Watch This Before Starting Your Roth Conversion in 2025

Hey there. Are you thinking about Roth conversions this year, 2025? Look, before you move your money, there are a few things you really must know, because a Roth conversion can either save you thousands in taxes or it can cost you big if you don't do it right. So let me just kind of give you a quick overview, what I'd like to cover for you in this particular video. We'll. We'll cover some of the basics of Roth conversions. For those of you that are just kind of late to the party and just kind of catching in on what this really is, talk a little bit about what the options are that you need to consider in terms of whether you should do conversions or not and how you should do them, and then also maybe some of the key questions. But I also have a real life case study that I want to show you. So if you'll stick around to the end, I'd like to show you an example of how you really can really save some taxes if you do it the right way. Let's go to the basics. What is a Roth conversion? So it's really simple. You move money from an IRA or a 401k into a Roth IRA. In doing so, it creates taxable income. So you pay taxes now in the amount that you distributed from one to the other. But once the money gets over to the Roth, the growth happens tax free forever. So the reason that this is kind of important for this particular year is the new tax laws created a little bit of an opportunity of a lot higher standard deductions and then the senior deductions, where you can, whatever you convert, you can do a little bit cheaper because you have more standard deduction to take, take to fill up. The other is because tax rates are remaining low and you have these higher deductions, you might as well cash in on what you know today to be lower costs and kind of avoid that future uncertainty of what might happen later. The other is everything that you do to convert out of the IRA today. One of the objectives is to really lower the balance so that later when your required minimum distributions kick in, that forced income that comes to you because those RMDs is low as it possibly can be. Also a promise to kind of go through some of the options that you need to think about before you do Roth conversion. So let's just talk through that. You know, you could just leave your money in a traditional IRA or 401k account. I guess the good part about that is you get to enjoy tax deferred growth and you don't have to pay taxes. Those are kind of really about the only two I can think of. And those aren't bad, but those are the ones that kind of come to my mind. The negatives, though, is the longer you leave that money in that traditional account, the higher that balance is going to get. And the higher the balance is going to get, the higher your required minimum distributions are going to be. Probably your Medicare premiums are going to go through the roof as well. Another negative is we can agree that if you got a $2 million account, some portion of that is Uncle Sam's money. You just are deciding to hold on to it until the very last moment. So the fees that you're paying, if you're paying asset management fees, you're actually paying fees on your part and the IRS part. And when you do the Roth conversions, you actually get the IRS's part out of there forever. And you're able to save your so a ton of money in tax, a whole lot of money in fees, and put yourself in a position where much more of your income later, whether it be regular income that you take from the Roth or to give to a grandkid or to buy a car or whatever, is all tax free. So there's a lot of really big benefits to it. And of course, I've, you know, I've written three books about this, so I could go on and on, on about it, but there's just a lot of reasons to get the money over to a Roth as soon as you can. But it doesn't always have to be a full conversion. You don't have to do all of it. In fact, you know, what we recommend is that you blend together charitable giving and estate planning and all those things all into one to where you have kind of a comprehensive game plan. So if you are charitably inclined, you probably don't want to do a full conversion. Depending on your lifestyle needs, you probably don't want to convert 100% anyway just because you have the ability to stay below certain standard deductions that you won't pay tax on that money probably at all. A partial conversion is probably what the right answer is for a lot of the people that are out there and that partial by that, I mean you may convert 90% of it. You probably will leave a little bit of a remnant there. So think about that as you're setting up spreadsheets or you're talking to advisors or CPAs. You need to think through some of these decisions and these options before you go in. And the Other thing I'll say is that timing the conversions over multiple years is more common than kind of a pull the band aid off, a one and done approach, right? Most of the conversion game plans that we set up for clients between four in 10 years, occasionally we find somebody that the circumstances, they're better off to do it in one or two years. Just need to understand what impact that's going to have on your taxable income, your Medicare premiums, your Social Security, all those kinds of things. Some of the questions that you