Four Reasons NOT to do 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 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. Thanks for tuning back into the what's Next podcast. You know, you get to play different places in life and you come to kind of a fork in the road and trying to decide what the right decision is. And you have to ask yourself, okay, what do I do next? And so that's what the podcast is to dedicated to, is trying to give you kind of the best advice I can on maybe what the options are and what the alternatives are, how to think about it, what to be careful of, how to stay away from some of the dangers. And we're doing the same thing in this podcast. You know, there is an overabundance of financial firms out there marketing Roth conversions these days. And, you know, while, you know that I'm a big proponent of conversions, they make sense for a lot of people. But there are, there are reasons why some people really don't need to do Roth conversions and probably shouldn't. It won't be in their best interest. So what I've done is I've identified four of these reasons for you that I want to run through today and just kind of help you to see if you fit that circumstance. And these are four reasons or circumstances that I've identified that probably indicate that you should not do conversions. You know, a lot of the firms that are advertising for Roth conversions these days are using the ad or the seminar as really a tool to, to get you to switch financial advisors or to buy an insurance product or an annuity that they're selling. And there's really nothing wrong with that. But their ultimate objective is to sell you a product or to convince you that, you know, they're the right firm for you to pay their tens of thousands of dollars each year in fees to manage the investments. And there's nothing wrong with that. But when you're looking at doing a Roth conversion, I really think that you need really just quantifiable information. Not opinions, not hearsay, not old paradigms. You need to know what's really, you know, for those of you that have not listened to one of the podcasts before or you haven't attended one of the webinars that I do every month, or you're not plugged into our email distribution list. So if you're kind of a newbie, brand new here, you know, in the back of your mind is always the what's in it for Craig thing. And I just want you to know that our firm does not sell any financial products. We don't manage client portfolios. Our regulatory documents only allow us to do consulting work for a fee. So that's the only service that we have is really just pure fiduciary consulting engagements to really help people determine if they're a good candidate for conversions. Provide comprehensive retirement planning and also a customized strategy for Roth conversions and tax planning that leads to a path that there's really just more of a tax free future. Yeah, we do, we charge a flat fee for a one year of service and you know, we quote the fees during initial consults that we have when we're determining whether people are a good candidate for conversions. So enough of the mini commercial, but I think it's important for you to know kind of where I'm coming from at the beginning. So maybe just relax and not wait for a shoe to drop on, you know, what's, what's his angle? What's he trying to sell? I've already just kind of told you what the angle is, so I'd like to, I'd like. You also know that, you know, we didn't, we didn't just begin talking about or working with Roth conversions. Like so many people who are advertising today. This is, this has been a long journey for me. My book that I wrote about this back in 2019 was a best seller on Amazon in several different categories. And that means it was depending on when you're listening to this, two or three years ago. If you'd like a free download, you can get a PDF copy by just clicking in the show Notes and I'll make sure that we get a link in there that you can get the most up to date version of it. We're working on a new book right now that hopefully will be out late in 2022 that is an update and deals with a lot of details that I just didn't go into on the first book. So, you know, look, I've focused on the Roth conversion specialty for nearly 13, 14 years now. And I can tell you that there are definitely good reasons that exist that indicate that most people should probably do Roth conversions. But there also are a few really good reasons why you should not entertain doing Roth conversions. In fact, I just had a conversation with a guy that was over at my house. It's a friend of mine that. Whose wife sent him over after a conversation with me that was like, you know, you need to talk to this guy. He's not doing what you told him to do a year ago. And so finally he came and gave me more information about their self. And he was one of the guys. I just said, look, man, you. You're really not a good candidate. But I. And I gave him a couple things that he should be doing. So not everybody should. So before you go buying some fancy insurance products, which can be good, or changing advisors, which you maybe need to do, I'd like to share these four reasons or circumstances that probably lead to the conclusion that you are not a good candidate for doing Roth conversions. Okay, so I guess as a little bit of a kind of a disclaimer on the front end. Look, there are. There are a lot of variables that factor into the decision of whether you're a good candidate to do these conversions or not. So. So please just accept that I'm distilling down the complicated and really could be missing unknown variables that are unique to your situation. But most of the excuses I hear for not converting are simply misinformation and old paradigms. So let's get to the four reasons or circumstances where you probably should not entertain doing conversions. So we're going to start with the first one, and that's just age. You