savings by doing it, even when the rates were higher. And you know, the math works today for a lot of people, regardless of what tax bracket that you're in. I know that sounds so crazy. Think about that. I just said the math works Today for a lot of people, regardless of what tax bracket they're currently in. We're going to dive into this here in just a minute. But when you consider that taxes have been at a 12 to 15% discount from from our pre 2017 rates, man, it's really short sighted for a lot of people who are great savers into retirement plans to continue to research the issue that we're talking about. I we've you got hey man, when everything's on sale, that's when. That's when we all like to run into the store and grab it. Well, your tax rates are on sale right now. So I hope this is the last piece of information that you need in researching the issue. I hope you just kind of get with the program and get something done. So I'm going to go through several things today that hopefully will answer a lot of the questions that you may have over Roth conversions and maybe you'll see yourself in some of the questions that we get asked that really just aren't valid. Well, another reason that it may be advantageous right now is the United States House of Representatives sent proposals over to the Senate not too long ago that has got all those guys kind of figuring out whether they want to accept the House or whether they're going to make some changes to it. But one of the things that's in that House proposed bill is that they sunset the Tax Cut Job act three years early. That's right. If they went with what the House wants to do, they would sunset the Tax Cut Job act this year. So that means that tax rates could be retro back to the beginning of the year. It could be that they accept it this year, make it into law and start it for next year. You know, those 535 people of Congress get to do pretty much any stinking thing that they want to, I guess as long as we let them get away with it right at the voting booth. So that means that taxes at almost every income level are going to go back up whether it's 2025 or whether it's this year or next year, tax rates are going back up. A big, big reason why you need to get on the bandwagon with your Roth conversions. So you know, whether the changes occur this year or when they're scheduled to occur in 2025, you've probably already missed the least expensive golden opportunity to get this done. Yet there's still hope. You don't need to say, well I missed that one and just go on about your day because it is a very Expensive procrastination if you keep putting it off. You know, you'll recall I just mentioned to you that we were leading people through this process very successfully in 2009 when rates were a lot higher. So you maybe have missed the sale on taxes, but the deal that the IRS offers is still a great deal. So the title of this webinar is A Day Late and a Dollar Short. So we've talked about the day late part. Maybe you've missed the greatest opportunity. So let's just kind of dig in now. This is kind of the meat of what I wanted to share with you guys. You know, a dollar short. So that dollar actually should read probably a couple million dollars short, because that's what our average client is projected to save in taxes. By implementing any kind of an aggressive Roth conversion strategy, they're saving a coup billion. Yet, you know, a lot of the people that we speak to each week, they've really been led astray by what you get to read from just the normal institutional financial media and their spin on the issue. You maybe get on to your online calculators or you call up one of the big national institutions that has your IRA money there, and they're representatives who are basically just glorified salespeople in a lot of regards. The first end of the customer service level. They're not. They're not up to speed on this stuff. And more importantly, a lot of those big firms, compliance departments and attorneys don't want them giving any kind of tax advice or anything that even comes close to representing tax advice. So here you get to read articles by people that don't have the full story. You go to the big institutions and you're not getting the full story there. And I don't think it's for a reason that they're trying to mislead you. It's just the nature of this subject matter. So what that does is that builds these paradigms in your mind, and you get these misunderstandings of what reality is, and you're getting them from people that you trust. And of course, the opinions are of abundance over the Internet. You can hear the same thing over and over, and before long, you just kind of believe that it's true. So I want to share with you some common statements that we hear from people who just simply haven't been shown the complete way to think about Roth conversions. And I'm not trying to say we have the answer to everything, but I'm not giving you my opinions today. I'm giving you the result of I don't know, 14, 15 years of just studying the issue and doing the calculations and seeing the common threads. And then we've even gone so far as developed software that we can use internally to evaluate a variety of different strategies all at one time. So what I'm giving you is not what I think think, it's what we know from what we've seen evidence in the math and the analysis. So