Roth IRA Conversions for Retirees (When It Makes Sense)

Well, hey you guys, welcome back to the channel. I have some, I think some pretty good information for you I want to give to you today. You know, there's a lot of conversation out there on the Internet about converting your IRA to Roth IRAs. Should I, shouldn't I, under what circumstances? Who's a good candidate? When does it make sense? When should I not? And I just, I wanted to just kind of come to you and just kind of share some things that I think are maybe be helpful to you to kind of get beyond a lot of the false information that's out there and hopefully give you some things to anchor on of thinking about your own journey. Maybe the conversions that you're already doing or that you're considering doing. And maybe you can weigh these against maybe some of the opinions that you're getting from other people in your life that maybe you trust in other areas, but maybe they're just not as skilled in the Roth conversion piece. You know, I've focused on Roth conversion stuff for our 14, 15 years now. And we have a whole team of certified financial planners that help people all over the country every day of the week. And we've learned a lot from all of the at bats that we've had. You can imagine, we've talked to people in all walks of life, all income, all net worths, all tax situations. And we don't use opinions or what we believe should happen. We always run it through software that we've developed. And then our CFPs have become very adept at taking the information from the software and turning it into really the financial art of how do you actually put this together the right way? So we've just had a lot of information at our fingertips and we've been able to help a lot of people with it. So first of all, let's just kind of start with an introduction for those of you that are brand new to the conversation about Roth conversions. Well, what you're really trying to accomplish in the Roth conversion is to get money from your pre tax accounts, IRAs, 401ks, 403bs, over to a Roth IRA. And when you get the money to the Roth IRA, you pay tax on the way over to the Roth. But then there's no more tax the rest of your life. There's no required minimum distributions. And all the growth that happens in that Roth happens from then on for the rest of your life absolutely free. And when you leave whatever is left to your heirs, they don't have to pay taxes either. Now they do have to take it out of the Roth within 10 years, but it's not a taxable event when they do that. So some of the reasons that people look into doing Roth conversions into retirement is to get ahead of the eventuality that's going to happen when they get to the age for required minimum distributions or just to get ahead of the tax that's owed in it. You know, what a lot of people don't talk about is that the you're going to pay tax. So doing a Roth conversion is really just the only way to be able to take control of the timing that you pay tax and the rate that you pay tax, instead of just kind of waiting for fade or the eventual aging process to start doing that for you, or you pass and you leave it to your heirs and they have to pay taxes. So one of the cool things about doing Roth conversions is there's no income limitations. There's no minimum or maximum amounts that you can do. And that's not like when you do a contribution to a Roth account, you're limited by the amount that you can do. And you're limited if you're in at certain income levels. And under current law, there's no limitations at all of your based on your income or your age, you can convert an unlimited dollar amount in a year that you want to. One of the things that people have that is really bad information is everybody believes that when you do a Roth conversion, you have to leave the money there five years. And that's, that's true for a lot of people. But if you're 59 and a half years old or older, you do not have to leave the money that you converted from an IRA in a Roth for five years. You are able to immediately withdraw the amount you converted. Now, there is a little caveat that you need to be aware of, and that is that whatever the earnings are on that amount that you converted has to stay there for five years. But hey, the IRS is cool in that they say if you do take a distribution within five years, we'll assume it's the amount that you converted first. So if you convert $100,000 a year for six years, you've got actually up to $600,000 that you can start withdrawing and not pay any tax or penalty or anything like that on it. So that's just kind of a little nuance on the 10, the five year rule that a lot of people just don't understand. But it only applies if you're over 59 and a half or more. You don't have to necessarily sell anything to be able to convert it. Unless you have to use money within the IRA to pay the taxes, which is also an okay thing. A lot of people think not, but it actually makes a lot of sense in a lot of circumstances to do the conversion, even if you have to pay the taxes from the IRAs. So, but let me kind of give you a couple of things to hang your hat on. And when does it really make sense for retirees to do Roth conversions? If you're between 59 and 74, 75 years old, and you've got say around 1 million or more, it's, it's a no brainer. I have not seen any circumstances yet where somebody with those kind of assets and within that age bracket should not do Roth conversions unless you're already withdrawing 3, 4, 5% a year out of your IRA for living expenses. So if you're already depleting that account and live because of living on it, then probably you need to get with an expert that understands it and run the numbers. But for me to be able to say to you, hey, it's a no brainer if you're not pulling very much money or anything out of that Iraq and you don't believe you're going to put much out of it for the next few years. And