Roth Conversion Myths and Tax Pitfalls: Insights from a CPA with Glenn Block

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.

Hey there. Welcome back. This is, as the intro said, this is Craig Weir again with clear direction for retirement. I've got a really special show for you today. It's been a while since we've done a brand new podcast and I've been waiting for just the right opportunity and the right information and the right guests to have on. And so today I think I have it. Today I think we're going to be able to give you some great tips. Pretty granular. I've got Glenn Block with me today as principal and founder of block Aldinger CPAs out in Pennsylvania. So, Glenn, thank you for joining me. Looking forward to the conversation.

Thank you, Craig. Pleasure and honor to be with you. And we'll hopefully put off a great podcast for everybody to enjoy and learn from.

Well, you know, I've kind of titled this a CPA's perspective on Roth Conversions because they hear from me all the time. Right times where we've, where we've brought CPAs and other professionals in, it seem to get a lot of, seem to, got a lot of attention. So I hope it is today as well. You know, one of the things, Glenn, that I've, that I've struggled with for probably the 14 years that I've actually specialized in this Roth conversion beast is that we get a client and they tell us that they're interested in what we do. We tell them how to save a lot of money in tax. We produce these fantastic reports that prove the math to them, get the information. But whether they take that report to their CPA or tax preparer or not, or whether they just talk to them about what we're doing. So many CPAs just, I mean, it's like they shoot their self in the foot and they're just not, they're not on board with doing Roth conversions in an accelerated way. And in fact, the more money people have and the more income they have, most CPAs even shut it down even faster. And we've seen that the more money people have and the more income they have, the better off they are to do Roth conversions. But why from your side of the fence? I mean, why are so many CPUs against doing this kind of stuff?

GLENN well, Craig, that's a great question and I'm glad you brought it up and I'm happy to address it. CPAs in general are geared in mind to believe that as far as converting a Roth ira, converting to a Roth ira, it's an age based type of event, and if you're not young, like in your 30s or maybe even your 40s, that too much time has passed to make it a viable event to convert to a Roth ira. And to be honest with you, shamefully, even I was of that school of thought when I first started out. Many of us, I think shamefully, are still in that mindset that you have to be in a younger position to be able to really take advantage of it. Now, there's no questions about it that if you're at a younger age and you make the conversion, you're going to be better off than if you wait to do it at an older age. But certainly factoring in many other things that would give one an idea to do the Roth conversion, such as the required minimum distributions that will take place at an older age, the IRMAA adjustments to Medicare, that's the adjustment to your premium if your income is high enough, taxable Social Security benefits that might otherwise be non taxable. And so that is number one. Craig number two are the tax brackets. And for whatever reason CPAs are of mine, and I'd say this is one of the bigger parts of it where they think that, well, gee, if you wait until your age retirement, your income's going to go down to a level where it makes sense for you at that point in time to do the conversion. The problem is by the time you get to that age, you're already up at your minimum required distributions. And if you're if you're at a point where you have to take minimum required distributions, you've probably missed the sweet spot to make a Roth IRA conversion. And and I'll take it one step further, for those that think that you're in either a 22 or 24% bracket, that that's much higher than a 10% bracket, depending on the individual specifics it still make, it still may make a lot of sense to take the tax slight at the 22 or even the 24% rate to do that Roth IRA conversion. And that's where a firm like yourself, Q3 advisors would come in and show the differences between making the distributions, converting and non converting and what the tax implications might be. Fragon, one of the other reasons that we run into is that for whatever reason, CPAs think that because if one is in a higher tax bracket that they shouldn't look to consider converting to a Roth ira. And their reasoning behind that is because they're figuring that when one retires, their bracket is going to drop down to a much lower bracket, such as a 10% bracket or 15% bracket. But that doesn't necessarily hold out to be the case because if they don't convert, what's going to happen is they're not taking into consideration the RMDs that the individual is going to be required to take out at age 72, which is going to put them up in a higher tax bracket, and what the effects of what those RMDs are going to do to taxable Social Security benefits that might otherwise not be taxable, and IRMAA adjustments also to their Medicare premium. So as far as the tax brackets go, if you're in a 22 or even a 24% bracket, it very well may make sense to, to make the Roth IRA conversion. And that's actually where Q3 Advisors comes in because you guys have the software and the ability to lay out the scenarios where you can show the tax impact either way by converting or non converting. And again, it's, it does require a specific analysis to each individual's set of facts to make that determination. But one should not be discouraged just because they're in a 22 or even a 24% bracket to make the conversion. It might actually be a gift horse looking you in the mouth if you don't take advantage of that. And again, I think that's where an advisor such as yourself can show somebody whether it strategically makes sense for them to make that conversion.