I've got seven statements that I want to just kind of talk through with you. These are statements that other people tell us that reveal to us that they're not given the right information. And so they're carrying these false understandings and really bad paradigms with them. So here's the first one. Some people say to us, look, man, I don't have any money outside my IRA to pay taxes with. And so I'm not going to do Roth conversions, man. Whether you have money outside your IRA or not doesn't really matter. It is certainly more advantageous if you had a big pot of money outside of IRAs to pay taxes with. But even if you have to pay taxes from within the ira, as many, many of our clients do, the strategies are still going to save a lot of money, even if you have to use those IRA funds to pay the tax. So a lot of people are saying, well, wait a minute, I cannot do that because I will have all this money that I cannot touch for five years. Well, there are actually two different five year rules. So the one that relates the most to you, if you're listening to this and you're over 59 and a half, here's the rule. If you're at least 59 and a half years old, the IRS says that 100% of the funds that you convert not contribute, but you convert. So let me make real clear what we're saying here. I'm not talking about you taking money out of your paycheck and contributing it to a Roth. We're talking about money that you convert from an IRA to a Roth IRA and pay the taxes on it. The rule says 100% of that money is immediately available to you free of taxes or penalty. Now what you cannot do is you cannot withdraw more than 100% of what you converted within five years. If you do, you simply pay the income tax on the overage that's there. And so where a lot of people come short with not using any money, using the money inside their IRA is a, they think it's too expensive, then their accounts will go to zero. And we prove every day that that's not necessarily correct. And the other is that they don't have any access to the money. And I've just explained the five year rule to you, and you really need to kind of consider that, because that part of the five really is a game changer for you. When you know that you're going to be retiring in a few years, you want to make sure you have access to your money. Okay, so here's the second statement that a lot of people say to us. Okay, I'm better off leaving the money in the IRA to grow, and I'll just pay taxes later and it'll save me money. If I had a nickel for every time I've heard that, I would have a whole lot of nickels, folks. But the math just doesn't support this unless you're okay with the IRS becoming your biggest beneficiary. Yeah, so the math doesn't support that mindset. Let me explain it to you. And I know we're doing this. You're having to listen to this. So I'll try to kind of lead you through it. If we had a whiteboard, it'd probably make a lot more sense or something that you could see visually. But let me see, Let me give it a go. So there's this little rule in math that's called the Rule of 72. And the Rule of 72 really just identifies at what interest rate, how many years it'll take for money to double. So you take the number 72, for example. You divide it by a 6% interest rate. If that's what you assume that you're going to earn on your money, 72 divided by 6 equals 12. So that means using the rule of 72, that at a 6% rate of return, $100,000 grows to 200,000 in 12 years. Okay, so that's important for you to understand these next two little logic lines that I have for you. So let's assume in plan A, you're going to take a million dollars and you're going to convert it today, immediately. And let's say your taxes are 25%. And I know there's not a tax rate of 25%. And I know that if you converted a million dollars, you'd pay more than 25% in taxes. So just hang with the theory here, because the math works at whatever interest rate that you want to give it. I mean, any tax rate that you want to give it. So we have a million dollars, right? You tax it now and you pay 25% in taxes. So now you no longer have a million, you have 750,000, right? Now let's assume that $750,000 grows at 6%. Using that rule of 72, in 12 years, that 750,000 is going to be worth what, a million and a half? Good guess. Alright, so if you have a million today, you convert it all today, you let it grow for 12 years, you got a million and a half. Hold that thought. Now let's assume that you do what a lot of your friends and neighbors say that you should do. I'm not going to pay the taxes today, I'm going to let it grow because I'll be in a lot better shape. Well, that million dollars today growing for 12 years at 6% is going to double. It's going to be 2 million. Uh oh, he's looking like he's right. Well, wait a minute. To make this the right type of analogy, we got to remember he still owes taxes on all that $2 million. And I'm not even getting into where the big amount of taxes are paid. I'm just dealing with the very myopic statement that a lot of people make. So he's got 2 million bucks, taxes at 25%. Now he's got how much left? Shazam. A million and a half. That's exactly what you would have had you just converted everything and let it grow. A million and a half is a million and a half. And you could do it at different time frames, different interest rates. It's just the way the math works. So