if it's about a million or more, and that's a kind of, it's not a black and white number, that's just my gut instinct tells me beyond that you're really, it's a no brainer to do it. Now if you're 75 and over, there still are going to be benefits to you to do this, but a lot of the benefits are going to go to your heirs. So let's say if in, if you're between 59 and 74, just to pull a number out of the air, if 80% of the benefits in the tax avoidance from new conversions were going to accrue to you, that at 75 or older, it's probably 80% is going to accrue to your heirs. Now that still could be $2 million of tax avoidance. So it's nothing to sneeze at. But if you got those kind of assets, it really makes a lot of sense to really get serious about developing some sort of a conversion strategy. Also makes a lot of sense to convert. Even if, let's say you have one spouse that's significantly younger than the other spouse, man, that's a great way to get the money from the older person converted soon so that when both of you get to the RMD age, you've already taken care of it, you've insulated it from having to have the RMDs. So we get a lot of times, well, what happens if I'm still working, I'm 56 years old and I got a couple million dollars in my ira? You know, do I just wait? And the answer to that is maybe. But if you have, if you're making large contributions to your 401k or you've got significant assets that are not in a pre tax account, there's still some ways to play the game and get you ahead of it because waiting rarely will ever put you ahead on the Roth conversion place. In fact, that's probably one of the biggest false paradigms that are out there is that you should wait until you're at a lower tax bracket to do the conversions. And I see really smart people that I respect a lot put in their financial media and their articles that, that the bottom line decision on doing conversions is whether you're going to be in a higher tax bracket later or lower tax bracket later. And those, those are not the criteria at all because it has more to do with the massive amounts of taxable income that's going to come to you if in the way of RMDs. And if you want to buy a new car or use it for a vacation house or take trips with your kids, all that contingent tax liability is baked into that large IRA that you have. So that's one of the biggest is is you don't want to wait until you're in a lower bracket. You want to do it in the most time effective way that you possibly can. One of the other false paradigms is that you should not do conversions above your current tax bracket. And I'll tell you that unless you have lower IRA balances, more modest IRA balances, that's probably not a good idea to only convert to the top of your current tax bracket. In fact, for the overwhelming majority of the clients that we actually do work for and we run full analyses for, you're better off to get to higher tax brackets. To get it converted sooner at a higher bracket actually saves you more than staying at your current tax bracket over a long period of time. Again, if you're that average, what I call IRA millionaire, a lot of people say, look, I'm not going to do conversions because it's going to cause me to have to pay higher Medicare premiums. And you would be right that short term, if you start doing accelerated Roth conversions, you're going to pay higher Medicare premiums for a few years. Medicare Part B and Part D are income based premiums. So the premiums are based on what your income is off your tax return. So if you're doing Roth conversions and you're adding a lot of taxable income in, then those premiums are going to go higher. However, what happens is when you're finished with this Roth conversion plan, now those Medicare premiums come right back down to the foundation of the basics. Whereas if you wait, what's going to happen for most people who are really good qualified candidates to do Roth conversions is, is those RMDs that your balance is going to grow until you get to RMD age, and then now all of a sudden those RMDs are going to be a lot higher than what you had imagined. And the thing is about the RMDs is that the factors go up each year that cause the RMD to go up. So if your balance is increasing because of returns, good returns, and if the factor is increasing the amount that you have to pull out, well, it's easy to see that you may start at 80,000 a year of RMDs today. And in five years you're going to be at 100 or $110,000 of RMDs. Another five years later you're going to be at 120 or $25,000 of RMDs. And all this is just massive taxable income every single year. Some people it causes their Social Security to be higher. Some people it's going to cause the Medicare premiums to be higher for a little while as we talked about. And if you don't get the conversions done strategically in the right amounts over the right periods of time, then what happens is those RMDs just sneak up on you and now you're kind of cooked. There's nothing you can do other than just pay the taxes. So a lot of people also think that they should just keep deferring taxes as long as they can. That's just a lot of problems coming down the road at you later. There is a point in everyone's life, if you have larger IRA balances, where the only way you continue to save taxes is, is to flip the story and to begin strategically converting your IRA to a Roth at the tax rate you choose and the time frame you choose, as opposed to just leaving it to chance and time and the IRS tables to do that. The right game plan is probably to convert at a higher tax bracket than you're currently in over A shorter period of time than you would probably think that you should, and you'll end up paying a lot more tax in the next few years. But if you do it right, and if you're an IRA millionaire, you literally will save millions of dollars of income taxes or you will avoid paying millions of