Yeah, and I, I know, you know, one thing that really surprised me years ago as I started being able to do more and more analysis, because the tools that we developed is that, you know, if you take somebody age 65 years old with say a million bucks at a just a modest rate of return over their lifetime for both, if they're a husband and wife, over both their lifetimes, there's going to be two and a half to over $3 million acquired minimum distributions come out to them and some people wonder, well, why is there so much money to be saved, so much tax to be avoided? And it's because you got that all that big income amount that's going to be taxed. And as you stated earlier, that's probably going to cause their Social Security to have a higher taxation. It's certainly going to cause their Medicare premiums to go up. And so what we started playing with was we, we, we started looking and there are actually a lot of cases that we can show people that if all they do is convert to the top of their current tax bracket, they will actually pay more tax over their lifetime than if they convert at a much higher tax rate today in order to lower those RMDs. Those challenges. But you seem like you really grasp this and you get it. You're, you've been a CPA for a lot of years. What, what kind of caused you to make the flip? What was it that caused you to see the light, so to speak, and to really kind of change your tune.

Of, in some respects, it's, I'm sorry to even have to tell you the answer to that question, but because of the fact that I'm actually at age 67 myself and I'm now past that Social Security, well, I'm not collecting Social Security yet, but I'm at a point where I'm on Medicare and until it hit me in terms of my personal effect and to understand how much additional premium that I'm having to pay as a result of going on Medicare, and don't get me wrong, going on Medicare is a great thing in terms of where I was before with independent health insurance coverage and cutting the Medicare. However, with that said, until you understand what the additional premiums are that one needs to pay because of certain income variables that affect you, it puts you into a higher bracket. So perhaps, you know, again, if I were able to have converted before this, and it's not too late for me either, I'm at a point right now where it really works out if you do the calculation, because I think as a cpa, we get caught up in how much tax we're going to have to pay in a particular year and we spend a lot of time dwelling on that number and our clients do too. I mean, it's not easy to try to tell a client to pony up a lot of tax to do a Roth IRA conversion. And it's true that the CPA will look at what the conversion is and what the impact for tax conversion is and try to then go forward to using mortality tables to see the benefit loss, if you will, in paying the taxes now versus later. But your program and your tax software deals with exactly that computation and not only does it deal with that computation, it deals with all the other computations that I'm not really sure that CPAs are geared to deal with. Because you've got customized software that you've developed specific to doing a Roth IRA conversion. Sure, there's many programs out there on the Internet that you can go to that will do a Roth IRA conversion. But take a real hard look at those programs and see what they don't include, such as those types of calculations that your software would absolutely take into consideration.

Yeah.

And.

And most of the time, most of the time that software of the Internet is somebody's ruse for being able to sell you a life insurance product or get you to move their money over. And so it's only going to, it's only going to lead you in the direction that they want you to go as opposed to just what's the answer to the question? And then let's go from there. I, I do want to also, I want to drill down into a couple of really specific questions I have for today's podcast. But before we get into that, I want everybody to understand Glenn and I's relationship. We share no compensation between our firms. We refer clients to Glenn, and Glenn refers clients to us, but there's no compensation shared between us. So it's a, it's a very fiduciary, very, very above board transaction. It's just, I don't know, Glenn, how you would view it. I just see, look, we have clients who need what you do and we trust that you understand the process and you're not going to mess that mess with their heads. I'll be able to save a lot of money. And I think you've come to grow, to respect and appreciate that. What we're doing is kind of on the same level of just trying to make sure that we get to the answer, the best answer for the client possible. So would you just agree that as we go forward, we're not just let the audience know that you and I aren't. We don't have some backdoor deal going.

