In this video, CFP® Craig Wear explains the two primary ways IRA millionaires can fund the tax due on a Roth conversion: (1) paying the tax with money outside the IRA (cash, savings, brokerage account, or proceeds from selling investments) and (2) withholding the tax directly from the IRA conversion, which reduces the amount that moves into the Roth. He uses a plant analogy to show that paying with outside money leaves a larger initial Roth balance, which compounds tax‑free growth over a lifetime, whereas withholding shrinks the starting balance and thus reduces future tax‑free earnings. Wear then discusses the tax‑bucket concept: long‑term capital gains from selling investments are taxed at a maximum 20% rate, while distributions from an IRA (including the tax paid on a conversion) are taxed as ordinary income, often at a higher rate for high‑net‑worth individuals. Consequently, using lower‑tax dollars from a brokerage account to pay the conversion tax is generally more efficient than using higher‑tax IRA dollars later. He advises that if you have the cash, you should pay the tax from outside the IRA to buy more tax‑free growth, but acknowledges that conversions can still be beneficial even without outside cash. He recommends having a CPA run the numbers for each individual situation. The segment ends with a second speaker urging viewers to schedule a call with their “Rothologists” for personalized conversion strategy advice.
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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 Wear, 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 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.
Well, hey, you know, by now you've read the books, you've been to a webinar or two, and you're still kind of just kicking the tires trying to figure out what you should do with your IRA conversions. If you're an IRA millionaire, Schedule a call with one of our Rothologists. This is all we do. We don't sell financial products. We don't want to manage your money. We just do nothing but find the right strategies and help people day after day after day find the answer to the question, should I do conversions and at what pace? What's best for me long-term? So I hope you'll choose to join us. We've got lots of success stories. We'd love to be able to have you join the family, but more importantly, just schedule a call, talk to somebody, see what happens next.