dollars of income taxes because you took away all those millions of dollars of required, of cumulative required minimum distributions over your lifetime and maybe even made your Social Security less taxed by doing it. So there are a few risks that people bring up about doing Roth conversions, and they're not, they're not wrong. They just are, I think, a little bit over sensitive. The biggest one that people are afraid of is that they do a conversion today and the stock market's really high and they have to sell assets to pay the tax on the conversion and now the balance is lower and they're afraid that today the balance is up here I do the conversions, pay the taxes, and now the balance is here and the stock market goes down and they're concerned that they'll ever catch up. And while technically that might be true from a practical standpoint, that rarely happens that way because rarely is a one and done conversion strategy the right strategy for you. Now, we have recommended a lot of strategies that are, hey, you need to convert everything this year. It saves you more money and you have a higher net worth later by just doing it. That's not the norm though. But we come to that conclusion through a lot of quantitative work and a lot of evaluation and analysis, not just an opinion. And you shouldn't either. You should, you should demand that somebody that is doing this for you, shows you the math on that. And you know, market fluctuations are okay as long as you're not doing converting everything all at one time, you have time to make it up. So you may. Our average Roth conversion strategy is between like four and 10 years. So that means you what if you missed it this year and you converted at a high? Well, you still got 3/4 of your account plus growth for the next three or four years. That's going to, that you have an opportunity to make that up and you will. But even in cases where people do need to do conversions in a real short period of time, there are some tips and tricks that we use that I think they're in another one of the YouTube videos that allow you to kind of treat it like your dollar cost averaging or to bring it in slowly over the year, but do it in a year or, you know, time different marker corrections that typically happen in the course of a year. So look at doing conversions, kind of like a dollar costing out. You know, that's how you're kind of pulling it out of the IRA and paying tax a little bit as you go. So the other thing though, to really ask yourself, first of all is, is your IRA large enough to cause you problems or to cause problems for your heirs? And this is something that's all comes down to. What are the resulting required minimum distributions going to be when I get to that age? And are, is that taxable income going to cause other things in my life to be more expensive? Medicare, my Social Security benefits? And is it going to push me maybe even into a higher bracket for that money anyway? And for the people who have large IRAs, I'll say around a million or more, those are significant. Those are seriously large enough to be worthy of doing a lot of investigation of whether you should do conversions. So what if you have less than that million dollars I keep talking about? I think you could still be a great candidate. You may not need to do it as quickly as what we do. A lot of our other clients, you maybe won't go as to quite as high of a tax bracket to get it all converted. But, you know, we talk to a lot of people who have got 5, 6, $700,000 and they still need to do conversions. You know, if you, if you have a more modest balance where the resulting required minimum distributions are going to still keep you in a low tax bracket for the rest of your life, then you probably don't even need to worry about doing conversions because you'll pay lower tax by just writing it out than you would if you converted and went to higher brackets to get it done. So as you can tell, there's just a lot that goes into this. I hope I've given you some good things to kind of think about and some ideas that would cause you to maybe go to talk to somebody about that you trust or that is really good at this kind of thing. So that you can really see, you know, should I do this or should I not? What are some of the practical steps? And they're, they're kind of intuitive. Get a game plan. Don't rely on anybody's opinions, yours, your CPAs, your financial advisors. I've done this 14 years and there's a lot that surprises me still when I actually do the numbers for somebody or when One of our CFPs does it. The answer to should I convert? Is a highly calculatable solution. Don't guess at it. You do have to use some assumptions, but any kind of planning for the future requires that you use assumptions. You just have to make good and well that you. The assumptions you're using are reasonable and probably most practical. That could happen. And then you run with it. And then every year you reevaluate your strategy to make sure that you're still on track with the things that you need to do. So I guess in closing, what I'd say is if you got a. If you are one of those IRA millionaires and you have the larger IRA balances, man, what are you waiting for? You really need to get busy at getting a very aggressive Roth conversion strategy done. The amount that you can avoid in taxes is unbelievable. And if you do it at the right pace and you get the right game plan, you'll. You'll end up with a higher net worth. In most cases, you'll leave more to your family and you'll give less to the IRS in your will. If you want to know more about the tax impacts of a Roth IRA conversion game plan that you might develop, click on the link someplace here and go to another video I did called Navigating the Tax Impact of Roth IRA Conversions. This is Craig Weir. Just trying to give you more information. Hope that was of help to you. Have a great day. God bless you.