In this video Craig Wear, CFP®, explains why many retirees and DIY investors lose substantial wealth when converting IRA assets to a Roth IRA. Using a fictional couple, Tom and Linda, he shows that the gap between the IRA balance shown on statements and the amount that actually ends up with the family is driven by four often‑overlooked decisions. 1) How the IRA is invested – fees, cash drag, and under‑performance shrink the pre‑conversion balance, reducing the tax‑free growth base. 2) How much to convert – converting only up to the current marginal tax bracket ignores future RMD‑driven bracket jumps, IRMAA Medicare surcharges, and the widow’s‑tax trap, leading to higher lifetime taxes. 3) When to convert – converting on a fixed schedule (e.g., every December) misses the biggest tax‑saving opportunity that comes from converting during market downturns, when the taxable amount is lower and the subsequent recovery grows tax‑free. 4) Which assets to convert first – converting a proportional slice of stocks and bonds dilutes the benefit of tax‑free compounding; high‑growth equities should be moved to the Roth first to maximize long‑term tax‑free returns. Wear stresses that these four layers compound on each other, so the total cost is greater than the sum of the parts, and it rarely appears on any statement but shows up in future tax returns and heirs’ distributions. He offers a free guide and a deeper video on the first decision, urging viewers to model their own situation rather than rely solely on a CPA’s year‑by‑year tax focus.
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Hey, so look at this. I want you to see something. This is what your IRA statement says your family has, and this is what your family actually keeps. Now, for most retirees, those two numbers start out the same, but there are four decisions happening inside your IRA that quietly pull them apart, and most people are really only aware of one of them. And for most IRA millionaires, the gap can mean hundreds of thousands of dollars, could be millions of dollars that end up with the IRS instead of with their family. So look, I've seen hundreds of families make these same decisions without realizing what it was costing them and their retirement. And if you're watching this, I don't want that to happen to you. So in this video, I'm going to walk you through all 4, and I'm going to show you how to make each one work in your favor instead of quietly working against you. And to show you exactly how this happens, let me walk you through a couple that I'll call Tom and Linda. So let's say Tom's 62 years old. He's a retired engineer, and he's been managing their investments for close to 30 years. Tracks everything in spreadsheets, didn't panic in 2008, didn't chase the meme stocks until 2021. And together he and Linda have built up about $1 million in their IRA by doing things the right way over a long period of time. All right, so 2 years ago, Tom started doing Roth conversions. He ran the numbers himself. He converts to the top of the 24% tax bracket every year, and his CPA looked it over, agreed, and so on paper, everything checks out. Now, for Tom and Linda, both of those stacks start right here, same height, $1 million on each side. So let me show you what happens next. Okay, so the first decision is really how you invest inside your IRA. So the first decision actually has nothing to do with Roth conversions, and that's exactly why most people miss it. It's really about how you're investing inside your IRA before you ever convert a single dollar. Tom had been managing his own portfolio for 30 years and he was actually pretty good at it. I mean, better than most, but like almost every self-directed investor, there was a gap between what the market returned and what Tom actually captured. Same way with professional managers. And even a small gap, just a percentage or two a year, doesn't stay small. It compounds and over decades quietly turned into one of the biggest drags on your portfolio. So Tom's IRA is sitting at a $1 million, but it probably should be closer to $2 million. And that gap doesn't really stop growing. The balance Tom is converting from was nearly really $1 million. It was $1 million after decades of quiet erosion, selling during a downturn, sitting in cash, maybe a little too long, chasing a fund that wasn't really what it looked like. And then on top of that, you got fees. So Tom's advisor was charging close to 2% annually, which includes all the fees from the active managed funds and all that kind of stuff. And the difference between the high fees and the low fees on the same portfolio over a long period of time is enormous. And that money didn't go to taxes. It went to fees. Every one of those dollars is a dollar that's never going to compound tax-free inside a Roth. What Tom actually got for his 2%, the vast majority of active managers don't outperform the benchmark over a decade. And the ones that do, well, most of them can't keep it up for even 3 years in a row. So the funds that underperform get quietly shut down, which makes the surviving track record look better than it really was. So look, if you're working with an advisor, there's really one question worth asking. What is my all-in fee and what am I getting beyond just portfolio management? There's a lot more to this investing layer that I can cover in this video, but I put it together in a free guide that breaks down the math, the behavioral research, and really how to evaluate whether your setup is helping you or working against you. And I'll show you how to grab that at the end of this video. So that's really the first piece of this. How you invest inside your IRA determines what you have available to convert. And Tom never really thought of this as a conversion decision, but it really is. And you can see what it's already done to his number. But here's what makes this worse. The 3 conversion decisions that follow, they don't just add their own damage. They compound on top of a balance that's already smaller than it maybe could have been. So let's look at the next one. The second decision is really how much you convert. So Tom converts to the top of the 24% tax bracket this year and every year. And his CPA agreed with that. And look, that makes sense, right? I mean, it feels safe and it kind of looks responsible. But the problem is that calculation only looks at this year's bracket. It doesn't account for what happens to the money Tom leaves behind or what happens to his spouse later on. So see, at 73 years old, required minimum distributions kick in and the IRS forces money out on their schedule. If Tom's remaining balance has grown for another decade, those distributions push him maybe into the 32% bracket or higher if we assume brackets