people saying, I won't, I don't want to do it because it's going to dilute, I'm not going, going to have as much money isn't necessarily correct. So you just got to do the math on it. A lot of people just don't do that. And remember I said that that works. And now if the guy had 2 million bucks, he said, I'm happy dying with 2 million bucks and I don't care what happens to my heirs. Well, that's one way of looking at it. Then we have to take that evaluation then to now what's going to happen to tax on Social Security and Medicare and everything else. But that's a different conversation. So here's another statement for you. There's other people say to us, well gee, you know, I'd love to do these Roth conversions, but man, I can't afford to pay all the taxes to do the conversions. In other words, they're afraid that their balances are going to go down significantly. We show Them where they're paying 60, 80, 100, $150,000 a year in income taxes while they're doing the conversions. And I mean, it causes a little bit of sweaty palms and I get that. But your fears are misplaced if that's what your concern is. Because if you do this right, if you get the conversions done at the right tax bracket over the right number of years, that's something we call the sweet spot. If you find your sweet spot, it really doesn't work out poorly for you at all. In fact, unless you're really distributing a big percentage of your IRA for living expenses. Now, I would wager to say that you can't afford not to begin Roth conversions. The fear is that you're going to be paying tax on the entire balance at once. And in reality, if you do this the right way, you're doing conversions over a period of time, 4, 5, 6, 7, 8 years, something like that, depending on how large and how large the balance is, how old you are, what your other incomes are. But mostly, if you do it over the right time frame, you're going to keep your overall net worth intact or really close to what it was anyway. If you look at a tax adjusted net worth. And so this whole comment of I can't afford to pay the taxes because my account is going to go to zero just by paying the taxes is really ill founded. If you do it the right way, our clients see really no difference in their tax adjusted net worth. After just, really just several years, they're back to even again. Okay, so here's another statement we hear a lot. This one is a tough one because I know you guys have some really good relationships with people that you've had that have helped you for years and years and years. And I, you know, I respect that. But a lot of people say to us, well, I'm anxious to hear what you have to say because my CPA or my investment advisor or my financial advisor has told me that I should really only convert to the top of my current tax bracket. And so you're converting this? We amount every single year, man. We've heard this one a bunch too. And you know, I'm sure that those folks in your life are well intended, but they're just simply wrong. And our work product proves this every single day of the week. In fact, I'll tell you this, you must convert at higher tax rates in order to save huge amounts on taxes over your lifetime. But you know, I don't want to be down on CPAs and down on other advisors. I mean, to be fair, that is not really their bailiwick. I mean, you go to CPAs for them to save you taxes and you get good tax advice on what's happening today or on a business that you have or something like that. You know, CPAs are rewarded to save U.S. taxes. They never, very few of them ever help themselves out as tax planners over a lifetime. And so we come along and we give them work product that shows that you're saving a couple million dollars and man, it puts them on tilt. But I've never had a single CPA yet refute our findings once they saw the work product. And kind of similar with your advisors, but for a different reason. You know, your financial advisors are telling you that because that's what's in the financial press. That's what they're reading. That's what the continuing education programs tell them that they should be telling you. That's what they're. And their compliance people aren't wanting them to get into doing tax work at all. But they just don't know. I have conversations every month with financial advisors around the country that subscribe to our email and they read, they, they go to our webinars that we do, and it just blows them away when we show them the numbers. They just aren't up on this stuff and they don't have the tools to be able to do it. The tools are the hard part to come up with something that gives a fair evaluation of what's happening. Okay, so we're coming around the home stretch here. We got more than half of them done. So I got three more of these, these statements that we hear from people that I want to just really break down for you. So we also hear this. Look, I don't want the added income that's going to cause because it's going to cause my Medicare premiums to go sky high. Really? Well, that's a true statement. For a short period of time, you will have higher Medicare premiums if you are already on Medicare. But let me ask you something. Would you rather pay a few thousand dollars each year less in Medicare premiums or would you rather save a couple million dollars in taxes? And look, I don't, I don't mean to be unkind with my tone, but I do need