Yeah. I'd like to make a comment or two about that as far as Craig, your company and what you stand for, and I've watched a couple of your videos and I am proud and honored to be associated with you because of your independence, if you will. You're not trying to sell a product and that's critical. You're just trying to give your clients who come to you the best advice that you can give them as far as whether they should or shouldn't convert to a Roth ira. And it's as simple as that. As far as my organization goes, we've always maintained independence on behalf of our clients. And I'll give you an example of that. Many of our clients use my firm to consult with. As far as we're not investment advisors, but we are CPAs and we understand taxes. And so many of our clients will come to us when one of their investment advisors advises them to either buy an equity or a stock or sell an equity stock. And where we come into play is being able to analyze that from a tax perspective. The investment advisor may not know that there's tax loss carryforwards that that particular client can use. So we may strategically plan at the end of the year to sell off certain investments to offset some of those losses that might not otherwise be usable from for tax planning. But the point of all this is that even with our relationship with any of our investment advisors or what have you, it's strictly a non fee based arrangement. And my clients love that because they know when they call our firm they're going to get a true and independent answer. Because the only thing in transparency that I might get from one of my investment advisors is on holiday time, Christmas time, a candy box or a spread of something like that, appreciation. But that's the extent of it. There's no compensation coming back and forth between us and any of our advisors. And my clients truly appreciate that because we truly are independent and that's the way we want to remain. And the reason I think our team is a good hookup is because you share the same philosophy I do.

And it, it really has become our secret sauce. People really want to have somebody they can get on a call with and just get the answer to the question without hanging up and wondering was that decision better for me or for better for that person. So let's dig into a couple really specific questions in a little bit of time that we've got left. You know, when we, when we meet somebody new and we do our complete analysis and we come up with this wonderful game plan that's very customized to them and, and oftentimes we're showing them where the benefits to them are to convert a whole lot more money a lot faster and a lot at a, and at a lot higher tax bracket than what they're used to. So what are the primary pitfalls to somebody in the way that, that's implemented when they, when they're starting their Roth conversion? So let's say this is their first year to Start doing Roth conversions. And it's a big number, and they're not used to it from a, from a cpa, from a tax standpoint, where are the hooks? What are the things that are going to cause them some problems that they don't plan out?

