Are Multi Year Roth Conversions Better for You - The Truth

Hey everybody, welcome back. This is Craig Weir. Welcome back to the channel. I hope that you're having a great day and I hope to give you some really good information here today. The subject is really, should you do 100% Roth conversions in year one, just rip off the band Aid, or should they be done over multi year timeframe? And there are shades of gray in between all that? So what I want to do is just kind of talk to you a little about what we've learned. I've specialized in this area for 14 years. We have, I don't know, a dozen certified financial planners on staff that meet with people every day, develop game plans and produce results that are pretty amazing for people. But we've learned a lot over doing thousands of Roth conversion game plans for people. So what I want to do is I want to try to relay some of that information to you as best that I can. It's impossible for me to tell you what to do over a video, but I can at least educate you and I could give you information that maybe is a missing ingredient of what maybe what a sticking point is for you on what you're trying to get accomplished. Let's talk about this. Comparing those strategies of taking 100% of your IRA and convert it all on a single year, or spreading it out over multiple years. And I want to, I want to really just call out the importance of Roth conversions for you. If you're an IRA millionaire, what I call an IRA millionaire, the reasons that somebody has told you not to do Roth conversions are probably wrong. You're in too high a tax bracket. Wrong. You are making too much money this year, which is kind of related, but wrong. You have too much money. Conversions will never make sense to you. Wrong. You don't have any money outside the IRA to pay taxes. Wrong. And I know that because we've just done so many of them, we've seen so many situations. And we just know that if you're an IRA millionaire, unless you're withdrawing a large percentage of your IRA currently to live on and you have no other assets to pay taxes on, then probably we would end up showing you a different way to get things done. You maybe have more of a financial planning need than anything. But everybody else we just seem to, there seems to find a way to save a lot of money. Our average client these days is that IRA millionaire. A million to $2 million somewhere like that. And they're able to avoid $3.2 million of taxes over their lifetime and for their kids without eroding their Tax adjusted net worth significantly, if at all. All these decisions impact your taxes, your net worth, your long term goals, all of it. Right. So let's back up just a step. What's a Roth conversion? Well, it's that, that transaction where you take money from the ira, which is tax deferred, pay tax on it and move it into a Roth IRA which never has any more tax and grows tax deferred also. And if you are kind of higher net worth with those large IRAs, really need to do this and get really serious about getting a really good game plan done. So the trade offs obviously are whether you pay upfront taxes by getting the conversion done or whether you just leave the money in an IRA and continue to enjoy tax deferred benefits. I would tell you the math supports the first, the math supports that you should do conversions over a long, over a shorter period of time than you're probably comfortable with. But let's dig into that. Let's talk about most everybody's fear. When I talk about converting all of the money in your IRA to a Roth, first of all, that's not absolute. There are certain amounts that you don't want to convert. So standard deduction later on, qualified charitable donations, maybe later on those kinds of things. But just generally, let's just talk about where we're going to convert the whole thing. And unfortunately, when we talk about Roth conversions, most people think this is what we're talking about. And in their brand, they really quickly calculated, holy smokes, I take one million and a half dollars in make it taxable, I'm going to pay 40% tax on that and I'm not going to be left with much. And if, if that's what you were going to do, that probably would be right. But that's probably a bad idea. The first person I ever helped develop a Roth conversion plan did this, even after me showing him a better way. His $1 million IRA when he retired from a major oil company grew to $2 million. He had his first RMD was $80,000 and he didn't need any of the money, which is very typical for a lot of our clients or much of the money. And so we went through this process and had his CPA hang up on me because he thought I was trying to sell the guy something. But finally when we got through the CPA and the CPA slowed down long enough to really look at my math and see what I was doing, he agreed with me that the guy needed to do conversions aggressively. But this guy decided he was just Going to write a check. So I watched him write a check for over $600,000. Not because it was the best decision, but he was just the kind of guy, he just wanted the government out of his wife. But if you do that and you do it all at one time, I guess the good part of it could be that you're locking in a rate that you know is going to happen, which is today's rate, whatever that is. We do know now that with the new administration, tax rates aren't going to go up at least for four years. That we can think of doing it all at once simplifies your tax planning, that's for sure. I mean it's just a one and done. Fill out the form, pay the taxes and you're done with. Also maximizes that tax free growth potential that you're never going to pay taxes on anymore from the very beginning. So you may feel like there's an investment opportunity or investment. But some people we've done this with, they had particular options, strategies and they were day traders and they felt like they could easily make up for the taxes if they just had the money sitting in a Roth that they get to go do their thing in. So whatever your deal is, I guess there are some pros to it, right? So I'm not going to blanket saying nobody