to wake people up from the garbage that most the media have really fed you about this subject matter. Yeah, you're going to pay a little bit higher Medicare premiums for a few years. But think about this. Once you get that, that IRA completely or or primarily converted to a Roth, you no longer have any kind of required minimum distributions. And if you don't have any higher requirement distributions, then the only thing that your Medicare Part B and Part D premiums are going to be based on is whatever your fixed income sources are and investment income. Now if you avoid those RMDs, what you're avoiding is adding that income also in so you either have a choice of paying higher Medicare premiums for a few years while you're doing conversions or pay higher premiums for most the rest of your life after you turn age 72. And the the difference in the money is huge as I've already mentioned. So here's another quote, another statement that we hear. Alright, so I'm convinced that those folks in Congress are just going to change the rules again. I'm going to go do these Roth conversions and uh huh, those stinking rascals are going to go change the rules and now they're going to start taxing me on my Roth. Well will they change the rules? Yeah, probably on something sometime soon. Yeah they probably will. They always do. But the taxes are never going to go away. So the way I'm looking at it is worst case scenario from worst case reasonable scenario is that you have to distribute money from the Roth later, but it's already going to be tax free income and you're still going to be better off than leaving it in an ira unless you converted everything this year and they changed the rules totally next year. But the other thing that I think a lot of people who kind of hang their hat that hook miss is that these same 535 people, they want to get reelected. You tell me how popular it's going to be with 20 something million baby boomers and older folks if they did something that maniacal. I do believe they'll make some changes, but they'll make changes like they've done in the past. They'll put a flag in the sand and they'll say anything done after this date has this challenge or this new restriction to it. I don't know. I do know this taxes aren't going away, they're going to get higher and you and I aren't getting any younger. And so if you'll just look at the math, get a good analysis of what's going on and make your decision with that based on just fear alone when you put the logic to it. And I won't take time on this podcast, but when you put the logic to it, yes they do change things and yes Things aren't popular, but very rarely do they come in and make those kinds of changes that people fear could happen. And mainly just because if I can trust anything about our elected officials, it's that most of them want to get elected again next time it comes around. And they will do everything they can to make sure that that happens. All right, so my last one that I want to give you before we talk about what's your better plan is sometimes, occasionally people say to us, look, I don't want to do Roth conversions because I don't want to have to change advisors or buy some life insurance policy. And man, those two can not be further from the truth. But unfortunately, that's the way that a lot of the people that are advertising out there in social media and doing classes and everything else that's kind of the way they sell this, is that it's either come to them and they can help you with Roth conversions. And if you do, that means you got to move all your accounts, right? But you know, a lot of people in the financial industry are really just using Roth conversions as an opportunity to sell high commissioned financial products or doing it to drive a wedge between you and your advisor so that you will fire your advisor and move all your money to them. This is probably the best time for me to remind you that at our firm, Q3 Advisors, we don't sell any financial products, we don't manage any money. We only provide Roth conversion strategies for people, right? So look, when you're implementing a Roth conversion strategy, it has absolutely nothing to do with buying any kind of financial product. In fact, in almost every case, you're going to wind up with the exact same investments that were in your ira. It's just a simple transfer from the IRA to the Roth with a tax bill associated with it. And you certainly don't need to change investment advisors because of it. Unless your investment advisor gets really horsey about this because they happen to be losing assets that they can no longer charge you fees on. And if that's your advisor, then I suggest you probably need a change anyway. All right, so I've given you all this up till now, you know, a day late and a dollar short, and hopefully you can. I'm making my my case that a lot of the misunderstanding and paradigms just really don't hold water to reality. So what's a better game plan? Well, I would say you don't want a better plan. What you want is the optimal plan. You know, that's what you really want, isn't it? Isn't it really what you want? Just to know that based on reasonable assumptions, you just want to know what the best game plan is for your personal situation for the future. So getting the optimal plan is going to require a few things. It's going to require that you have a desire