Well, obviously they're going to have to first bear down to the fact that they're going to have to pay tax on whatever Roth IRA conversion they choose to do. That's an obvious one as far as how that goes, if there, if there's enough wealth outside of their retirement plan to be able to cover that tax from, in other words, not paying the tax within the traditional IRA that they are converting to the Roth ira, but coming up with the tax using external funds. To me, that is a home run if they're able to do that. The reason being is because they've now preserved the Roth IRA to the maximum effect as far as being able to shelter those monies from that point forward to be tax free. And so the idea is to keep as much in the Roth IRA or in the Roth IRA that you can upon conversion, rather than having to take traditional IRA monies out to pay for that tax. You know, one of the things, again, having to tell our clients to come up with tax is not an easy thing to do. It's a very hard, you know, if they're converting $500,000, let's say in the first year, or even 250,000 in the first year, to, from a traditional to a Roth, they have to come up with tax money, as I said previously, and how to pay that also requires some strategy, because the normal thought pattern is from an individual, especially in the first year of conversion, is that they have to come up with money sooner than later to pay for that. Let's say they convert sometime in the month of August, for example, and their thought is that September 15th is coming up, which happens to be one of the dates for making estimated tax payments, and that they may be of mind to think that they have to come up with the full, let's say the tax on 250, just for argument, is 50,000. They may have to come up with $50,000 of tax sooner than later. Well, in the first year of doing a Roth IRA conversion, and again, specific to the individual, this is where you need a good advisor to look at this. The facts are usually that they're either working and have had a tax liability from the prior year, or they're taking distributions from their traditional IRA and having withholding taken out. So what I'm driving at is in order to not have a penalty on having to pay this tax. There are ways to actually not in the first year not having to pay the tax until April 15th of the following year with assurance that there won't be any penalties. How do we do that? Well, we look at their total tax liability from the prior year and there are different factors on whether you're over $150,000 in income or below that. But if you're below 150,000 in adjusted gross income, as long as you're withholding from the prior year or the year that you're currently in is equal to 100% of your prior year's tax liability. So we're looking at 23 tax return and looking at where your total taxes and as long as the withholdings you've paid either via W2 1099 or however withholdings are withheld, if they're 100%, you will not have a penalty and you can pay the full 50,000 that you're going to owe on April 15th. Now why is that important? Well, let's say again, we're here in August. You normally might think you'd have to make a September 15th payment to cover for that to get you out of the penalty. Well, $50,000 for a period of at least six or seven months generating dividends and interest in your account is worth a lot of money. And so with proper tax planning strategy from a professional competent tax advisor, we can help you make those kinds of decisions. This is, this does not work for everyone, but it does work for a lot of people. And in fact, many of the people that I've been referred to were not aware of this. And we're able to save them a lot of money by just that one thing. Now, it only generally holds true in your first year once you get into the second year of conversions. Now you have to figure out how you're going to estimate your taxes either via withholding, but even then there are other aspects of what we can do. I'll give you an example, Craig, that works great. And we do this with a lot of our taxpayers who are on RMD that are taking out required minimum distributions. I might have a client that let's say needs to take $150,000 out a year in RMDs and rather than having the withholding coming out every month, which is the way an investment advisor would have you fill out a form asking you how much do you want to have withheld, they'll just give you a monthly distribution, take out 10 or 20%, whatever you ask them to do. And that goes bye bye to Uncle Sam with no interest earnings on it. We, on the other hand, look at. I'll make it easier. Let's just say the tax in this case is 30,000 and the monthly distributions are your total RMD is 150 with 30 in tax and 120 in distribution. So you're taking out $10,000 a month. What we'll have our clients do is Instead of taking 150 and dividing it out over 12 months, we tell the broker to hold onto that 30 grand till the December month. That leaves $120,000 left to be distributed. That's $10,000 a month that that individual can take out. By the way, this works fine with Roth IRAs too, in terms of planning and figuring out how you want to do it. But as far as the tax liability associated with the RMD, they can hold on to that 30 grand until the month of December and pay it in literally the last day. Normally you want to leave your broker two weeks or so beforehand, send that in, but what that accomplishes is you're making investment income on $30,000 more than you otherwise would have if you did it the traditional way by having them withhold it on a monthly basis. So it does go to years two, three, and thereafter with good tax planning strategies.

Well, you know, I, we Frequently get our CFPs, frequently get asked the question, well, gee, do I need to bring a, do I need to bring a CPA into this? Do I need to talk to my tax advisor or whatever the case is? And you make a great case all on your own. But we like to tell people, look, for the first, at least for the first years, you need to bring somebody in that knows what the heck you're doing. You know, so many of the people that we work with are the consummate do it yourselfers. And they're smart people. They have some acumen related to financial stuff and they think, well, I'll just do it myself. And they very well may be able to, you know, make it work. But you've just given a couple of examples of reasons that support why we really feel strongly that you need to get a professional involved because the benefits of just the little things that, you know, because of experience, I mean, you know, most of our clients come to us, that's the first time they retired. And so we try to help them through that maze. And it's probably the first time they've done large Roth conversions. And although they Maybe understand mentally premises and the principles, they don't have experience with application like you have hundreds of times over and over and over with clients. So if, if, if, if you're out there and you're starting to do big Roth conversions and you just are kind of thinking, well, I'll just do my sound thing. You certainly can do that. But I would suggest to you that the fees that you're going to pay a competent CPA like Glenn and his firm are going to really give you a solid insurance policy against potentially some penalties and interest because you did it right. So I would encourage you to consider what you're doing. If you have a tax preparer that already, that you already work with, great. If you maybe want a second opinion and you want to make sure that really everything's happening the right way, or you just want to, maybe you want to know that you can talk to a competent cpa. Glenn, can your firm accept clients outside of Pennsylvania? Do you work with people outside of.