aren't even going to change. The IRMAA threshold kicks in, the Medicare surcharge, it adds thousands of dollars a year in premiums most people don't plan for. For, and they continue for the rest of his life. And then there's the piece Tom really didn't see coming. If he passes first, Linda files single taxpayer with a much narrower bracket. The money Tom thought he was protecting quietly becomes a lot more expensive for Linda. That's the widow's tax trap, and we see it hit harder than most families really expect. So the safe conversion amount often turned out to be the most expensive one over a lifetime. Getting the right number means modeling your RMD trajectory, Social Security timing, IRMAA thresholds, life expectancy. Craig Wear] See, cash flow and all that stuff together, because those variables push and pull on each other and a spreadsheet that adjusts one at a time is going to get you close, but in my estimation, it's just not good enough. We see it all the time. So now you got a balance that was already smaller than it should be. And the money Tom left behind is going to be taxed at a higher rate than what he paid to convert. And those two numbers are pulling further apart. Here's where Tom left the most money on the table. So the third decision is when you convert. So Tom converts every December, same time, same approach. Look, it feels organized. You wait till the end of the year, see where all your income is, check with your CPA or your TurboTax program, but it ignores the single biggest advantage available. So like in 2022, for example, the market dropped about 30%. Tom's growth holdings lost nearly a third of its value. And Tom did what most people do when things get shaky. He froze, he paused and didn't do conversions. He waited because, man, if it's going to fall this far, maybe it'll fall further again. And I mean, it felt responsible and who wants to convert when things are really low is kind of where a lot of people's attitudes are. And it's actually the most expensive decision that Tom made that year. See, when a holding drops in value and you convert it at a lower price, you pay taxes on the lower amount. That's a straight tax savings right there. But here's the bigger part, the recovery when that holding climbs back up and beyond, if that happens inside the Roth, all of that growth is tax-free permanently. So Tom didn't just pay more tax than he needed, but too, by waiting, he also missed out on tax-free growth that he's never going to get back. A market correction inside your IRA isn't a reason to pause. It's actually the best conversion opportunity that you get. So now we got the smaller balance, a conversion amount that's leaving money at the wrong rate, and mistiming that gives up tax-free growth that Tom's never going to get back. And the gap just gets wider and wider. We've done research recently to support a service that we offer to some of our clients. And we've come to realize that across all the ways that you can convert, waiting until December is actually the least beneficial conversion strategy. And so you have to find a better way to do that. Throughout the year and know which investments and at what time to do that. And at the time, Tom didn't see it that way. Most people don't. That really is what brings us to the last decision. And this is the one I find that almost nobody's talking about. And that's which assets you convert first. So Tom's portfolio is kind of a traditional 60% stock, 40% bonds and cash. And when he converts, he converts proportional slice every time. If he's going to convert $75,000, then it's $75,000 and it's broken up accordingly so that equal shares kind of go over, right? Feels balanced, right? It feels like what you should do, but think about what tax-free compounding actually does at different growth rates. On bonds growing at 3 or 4% a year, the tax-free benefit is fine, but on growth assets averaging 8 or 10% plus, the benefit over 20 or 30 years becomes enormous. So the order you convert in really determines how much tax-free runway your highest growth holdings are going to actually get. Growth should generally cross into the Roth first. Every year those holdings compound inside the tax-free account is a year returns, your family gets to keep all of it, right? So here's where this connects back to timing. During a significant downturn, if you got cash sitting inside the Roth, that cash is ready to deploy. You move it into equities when prices are low, and then the entire recovery happens tax-free. Timing and order really work together, and that combination is where the real value lives. So that's all 4 decisions. And at this point, those 2 numbers that started out the same don't look anything like each other anymore. Now here's what surprises most people. Those 4 layers don't just add up, they actually compound on each other. A smaller balance converted at the wrong amount, at the wrong time, in the wrong order, and each one quietly makes every other one worse. The total cost is larger than the sum of the individual pieces. And that cost never really shows up on any statement that Tom's ever going to get to read. It shows up in Linda's tax return when she files single after Tom's gone. It shows up in a 10-year window the kids inherit under the SECURE Act when those distributions land during maybe their highest earning years or with their beginning of their retirement. Look, maybe you've already started doing conversions and feel like you're ahead, and you are. The question is really whether each one is capturing its full value. We see the pattern all the time. Good news, every one of those decisions can be made differently starting today. Now you might be thinking, well, if all this were true, my CPA would have brought it up. And look, your CPA is great at what they do, but there's a really important difference between minimizing this year's taxes and maybe next year and minimizing your lifetime taxes. And most CPAs are focused on this year's return. And what's surprising is the strategies that look the most responsible on this year's return can actually be the ones quietly increasing what you pay over the rest of your life. I made a video that shows you exactly how that works and a simple visual that's going to change the way you see your IRA. I'd watch that one next if I were you, but it's called The 3 Biggest Risks to Your Retirement Portfolio. And it goes a lot deeper on that first decision, the investing layer, the fee math, the behavioral research, and how to evaluate whether your current setup is really working for you. So you can grab it through the link in the description below. And I mentioned a free guide earlier in the video that's there as well. So hope this is helpful to you. Have a great day. Thanks for listening.
