The Smart Way IRA Millionaires Pay Roth Conversion Taxes

Hey there. Look, if you're sitting on at least a million dollars in IRAs or 401ks and you're thinking about Roth conversions, there's one question that stops almost everybody cold. If I pay a big tax bill, am I gonna hurt my future growth? Today, I'm gonna walk you through the smart way IRA millionaires handle Roth conversion taxes without making a mess of their financial plan. Now, I'm sharing what we've learned from working with thousands of clients and their CPAs doing Roth conversion planning. In fact, this past year, we hit a milestone of providing over $8 billion of tax avoidance for our clients. All right, so we've had our tax event this year. What's the smart way to pay it? Most IRA millionaires pay Roth conversion taxes one of two ways. They either pay the taxes with money outside the ira, cash savings account, a brokerage account, or maybe they sell an investment. Or they redirect money from somewhere else. Or they withhold taxes from the conversion itself, meaning the IRA money pays the tax. Both can work, but one option is better. Can you guess which one? Let me show you this in the simplest way I know how. Let's say these two plants are the same person. Same age, same investments, same market returns, same Roth IRA rules. There's no difference here yet. But after our first year of taxes, things start to look different. The only difference is how the taxes were paid. The plant on the left, the taxes were paid from money outside the ira. The plant on the right, the taxes were withheld from the conversion itself, so it had a smaller starting amount. When you pay taxes from outside money, you're not being more aggressive, you're not taking more risk, you're not changing investments. You're simply starting the Roth bigger over time, the difference compounds. And remember, Roth growth is always tax free. So that extra growth on the left plant, you never share it with the IRS. Not at 72, not at age 85, not ever. Now, if you don't have outside money, that does not mean Roth conversions don't work. Plenty of people grow the plant on the right and still end up in a much better place than doing nothing. But if you can afford to pay the tax from outside money, this is why we usually recommend it. So paying taxes from outside money isn't just paying a bill. It's buying more tax free growth for the rest of your life. Same Roth, same market, just more of it growing where the IRS cannot touch it. Now, some people say, craig, I get it, but I don't want to sell investments. I've got gains. That's a totally fair concern. Nobody likes the idea of triggering taxes on purpose. But here's the part most people miss. Not all taxes are the same. When you sell an investment you've owned for a long time, that tax is usually a a long term capital gains tax. That tax lives in its own lane. It does not stack on top of your IRA income. And the highest federal rate on long term capital gains today is just 20%. Now compare that to IRA money. Every dollar that comes out of an IRA, whether it's for spending or to pay taxes later, is taxed as ordinary income. And for most IRA millionaires, that rate is often higher than 20%. So conceptually, here's the trade. You can use lower tax money from a brokerage account to pay the taxes now, or you can leave that money alone and end up using higher tax IRA dollars later. Personally, if I have the choice, I'd rather satisfy the IRS using the cheaper tax system than more expensive one. You're not avoiding taxes, you're choosing which tax bucket you pay them from. And when you do that, you often end up with more money growing inside the Roth where it's totally tax free for the rest of your life. Now the exact math matters. Your CPA should absolutely run the numbers for your situation. But that's the idea. Use lower tax dollars to buy more tax free growth. Now let's talk about the real world. A lot of IRA millionaires, especially retirees, have most of their investment money inside the IRA or the 401k they rolled into an IRA and they say, Craig, I don't have outside money. Okay, then you may withhold taxes from the conversion itself. That does reduce the amount that ends up in the Roth. So yes, it limits growth potential a bit. But, but I want you to hear this very clearly. I have plenty of clients who do it that way and still save a tremendous amount in taxes over their lifetime. And for their kids, is it still usually worth it? Often, yes. There are a couple situation where these strategies don't work quite as well. If you're taking big withdrawals from your IRA right away, 4, 5, 6% a year, and you're trying to do conversions and pay taxes out of the IRA at the same time. You just want to make sure you're not draining the account too quickly. And if, and if you're under age 59 and a half, you need to be very careful about paying taxes from the IRA. You can face a 10% penalty plus taxes. So for clients under 59 and a half, we try to get creative. Are there other assets you can use? Can you stop contributing to a 401k and redirect discretionary income toward taxes? There are a lot of opportunities, but you need to be careful. For IRA millionaires, this is still usually very much worth it. For more modest balances, the long term problems aren't as big and the strategy may need to be different. But the tax implications are the same. Now you've decided you're doing a conversion, you're anticipating the taxable income. When do you actually have to pay? Well, generally taxes on Roth conversions are due by the regular tax filing deadline for that year, typically April 15th of the following year. But if the conversion significantly increases your taxable income, you may need to pay throughout the year to avoid underpayment penalties. This is where quarterly estimated taxes come in. Estimated payments are typically due April 15, June 15, September 15 and January 15 of the following year. And there's something called the safe harbor rule. In plain English, safe harbor is the IRS telling you if you pay enough along the way, we won't penalize you. For high income folks, that safe harbor amount means paying 110% of of your prior year tax liability. But again, this is where you confirm with your cpa because details matter. The point is this. You can pay the full tax by April 15th and still get penalized if you didn't pay enough during the year. So don't wing this now. We've covered some of the mechanics. Here's the bigger issue. If you go online and you ask Google or you ask ChatGPT, how should I do Roth conversions? You'll often get a simple answer. Just convert up to the top of your current tax bracket. If you're an IRA millionaire, that can be a really bad plan. You can leave a ton of money on the IRS's table. What you need is a strategic plan that looks at multiple tax brackets, future scenarios, and the entire timeline. Income changes, RMDs, Social Security timing, widow or widower tax brackets, inheritances, selling a business, all these things that can spike taxes later. The goal is not to pay the least tax this year. The goal is to pay the least tax over your lifetime and maximize what I call your tax adjusted net worth. Because if you've got $2 million in an IRA at age 85, that's not 2 million of spendable money. The IRS still has a claim on a big chunk of it. Please don't leave your future to Google or AI. Even financial planners and CPAs don't know how to strategize this right? We've been doing this for 14 years. We don't replace your CPA or your financial advisor. We just do one thing. We build strategies for IRA millionaires to avoid hundreds of thousands in tax payments. The best place to start is by mapping out your RMDs on our free calculator. It only takes 30 seconds and you'll be amazed at how much in taxes you can avoid. The link is in the description below. One more strategy, and this is not for everybody. If you already give significantly to charity each year, there are tools like donor advised funds. The idea behind this is really simple. You stack charitable giving into one year, take the deduction in that year, and then distribute to charities over time. In the right situation, you can offset a meaningful amount of that conversion income. Again, your CPA helps you confirm what applies to you. But for some IRA millionaires who are already generous givers, this can be a powerful lever. So here's the simple checklist. Decide how you're going to pay taxes. Outside money if possible. Withholding if you have to. Understand the timing, filing deadlines and estimated payments so you don't get surprised by penalties. And most importantly, have a strategic plan designed for an IRA millionaire, not a generic rule of thumb. Hey, if you like this kind of content, hit the like button and subscribe to the channel. We put out new videos regularly and we focus specifically on helping IRA millionaires make smart strategic decisions. If you want help building a real plan, the best place to start is with our free RMD calculator. And if you decided to move forward with Roth conversions, make sure you watch this video to understand the three steps to fully optimize your Roth conversion this year.