really need to kind of get familiar with and ask yourself up front are do I have cash available to pay the taxes or will taxes need to be paid from within the ira? A lot of people mistakenly believe that unless they have the cash just sitting there, that Roth conversions aren't worth it. And that's far from the truth. Most of our 14, 1500 clients, many of them, I should say, had to pay the taxes from within the IRA and it still worked. They saved millions of dollars of taxes by making that, that decision. But the other place that you maybe have cash is that if you're still working, you may be maxing out on your 401k. And so there's probably a whole lot of cash flow that you're putting into the plan that is just going into the 401k. That's compounding this problem of this big IRA. And so maybe if you don't have cash outside, you can redirect and not put quite as much money into the 401k and use that cash instead to pay taxes on converting a whole lot bigger amount. Another question to ask yourself is when are you going to need to use distributions from the IRA or the Roth ira? Most of the people that become our clients are what I call IRA millionaires. And they probably are never going to use the IRA money. But if you plan on taking distributions starting this year and they're significant, then you know, it could be very well that doing Roth conversion, that's that ship sailed and should have been done years ago. But just keep in mind, when am I going to need them? And if you're probably never going to need them, it's even more of a compelling reason to get the conversions done. And then the other thing I guess is just think about what are your objectives of the conversion? Are you just doing it because it's cool and you read about it? Or what the two big reasons would be to save taxes for yourself during your lifetime. Number two would be just avoid leaving your heirs with a tax mess to clean up. But in any regard, you just, you do need to do your research and consult somebody that really specializes in this and knows what they're doing. The IRS rules can be tricky. There's a lot of data points that need to be considered. And they, they're dynamic in that they change based on. If one here changes, it has an impact over here at this one that needs to change. Remember, when you do conversions now, they're permanent. It used to be you could undo them if you did them by a certain time of the year. And now there's no undos. So you got to make sure you get it right and you convert the right amounts. And technically you should be able to go to a CPA or a financial advisor that can run tax rejections to help you maximize your benefits. Unfortunately, not many specialize in this area. They do have tools that'll give you advice. But in our study of all the software that's out there, there really are none of them that do a good job of helping you to really see what your objectives are. They produce an output and there's numbers on there, but they leave out so much information or they present it in a way where it's just really difficult to really understand what is going to be the really the best for you. So you end up using those methods. You end up with just very limiting strategies. I promise to kind of go through a case study with you. So this is a client case study that somebody in their early 60s came. So they had 1.3 million in IRAs, wondering, you know, should they convert? You just take the question at face value and you run the numbers. If they didn't do anything, you can see that their no conversion Strategy generated about $2.281 million of taxable income. Plus their RMDs were estimated over their lifetime to create about another 3 1/2 million of income, which caused about a million and a half of estimated taxes over their life. And they were going to leave enough money, they were going to have enough money left at the end of their life that their heirs would have about $900,000 of taxes due to them, for a total of about 2.4 million of tax that was going to be due. So if you went a step further and you said, okay, so now what happens if I just use kind of the typical strategy. If you go to your kind of. Normally, if you go to a CPA or your investment advisory firm or a financial advisor, they normally, we'll tell you, they'll give you, they'll create a bunch of reports and they'll create strategies, but they'll stop. Typically they'll stop at the top of whatever your current tax bracket is or maybe make a big bold move to just move up by one tax bracket. So this same client that came to us in their 60s with 1.3 million, we what if they just went to the top of their current tax bracket and they would save some money? You'll see that here. But I'm also going to show you that they're leaving a lot of money on the table by doing that. You'll notice on here that the RMDs went from 3.4 million to 1.3 million. Their taxes during their lifetime did go down from 1.4 to 1.2 million. And the heirs, instead of having 894,000 of taxes, they're only at 656,000 of taxes. So they did save $459,000 by going to the top of their regular tax bracket. But let's look what happens when they optimize that plan. When they get the timing right and when they get the amount, then these things happen. And by the way, you know, this is definitely a strategy for IRA millionaires, not for just