CFP Craig Wear explains how required minimum distributions on $1M+ IRAs can cost retirees close to $900k in taxes over retirement. Proactive Roth conversions before RMDs begin can lock in lower tax brackets and permanently shrink future RMD amounts, but converting only enough to fill your current bracket often leads to higher lifetime taxes.
If you've spent years saving over $1,000,000 in your IRA or 401k, you want that money to actually be yours. But between required minimum distributions and future tax rates, a large portion of it may end up going well somewhere else. Let me give you a quick example. So we worked with a couple, we'll call them John and Susan. They had about 1.2 million in their IRA. What they didn't realize was that over their retirement years, they were on track to pay nearly $900,000 in taxes to Uncle Sam. We've helped thousands of IRA millionaires save six and even seven figures in lifetime income taxes. And they all say the same thing. Gee, I wish I'd have known this sooner. So in this video, I'm going to walk through five things every person with over a million dollars in an IRA or 401k needs to understand if you want to avoid losing hundreds of thousands of dollars to unnecessary taxes. Alright, so first, there's one mistake that makes higher taxes in retirement almost unavoidable. In the last few years before retirement, your income usually looks fairly steady. You have income from work, investments, maybe a business. You stay in roughly the same tax bracket each year. Then retirement starts. The paycheck goes away, but it gets replaced by Social Security, by pensions, maybe rental income and capital gains. That income already fills up a large part of your tax bracket. And then at age 73, required minimum distributions RMDs begin. Every year. The IRS tells you exactly how much you must take out of Your IRA and 401k and counted as taxable income. And that's whether you need the money or not, folks. So if you've saved over a million dollars, that income now stacks on top of everything else. Instead of smooth taxes, your income piles up, you get pushed into higher brackets, and guess what? You lose control. That's the tax trip. Now here's the move that changes the entire picture. We don't eliminate taxes. We change when you pay them and at what rate. So by converting part or all of your IRA to a Roth ira intentionally before RMDs begin, you can fill lower tax brackets. Now, the total amount of money doesn't change. But future RMDs stay lower forever. Your taxable income stays more controlled. This is where planning ahead makes such a massive difference. Even if RMDs feel far away, starting Roth conversions earlier gives you much more time to spread the taxes out intelligently. That's why our clients save hundred thousands of dollars and often even millions of dollars in lifetime taxes. Look, if you Want to see how large your RMDs could get and how much Roth conversion could save you? There's a link below to our specialized RMD calculator. But even when people, they often make one other mistake. So let's zoom in on the pre retirement years. Most people approach Roth conversions like this. They convert a small amount, add it to their income, and that makes them feel responsible. And yes, they're doing something. But here's the problem. Each year there's unused space inside your current tax bracket. And if you don't use that space, it disappears forever. So people learn this and they make another understandable mistake. They convert every year right up to that bracket line. Well, man, that sounds smart, doesn't it? But compared to a customized strategy, this often leads to a higher lifetime tax and higher Medicare costs. So the key is this. Don't base conversions on your comfort, base them on long term strategy. Let's zoom back out. In retirement, you have far less control over your income. If RMDs push you into a higher tax bracket, there's often nothing you can do. So sometimes the smartest move is stepping into higher tax bracket now to avoid being forced into a much higher one later. This matters even more. Today, tax rates are at historically low rates, deficits are growing, RMD rules are tightening, and your heirs now face a 10 year forced distribution window. Right now you still have room to plan, but that room shrinks every year. This isn't about making each year look perfect. It's about controlling taxes now instead of being controlled by them later. Which brings up the next question. What about Medicare premiums? Converting more can increase Medicare premiums. But let's look at the trade off. A small temporary increase now can prevent massive permanent taxes later. So the real question is, would you rather pay a little more today to protect your retirement freedom or keep costs low now and risk higher taxes for the rest of your life? That's not a decision most people should make alone. Let's think of it like this. If you had a heart problem, you wouldn't try to diagnose it yourself. You'd go to a doctor. Let's say you go into your primary care doctor and they can run tests. But if you need surgery, you probably don't want your primary care doctor doing the operating. You'd want a specialist, a cardiologist, because that's what they do every day. Roth conversion strategy works the same way. Look, we've helped people save six and seven figure sums in lifetime taxes for over 16 years. Most advisors and CPAs are good people. They do solid work but they focus on investments and may only see a handful of conversion cases each year. High level Roth strategy just isn't their specialty but it is ours and your peace of mind in retirement isn't worth risking to save a few dollars up front. So don't rely on a generalist. Find a specialist or as we call it a Rothologist. So there's an easy first step for you to take. Click the link below and use our RMD and Roth Savings Calculator. It's going to show you a few things. Number one how large your RMDs could become, how much tax you're currently on track to have to pay and we add in some special secret sauce that's based on our clients real life results. How much a real Roth strategy could save you. This is a calculator like none others and if you want to see exactly how we build the custom plans for clients, watch the next video.