PA Tax returns and advise nationwide? So we are geared to that type of thing. Yeah. Craig, there's many reasons, too many to go into here in this short podcast as to why it probably makes sense for somebody who's doing something like this to take advice from a qualified cpa. But the other reasons are that things sometimes change. Like you might have a ladder IRA plan of conversion situated, and then you find out in year two or year three, something else happens to either you get more income or you have losses. Something just changes a little bit to offset what you've been doing. And that's again, where I think getting the advice from a CPA can really help strategize. I also want to point out that while I commented earlier about having to take external funds to pay for a Roth ira, conversion is a home run. Right. It doesn't mean that if you can't do that, that you can't still score a triple. And we can help you devise with all of Q3 advisors and their planning software, the strategy to be able to have a hybrid of both of those so that you're not discouraged from doing the Roth because you don't have enough money to cover the full tax bill outside of the Roth. It's the traditional IRA accounts.

Yeah, absolutely. In fact, many of the clients that we meet with kind of drank the Kool Aid their whole career, and they've got most all their entire life savings sitting inside. What was the 401k rolled to the IRA? And so we hear often, well, I, I can't do it because I don't have any money to pay taxes. And in reality, our average client is going to save little over 3 million income taxes over their lifetime. Their errors, they're going to save 80 to $100,000 in Medicare. And most of those people are people who have to pay taxes from the ira. Now, there are some reasons why you don't want to do Roth conversions at all. And I've got YouTube and another podcast that you can listen to that'll help you to understand where am I on the continuum of should I do Roth conversions or not? There's another podcast episode out there that kind of helps you to understand. Under what circumstances would you call that? You probably it's not in your best interest to do that. But we're, our time is running kind of short on us. I think what, what we'll do, Glenn, is we're going to put contact information for you at your firm in the, the show notes here in the podcast. And I would just urge you guys, you know, if, if your CPA is not up on Roth conversions, if they're not up, not necessarily from a knowledge standpoint, but from an experience standpoint, if they have, if they're not positively bent toward you doing massive conversions, then you probably are going to get pushback from them at every single corner. And that's okay. They maybe are really like me. My CPA has been with me for 30 years. But there are certain things that I just can't rely on them for because they're just not up. And this is one of those specialties and one of those bodies of information that perhaps you bring Glenn and his firm in to kind of support you. The penalty, the price of a well meaning, well intended CPA talking you out of doing conversions is millions of dollars. They don't bear the burden for that. You do. So get with some people that really understand what they're doing. So, Glenn, we got a lot more topics that'll be for another day. For right now, I just really appreciate your time today, really appreciate our relationship and between our firms and the way that we're able to help clients to really be better and to do better on their own. If you guys, if you're new to the podcast and you want to continue to have information like this when you want to listen to it, hit the subscribe to the podcast, share it with your friends and relatives, maybe your financial advisor, maybe your cpa, some education for them as well. There's enough people out there for all of us to service and do well. Glenn, any final thoughts before we sign off.

I just want to thank you, Craig, for having me as your guest speaker. And I think your alignment and mine alignment are right down the same path. We both have the same goals. We want to help our clients achieve the maximum that they can achieve. Paying the least amount of taxes legally. And again, I just want to thank you for having me.

Yeah, you bet. Sounds great. And I'm sure we'll be talking soon.

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.