for the truth. You know, I'm not really interested in debating the issue of whether you should or shouldn't do Roth conversion, because if you fit within a very wide range of financial situations, I've just seen too many very detailed analyses that prove that there's a lot of money on the table. The problem with this whole issue is that you can discard this. And most people that are listening to me are going to have just a great retirement whether they convert or not. It's just going to be more painful once they start hitting 72 and 73. Because now the taxes are going to be your single biggest line item and you can afford it. You'll kind of curse every time you write the check to the irs, but you'll afford it and your retirement will be unaffected. The problem is you're just going to waste hundreds of thousands, if not a couple million dollars in taxes that you just don't need to do. You know, as a fiduciary, we wear a very special hat. And that hat is one that we choose to wear in a way that we distance our from even the appearance of a conflict so that we don't sell anything, we don't manage anything. We only do one thing, give you great retirement planning advice, great Roth conversion strategies, and then help you with that process. So look, you have to be open for the possibility that you've been fed a ton of really bad information and it's going to cost you dearly. You know, if you're not open to that as a possibility, then there's probably not much anybody can do for you. My grandmother used to have a lot of different sayings. She was back from that whole depression era. She had a lot of funny little one liners, or at least I give her credit for them. I don't know where I got them, some of them, but she used to say a man convinced against his will is of the same opinion. Still, you know, some people just don't want the truth. They just want to hold on to what their opinion is. You know, I really hope that's not you, as it's likely coming at a really high price. I hope that you have formed your opinions based on things you've read from institutions that you trust. And I'm just Trying to say to you that information, even though you trust them on other things, doesn't prove out in real life, at least from my personal experiences for 15 years of specializing in this area. Here's another thing that you're going to need. In addition to a desire for the truth, you're going to need an unbiased analysis and a set of recommendations that prove to you the best course of action. I don't know where you get that. If you can come up with your own spreadsheets, then that's what you need. If you believe that your existing financial advisor, if they're coming to you and they have something that they can prove to you in writing, what your taxes will be under a no conversion scenario, and if they can prove to you what your taxes will be under a different scenario, including Medicare costs, including taxability on your Social Security, everything else, then whatever it takes, that's what you need. You need that unbiased analysis. And I would suggest to you, you need a sense of urgency right now. You know, the day late and a dollar short thing. It's really time to stop playing around with this, folks. It's about to get much more expensive to make the changes that I know that you need to make. And then I guess the other thing, just as a shameless plug, is I believe you need us. I believe you need our firm. We are the best in the country at this. We've seen a lot of the other material. We've had clients come to us after trying everybody else out there on the Internet. And look, we specialized in this area longer than anyone else, and we have much more sophisticated tools that help our clients get to see the optimal outcomes. I mean, it's there in front of you, black and white with assumptions that you either tell us or you agree on are very conservative and reasonable. But that first step is up to you. That's the hard part. You know, I would invite you to really consider the statements that I've told you today and think about if you're making any of those and then just consider reaching out. Speak to one of the certified financial planners that we've handpicked and they've been specially trained by me. They're all very experienced folks. They're not at all wet behind the ears and they know their stuff. They know what they're talking about, and they can show you samples of our work product and that. But, you know, in the show notes below, there's a link that you can actually schedule a complimentary consult just to see if you're even a good candidate for the things I've been talking about. And you know if you enjoy listening to this kind of information and you'd like to have this kind of stuff sent to you on a regular basis where you know what's going on with, just subscribe to the podcast and we cover not only Roth conversion but we'll be deal digging into all the elements of personal financial planning and retirement planning and hopefully just trying to give you a lot clearer direction for the decisions that you need to make for your retirement. So I appreciate your time today and we'll come in with another podcast here probably in a week or so and hope to be able to get you back on track and help you with a bunch of great stuff. So take care. God bless. Have a great week.

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.