Craig Wear, CFP® explains how strategic Roth conversions can save individuals with large IRAs (example: $1.75M) over $1M in taxes across their lifetime and for heirs. He outlines the "tax trap" from tax-deferred IRA growth, required minimum distributions (RMDs), higher taxation of Social Security, and IRMAA-driven Medicare surcharges. Using a client example (ages 65 and 63 with $1.75M IRAs), he shows conversions can shrink projected taxable RMDs (~$3.67M) to nearly $50k, reduce lifetime taxes by about $1.5M (including ~$875k saved for heirs) and lower Medicare premiums (~$200k saved). He also describes common mistakes (converting only to top of bracket, waiting too long, using IRA funds to pay conversion taxes instead of after-tax brokerage funds, ignoring IRMAA, and not coordinating charitable giving).
Questions this video answers
$1,750,000
He was 65; she was 63.
About $3.67 million
Under $50,000
A little over $1.5 million
Chapters
Hey everybody, hope you're doing great, hope you're having a great day or evening, whichever it happens to be, you're watching the video. So today I'm going to tackle a little bit of a controversial question that we get asked a lot. The title of this little video is how a 65 year old can save over a Million Dollars in taxes from a $1.7 million IRA. So what if I told you that with strategic planning you could actually save over a million bucks in taxes if you had that size of an ira. So my name is Craig Weir. I'm a certified financial planner. I'm the author of two books about Roth conversions. Paying the Piper was the first one. And then Roth Conversion Secrets, which is just details all the mistakes that most people make when they're doing Roth conversions. So the big idea of this short video is this, without an optimized strategy for converting your IRA to a Roth, taxes will likely become your single greatest expense during the rest of your lifetime. So how can this be? Sometimes we get asked that, how can it be? I got a million three quarter in IRAs and 35% maximum tax bracket. If I converted it all Today, it's only $612,000 of total tax. You may be thinking, and you would be correct if you said, well, I'm just going to convert the whole thing. And realistically that's normally not the best game plan for most people. Occasionally we do a and done, but most of the time it's better to make sure to preserve your net worth, you do it over a period of time. But I promise you, by the end of the video you're going to understand how it's very possible to save over a million dollars or more in taxes if you've got a larger ira. So first let's talk about what the problem is. In my first book, I call it a tax trap. So this tax trap for IRA millionaires is really down to the fact that IRAs grow tax deferred over a long period of time. But then they create this tax trap bomb through a few things. One is required minimum distributions that under current law have to start at age 73. The second is through the increased taxable income that keeps pushing retirees potentially into higher tax brackets. Also, a lot of times for some people there's taxation that happened on your Social Security Security benefits that is greater because you have these RMDs coming in at these higher levels. And in every case it's almost always the large IRAs are going to cause higher Medicare premiums through Something called IRMAA thresholds to happen. So I'm going to use an example of a recent client of ours. He was 65, she's 63. They had about 1,750,000 in IRAs, and they projected that they were going to have about 3.67 million in required minimum distributions over their lifetime. So let me talk through very quickly and very succinctly. Where does this tax savings come from? How can it be over a million bucks? Here's some of the key factors. First of all, by converting strategically that 1.75 that they have, it's going to reduce their lifetime requirement of distributions. And in their case, converting all of the IRA reduced their taxable distributions from $3.7 million of taxable RMDs to under $50,000 of taxable income. So there's a huge savings there. Their lower Social Security is also accumulated some tax savings for them. So keeping taxable income lower avoids taxation of up to 85% of your benefits. Now, this won't apply to everybody because some of you have got high enough income that you're always going to pay tax on up to 85% of your Social Security. And if the tax laws change that Trump wants to get changed in his administration, we won't have any tax on any Social Security. So that'll be a savings as well. But that hasn't happened yet. So we're going to talk about that. Also, the Medicare or IRMAA savings, by avoiding the Medicare premium surcharges from all of those RMDs over a long period of time, it's going to reduce their reported income, which reduces their Medicare premiums on Parts B and D by almost for this couple $200,000 over their lifetime. I know that's not a tax savings, but I thought I'd throw it in there, just kind of an extra bonus. Just because you watch the video and understand that there are benefits of getting these conversions done because of that. The other big one is that the heirs are going to get their inheritance in a Roth ira, which is going to be totally free of any taxes. In this client's case, it's going to save them $875,000 of taxes that their heirs are going