Craig Wear, CFP® explains the distinction between Roth contributions (annual, income-limited) and Roth conversions (moving pre-tax IRA/401(k) funds to a Roth and paying tax on conversion). He argues that for many—especially those with large IRAs—paying tax now via conversions can save substantial lifetime taxes, reduce large required minimum distributions, and lower future Medicare surcharges and Social Security taxation. He notes conversions work best when taxes to convert are paid from non-retirement accounts, cautions retirees already withdrawing from IRAs may be poor candidates for aggressive conversions, and points viewers to his books (Paying the Piper; Roth Conversion Secrets), podcasts (What's Next for Retirement?), webinars, and website for deeper guidance.
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Hello, this is Craig Weir. Thanks for coming back to the channel. You know, when you're navigating Roth conversions or just kind of considering doing Roth conversions, a lot of people stop short of where the real savings is because a real severe distaste of paying taxes and hey, I get it. But to truly get the gold from conversions, you simply have to look at it from a different perspective. And that's what I want to give you today, is a little different perspective. First of all, you got to understand what Roth IRA conversions are. A lot of people confuse Roth contributions with Roth conversions. And contributions are the amount that you take from your income and you put into a Roth. And they're limited every year by how much you can put in. In fact, you can make enough money that you can't even do a Roth. A conversion, on the other hand, is the act of taking money from an existing IRA or 401k account, some pre tax account, and moving it over to Roth account and pay taxes along the way. There's no limitation on the amount of money that you can convert each year. Currently, there are no stipulations, no challenges. As long as you're willing to pay the tax, you're good to go. And that's a great thing, except where people fall short is they don't want to pay the tax. I will promise you that if you are, especially if you're an IRA millionaire, if you pay the tax now, you're going to save yourself a lot of money because the option is pay tax later, but you're going to end up paying a lot more tax later. You're going to pay higher required minimum distributions, your Social Security, Medicare premiums, Part B and D are likely going to go up and you may end up having to pay tax on your Social Security. Some people are going to pay tax on their Social Security anyway. But what happens is these things just sneak up on you if you have a large ira. Now, if you don't have a large ira, there probably is still some benefit of doing conversions, but the approach is totally different and it really needs to be done within the context of a much bigger financial plan. Let me help you to understand. When you try to develop a strategy around doing Roth conversions, the goal is to minimize the tax impact. And a lot of people, that's where they, they kind of just tap out, is like, well, wait a minute, you realize how much tax I'm going to have to pay to start converting my IRA or my 401k? Yes, I do. But do you understand how much tax you're going to pay over your lifetime if you don't do the conversions. So you kind of have to have a longer term view. You have to look at what's going to happen over my life and for my heirs and was it worth it? Rarely is a one and done conversion the right decision, meaning rarely is it that you actually convert all of it at one time and be done with it. Now, if you're very, very high income earner and you have a very large IRA a lot of the time, a much shorter time frame actually puts you in a lot better position even at the higher tax bracket. But if you do Roth conversions properly, however, that is the gains in your IRA and 401k accounts annually can offset the impact to your net worth on your taxes. But make no mistake, you do have to pay the tax when you do the conversion. So let's talk about kind of the risks and the benefits if I can, for just a second. Just one real quick comment. It's really best for you to do conversions if you can pay taxes from other accounts, like if you have a brokerage account or savings or money market account. But most of our clients come to us and they have kind of drank the Kool Aid of the HR departments and what the financial media has talked about for decades and most of their savings is sitting in their large 401k or IRA account. And it still works out okay. The math will still work for you unless you meet one of four different criterions. And I'm not going to go through all four of them, but you can go to our website, hit one of the podcasts, and on one of the podcasts I talk about the four circumstances in which you probably don't want to do a Roth. Let me just hit the biggest one. The biggest one really has to do with if you're already retired and you're already withdrawing, oh, say 3 or 4% or more of your IRA for living expenses, and there's no other bucket that you could take the money from, then you probably are not going to be a great candidate to do aggressive Roth conversions. We probably would have you slow your roll. We'd probably get a little bit more strategic. We'd probably kind of look at the big picture on a financial planning scale. There's some resources that are available to you for you to check all this stuff out and I'll mention them to you that they're probably going to be links in the notes below the video. The first book that I wrote was called Paying the Piper. And that book you can actually download for free off of our website. We'll put a link down there for you. Paying the Piper was is kind of for somebody who's not real sure if they really should do Roth conversions. And then my second book, Roth Conversion Secrets, really talks about the five biggest reasons that people fail or don't get everything they should out of doing Roth conversions. That's also available on the website for you as well. We do webinars all through the month that are educational that just you can lean into those and learn. And of course, if you go to the website, there's all kinds of podcasts. The title of the podcast is what's Next for Retirement? But you can, you can learn a lot from just the resources that we've been putting up for the last several years. In order for you to get the biggest bang for your buck, you probably are going to need to convert a lot faster than what you probably are comfortable with right now, and probably at a lot higher tax bracket than you imagine, or that you're also comfortable with. But if you get it right, you're going to save millions of dollars of tax or you're going to avoid a million dollar millions of dollars of tax over your lifetime and you're going to put your heirs in a much better position and you won't have to worry about the large required minimum distributions that kind of kick in when that when you get to that age, you won't have to worry about paying Medicare surcharges for the rest of your life. You'll pay them early on. If you're already retired and you're on Medicare, you're going to pay a little bit more, in fact, maybe a lot more Medicare premium for the next several years. But then you go back down to the minimum. Whereas if you don't do the conversion, it's going to sneak up on you. You're going to pay a lot over the rest of your lifetime. So subscribe to the channel if you want news and you want immediate updates. When we come out with new information, attend one of our free webinars. Learn more. Read the books. Hit the links below. I hope this has been of some help to you. Have a great day.