should do that because we have had many clients that it turned out the best decision for them was to do it all at one time. There are certain things they have in common, certain things that are different, but the one thing in common is that we did the math and we, we showed them the impact and they came to the conclusion that they were, it was in their best interest to just kind of get it done. The negatives are pretty obvious, right? I mean you're going to go to the highest marginal tax bracket, you got all the extra little nit and stuff like that. They're thrown in. You're going to have Medicare premium is going to have an impact for a couple of years because they look back two years but it's only going to be a Medicare impact for a short period of time. But it still is going to hit your Medicare premiums. The IRMA premiums pretty high. Depending on where you're going to pay taxes from, it's going to reduce that liquidity. I'm listing it here is kind of a con, a negative. But actually in reality people with high net worth that have large brokerage account balances, those brokerage account balances are creating capital gains, dividends, taxable income and by actually using those assets and bring those down in favor of building Roth up, you actually lower the overall tax impact over time. And many people don't even think through that part of it. They just like to hold onto the brokerage assets because they're liquid and available, not realizing that after 59 and a half those IRA assets are for the, for the most part they're liquid and accessible except for the, the gains for five years. But all the principal amount that you convert as long as you're 59 and a half is immediately accessible to you. But the negative to doing this all at once is probably if you do the math, you it it's going to result in a lower tax adjusted net worth over your lifetime unless a few particular situations exist. But those are such outliers, I'm not going to go into that. So that, that takes care of what do we do? What are the good and bad and the ugly of doing it all at once? So let's talk about the other alternative. And the other alternative is that I'm going to do this over a multi year period. Now most people take the multi year period and they get it wrong. They just go to the top of their current tax bracket and they call it a day. And I can show you a lot of circuit circumstances, situations where our clients, we prove to them if they just stayed at the top of their current tax bracket, their Medicare premiums were going to be higher over their lifetime because they're going to have more years of higher income and their overall tax liability was going to be a lot higher over their lifetime compared to if they just left it alone and be done with it and taking care of taking the hits on the rmd. So you got to get this right if you really want to save the money. But the good part about doing it over a few years obviously is you smooth out that tax liability and you're able to let the earnings keep up. So if you got a million dollar IRA and you're converting $200,000 and you got to pay $50,000 of income tax, that million dollar IRA will probably increase enough to offset what the taxes were. So you're able to actually maintain or grow your net worth. If you do conversions over a period of time and again over too long a period of time goes way the other direction. So if doing it all at once is too far in one direction, doing it at your current tax bracket if, if you're an IRA millionaire is probably overdoing it to the other, but it does help you stay within lower tax brackets if you do it over a period of time and it allows you to kind of stretch out that IRMAA a little bit. Most of our clients see is somewhere between 80 to 100,000 or more actual savings of Medicare premiums by having an accelerated multi year game plan. So if your spreadsheets are not showing you that, then I don't know what to tell you other than the software we use that we've developed kind of tells a totally different story. So just kind of work with your assumptions and kind of try to make it work into that. But doing it over several years also gives you a lot of flexibility. Right. The negative is that it's going to prolong you to even more years of RMDs if you're already 73 years old. Right. And so that has to be taken into account. It also delays getting all the benefits from a Roth because they're, they're going to grow tax free forever. Right. So depending on where the markets are or what your investment opportunities are, you may want to consider doing it faster or that slow as well. I would just say, you know, there are just a few key factors that have to go into any Roth conversion decision that you make. A lot of people will tell you that the number one thing is what do you think tax rates are going to do? And that that becomes your number one factor, meaning the current. If you're, if you believe your future tax rates are going to be higher than what they are today, then you should do, then you should do conversions. And that as a data point is irrelevant to whether you should convert or not. The problem that you're solving with Roth conversions is not a interest. I mean, a tax bracket risk. The problem you're solving is you're eliminating or dramatically reducing the massive amount of taxable RMDs that you're going to have come into your life over the rest of your life, you're better off to convert sooner at a higher tax bracket and over a shorter time frame than you're currently comfortable with almost in every case that we see. But the things that are important that you got to bring in are your income levels and the timing of whatever your other incomes are. Pension, Social Security, health care costs, and IRMAA thresholds. Your charitable giving strategy, if you're somebody who gives to charity a lot, that you can use particular strategies to offset that first year or two of taxes from doing the conversions. And of course you got to think through what are, what are my goals for my estate, my family, and that kind of thing. 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