anybody. Once you get to the point where you got a million plus in IRA money, that creates a big enough problem that you have to use a different strategy. If you have a more modest account, you probably can stay at that top of your current tax bracket and it probably will work. Although I will say that I've seen some cases where going to the top of your current tax bracket actually cause you to pay more tax over your life than if you'd have just gone and just waited to do. RMDs really have to get with somebody that understands this and can give you the right tools to understand what their best decisions are. But if we optimize the plan for this, people in the in their early 60s, we almost get rid of their required minimum distributions altogether. Their total tax over their lifetime goes from 1.4 million to just 516,000. And we eliminate all the tax for their heirs. And in this case, we go from them saving 456,000 of income taxes at the top of their current tax bracket to an optimized strategy that ends up saving them ultimately $1.8 million. The last thing that I'll mention just real quickly is that if you wait to do conversions, it costs you money. And the cost of waiting can be calculated by showing what your projected lifetime taxes are. If you wait one year and the cost to wait is about 66,480 dol to do that. So getting the conversions done sooner rather than later in an optimized way is where really the big savings is for you. There are some other things that you know accrue to you by getting the conversions done. When you get the money to the Roth, you got totally tax free growth. And all the withdrawals that you make in retirement are also tax free. There are a couple of different five year rules that you need to be aware of. But I'll just say this. If you're over 59 and a half and you do these conversions, all the money that you convert is immediately accessible. The gains or the earnings on it, you have to leave there for five years. But if you're doing a series of conversions that are significant, dollar amounts really don't have very big handcuffs at all on being able to get in and access the money. The other benefit, getting the money over to the Roth is you no longer have to worry about required minimum distributions. Roth IRAs do not have any of those. The other benefit is really to your heirs. In doing legacy planning, not just to the heirs, but also to your spouse. Roth assets pass tax free to heirs. Of course your spouse would get those. But one of the things that we don't talk about a is something called a widow's trap. And that's if you don't get the conversions done, you leave all the money to the spouse who now has single taxpayer brackets to deal with. And so while that still is probably a good strategy for single people, it's much less expensive if you're married and you get it done before that event happens. I guess the other big one, the big reason that people do Roth conversions in an aggressive way is they just want the flexibility of having more control over that future taxable income stream. Let me just kind of tie this up for you. Let's just kind of go through and remember, you know what Roth conversions are, is a way to take money that's going to be, that's tax deferred, that's going to cause a big tax bill later through RMDs. And you convert it now and you choose when you pay the tax instead of just leaving it up to the government tables. When you pay the tax, you do have some options. You don't have to convert all of it at once. You can convert it strategically over a period of time at a variety of different paces and tax brackets. And there are some really big questions that you have to ask yourself at the very beginning. Having A lot to do with what are your goals, but the benefits can be pretty phenomenal. And if you get the conversions right, you're going to be able to avoid an amazing amount of taxation over your lifetime. I just, I just can't stress enough that the, the timing of when you do these and the strategy of how you do them are much more important than just doing conversions and picking a tax bracket or picking a number. Get strategic about it and you'll, you have the ability to avoid millions of dollars of taxes if you' an IRA millionaire. So a Roth conversion isn't right for everyone. But if you plan carefully, it can be one of the smartest money moves that you can make for your retirement. You know, we've created an RMD calculator that's really unique. Most of the RMD calculators just ask you how old are you, are you married? And what's your balance? And they tell you what your RMDs are going to be. What we do is we take it a step further. We want to show you all that, but we also want to show you what the potential tax savings can be to you based on the 1400 clients that we've worked with. You give us a little bit of information into the calculator and we want to create a report for you that says here's what's possible, what other people have saved who are in a similar spot as you. So you can click the button below all this and you can get taken to the calculator. So hey, thanks for your time. I hope you find the right strategy for you and that we're able to be of some help to you in the future in some way. So be sure to hit the like and subscribe. If you like this kind of stuff, we'll just keep doing it. Take care.