know, if everyone in your household Is in their mid-70s or older, you're probably not a good candidate to begin converting funds from your IRA to your Roth. The reason is one of the biggest benefits that our clients receive from doing accelerated Roth conversions is the avoidance or at least a dramatic reduction of the required minimum distributions. So when you're already well into your 70s, the benefits of paying the taxes sooner are really hard to make up for during your lifetime, especially if you're already taking RMDs. Now, that does not mean that if you're already taking RMDs, you should just totally nix the idea of doing Roth conversions. But if you're in your mid-70s, these other conditions exist. I'm going to go through then you probably want to just kind of, you know, mark it off that I looked into it, probably don't need to do it. But when you're in your mid-70s, your heirs really are the ones that benefit more greatly than you and potentially your spouse or significant other. But you know, a lot of people don't really want to pay tax today to convert if it only is going to help the heirs when they're gone. On the other hand, we do have a lot of clients that that's really their primary objective. How do I make sure that my kids don't get stuck with a big income tax bill? Because I'm leaving this huge ira. So you've got to just decide kind of what your priorities are and what's important to you. But if you're in your mid-70s and you're already taking big RMDs, the benefits mainly are going to accrue to your kids. So just be aware of that. So the second reason is kind of like the first, but it's the other direction. Age. You may not be old enough to be able to get the real benefits out of it. And what I mean by that is, you know, if you're under age 59 and a half and all of your money is inside of IRAs, you're probably not a good candidate yet because the tax has got to get paid somewhere. And if you're under 59 and a half, you still have a penalty and tax to pay. So that's probably not the best thing. Now, you know, when, when, let me explain that. When, when you convert from an IRA or a 401k, you got to pay taxes to get the funds over to a Roth, right? If you're under 59 and a half, you need to have funds outside of your IRA from which you can pay the taxes. With over age 59 and a half, it works out just fine to pay taxes from within that IRA account, but it's always best to have outside resources available. But the conversion can still work even if you have to pay the taxes from the ira. The big issue on this point is if you're too young, under 59 and a half, and you don't have any money sitting outside of IRAs, then it probably, the math is probably going to work out where it's not in your best interest to do that. Okay, so here's the third reason. If you have modest IRA balances, you probably won't benefit much from doing conversions. I can't put a number on modest because that modest is in relationship to a lot of other factors that get to in just a second. But if the required minimum distributions from your account are going to be small and remain small during your life, the avoidance of tax is going to be minimal by doing the Roth conversions. So let's say you've got half a million dollars in an ira and that half a million dollars is maybe going to generate 20,000 of required minimum distributions. And if that's your only income other than Social Security, you're probably always going to be a 12% tax bracket. Well, in that case, you're probably not going to benefit from stepping up to one of the higher brackets. So if you're in a low tax bracket, and you always will be, even after age 72, which is currently the age in which you have to start required minimum distributions, then converting at a higher tax bracket probably doesn't make sense. So you need to do a little bit of planning. You need to figure out what's on my income, what are my deductions, and just kind of spitball it on the back of a yellow pad and see where you're going to be tax wise. And if it works out that you're always going to be in the lower bracket, then just mark it off, you're done. Now one thing you could do if you're in that lower bracket is just make sure you get to the top of that 12% bracket each time. So the people in the 12% bracket oftentimes say, okay, well, I don't need to convert, because Craig said that. And in reality I didn't say that. What I said is if you're going to be in that bracket and always will be, because see, if you project out what your balances are going to be at 72 or older when you start having to take required minimum distributions, for most of the people we work with, that's going to add another 60, 80, 100, $150,000 a year of taxable income through those required minimum distributions. And in that case there definitely is going to be a reason to get the conversions done. Alright, so the fourth reason or set of circumstances that exists that you maybe don't really need to worry about, the Roth conversion thing, is if you have a large amount of your IRA balances sitting in annuities that still have a lot of surrender charges, or if they're in other illiquid investments, you're probably not a good candidate for conversions. And this is really kind of especially true if you're individual annuity balances are really large. You know, see, life insurance companies do allow for these to be converted, but normally they require the entire contract to be converted. And so if you've got 500,000 sitting in an annuity, a lot of the insurance companies require that the entire Balance has to be converted all at once. And that means you have to have funds outside of that annuity to pay the tax taxes with. So otherwise you have to surrender the investment or the annuity and suffer a really hefty fee or loss of value when you do the conversion. So be careful when you have the annuities. You know, there are a few companies out there that will allow for partial conversions. So