to have to pay after they're gone. So keep in mind that they had other income and brokerage accounts that added taxable income each year. But let me give you kind of the summary of how this worked out for them. Their total tax over their lifetime, including all their income streams and everything dropped by a little over $1.5 million over their lifetime, which also counts their heirs, their savings for their heirs. So if their heirs were going to save 875 and their total savings was $1,500,000, then they had another somewhere around about the same amount of $700,000 or something that they saved just during their lifetime. I've already mentioned the Medicare premiums dropped, but most people that we talk to don't think that there's that much savings that is out there. But they, they don't understand how big the R and Ds are. They don't understand the impact on Social Security on their heirs, all of it. But some of the big mistakes that many people and other advisors and CPAs and tax professionals make is they don't open up their lens wide enough to consider all the other things that could happen or the other, the other opportunities that are available. So what happens is people put some limitations on their abilities. They convert only to the top of their current tax bracket, for example, and that's not an optimized strategy. Or they wait until they're in their mid-70s or at some lower income to start conversions and that's anti productive. The RMDs just get bigger and bigger the longer that you wait and the about the balance that you have to convert becomes bigger and it's just not worth waiting. Another mistake is lot of people use IRA funds to pay conversion taxes when they also have other brokerage accounts that are after tax. These strategies work just great if all you have are IRA money to pay the taxes with. But when you have those other accounts that are outside of your ira, a lot of people hold onto those almost as though they're so valuable that they can never spend them and never use them. And I get that. But when you're doing Roth conversions, the best money you can actually use are those after tax accounts. Even if they have a capital gain that you have to pay. The maximum capital gain tax is 20%. If you don't use that money and you use IRAs, you're taking money out of the IRA paying ordinary income tax rates instead of capital gains rates. The other benefit of using those non qualified accounts, non qualified meaning brokerage and after tax accounts, is that if you have large balances of those, by using those accounts, you actually reduce your total taxes over your lifetime in favor of moving assets over to the Roth. So you have all the investments that you had in the brokerage account over in the Roth. But the difference is as they pay dividends and as you need them to pay bills or to go on a vacation or whatever the case may be or buy a car. There's no tax on them where if you leave them over in the other account and you need them, it causes a problem there. And there are estate planning issues that you got to work through with a financial planner or an estate planning attorney in that there is step up in basis on the others. But we're talking about funds that maybe you would be needing during your life or could use in a better way. The other mistake people make is they they really ignore that impact of conversions on the Medicare premiums already talked about. And then the last one, and I've got other videos about this that you can kind of search for on this channel is a lot of people fail to coordinate charitable giving with their tax planning. So I didn't include it in this little example I gave you. But there are a lot of benefits. If you are charitably inclined and you're normally in the habit of giving away to charity in some significant ways, 10, 20, $30,000 or more a year, then you can actually front load your Roth conversion game plan with larger deductions going into some special types of accounts that you can get at your normal whoever your current custodian is and you get a big tax deduction in the year that you're making big Roth conversions. So that's there's another video on that you can check up here, down there or someplace, somebody maybe will put a little tile icon on the page for you. But there's really a lot of importance in really getting a proper analysis. So you don't leave a lot of money on the table. So look, don't wait until it's too late. Start your Roth conversion strategy like today. Now. Keep your hard earned money in your pocket. Don't give it away to the IRS or leave it at the doorstep of the irs. So in summary, let's just recap what we've said. You can save over a million dollars in taxes is very achievable if you use strategic Roth conversion plan and your that IRA millionaire. Plus also I want just to reassure you that this, the Roth conversion is not just about taxes. It's about maximizing your retirement. It's about having the highest amount of tax adjusted net worth. So you're leaving a legacy and achieving peace of mind. If you like this kind of content, I would appreciate a like on the video. It helps out the channel a whole lot. And if you aren't subscribed, subscribe more for more educational content. And we've got all kinds of downloads and free resources on our website@q3adv.com, so hopefully that's of help to you. Have a great day.