the best thing to do is just get out your statements and make a telephone call and ask them if they allow partial conversions within your annuity contract. Alright? So, you know, a lot of people really falsely believe that there are a lot more reasons not to convert than there really are. There's a lot of I'll call it false factors that they, that they hang their hat on. And I don't know, there's probably eight or 10 of them that we hear all the time. And these, I'll call them false factors keep a lot of people from converting and avoiding millions of dollars of taxes over their lifetime. And not only just taxes, but Medicare premiums get higher when you have large requirement of distributions, more of your Social Security is taxed, adding to the equation of figuring out what the total cost is going to be by not converting. But you know, you maybe have heard or read some of these things. Let me just kind of run through a few of these false factors and just see if you've heard these before, if they maybe are a paradigm you have. So the first false factor is people say, gosh, you should not convert if the added income is going to add to your Medicare premiums. So for those of you that aren't aware of this, your Medicare premiums are based on your part. Medicare premiums for part B and part D are based on your income. So it's every two years, they're looking back and it's rolling. So if you have higher income, it can cause your Medicare premiums to go up. So people think, well, if I'm going to do conversions and my income is going to go up, then it's going to cause my Medicare to go up, so I shouldn't do it. It's probably one of the biggest things that we hear people back away from conversions about. In reality, the clients that we work with actually save somewhere between 80 and $120,000 of lifetime Medicare premiums because they convert. And the reason for that is once the IRA balance is converted to a Roth, there are no required minimum distributions. And without those required minimum distributions, most people are still in a low enough total income tax bracket. That they don't have to pay higher Medicare premiums. But if you don't do the conversions, your RMDs are going to kick you above and you could pay as a married couple as much as $15,000 a year because of your RMDs, $15,000 a year of Medicare premium because your RMDs. Alright, so that's the first false factor. Let me give you the second one. What we hear a lot of people say, or a paradigm they're holding on to, is you should not convert if you're going to be in a lower tax bracket later. First of all, there are only a small percentage of retirees who have a dramatic enough decrease in their income to push them down to a lower bracket. Oh, their income is lower, but the bracket isn't any lower. So they may be in a 22% tax bracket and they're going to lose a lot of income. But by the time they look it all up and they do the math, they're still in the 22% tax bracket, but in the bottom of that bracket instead of the top of the bracket. So the lower tax bracket argument is largely just wishful thinking. People do have much lower income into retirement, but in my experience, their brackets don't change much. So the third false factor, and this is the last one I'm going to give you, is that people believe and tell us that they should never convert. If you have to pay a higher rate of income tax than your existing rate, in other words, only go to the top of your current tax bracket, which is just total hooey that really does not hold water at all. In almost every client strategy we encounter that works that optimizes their real tax avoidance. The only way, the only way to maximize the avoidance of tax is to purposefully move to a higher tax bracket. It must only be done in a manner that also proves to be a good financial decision though. And that means one that keeps your tax adjusted net worth relatively unscathed. So very seldom do we suggest people convert everything all in one year. We have on occasions where the math proves itself out. But most of the time you don't do it all in one year. You do it over a few years and at the right rate. Strategically, that allows you to really find that sweet spot of time and rate that gives you the maximum total benefit available to you. So those are the four circumstances that tell you that you probably are not a good candidate. And then there's three of these false beliefs that people have that I wanted to just kind of throw in there as kind of a bonus and just help you to do a gut check, you know? Is that what I've been holding on to as my excuse or not? Look, if you fit the four reasons above, I hope I've helped put the issue to rest for you. If you're not in those circumstances included in the four reasons, and you'd like some further unbiased input as to whether you're a good candidate or not, we stand ready to help find answers to questions about the subject for you. I have a staff of certified financial planners that are ready to have a free no obligation call to help you resolve the issue once and for all. If you want to schedule a free consult with one of the experts that we've got on our team, all you need to do is check in the show notes and there'll be a link provided there that you can schedule. No obligation. Hey, let's see whether you're even a good candidate or not. You know, our desire is to guide you into a really a more tax free future and retirement and I hope some of the information here has been helpful to you and I hope that you will take us up on the opportunity to have one of those complimentary calls with folks that know what they're doing. They've been trained in Roscoe conversions, they are experts at Roth conversions. Alright, hope you have a great rest of your day and tune in to more of the podcasts here. And as always, God bless and have a great rest of your 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 or tax or investment advice.