Why is it so difficult to get a straight answer on Roth conversion advice?

Welcome to another edition of the what's Next Retirement Podcast with Craig Weir. Life is full of transitions that have a financial impact now and in your future. When finances are affected, there are always questions to ask and choices to make. As an independent certified financial planner for well over 30 years, Craig has helped Americans make decisions that give them their best financial futures. The experiences with so many clients has given him a unique experience perspective to help with what's next for you as you navigate the unknowns of your own life. What's next? Answers to the retirement issues on your mind.

Hey there. This is Craig Weir. Welcome back to another episode of what's Next in Retirement podcast. You know, we've got kind of an interesting subject matter that I wanted to kind of run through with you today. I get a lot of questions from a lot of other folks, and our advisors do as well. Just asking, you know, what's so different about what you guys do than what everybody else is doing? A lot of people wonder, gosh, why? Why not just do what my CPA is telling me to do? Or, hey, I've got a financial advisor. They're giving me advice there. They've been helping me for 20 years. So why would I do. What's so different that you're talking about? Why not just listen to them? Or, you know, a lot of people, you know, they'll call and they'll talk about software that's available and the differences of what we do and what's out there. What's out what? I mean, there's just a lot of questions. Okay. That's kind of what this podcast is all about. This whole episode is. Is all about what is so unique in the Roth conversion space, and more importantly, what. What are the options that are available to somebody to actually kind of pursue down this Roth conversion path? So that's what I want to do this for the next, I don't know, 20, 30 minutes, however long we're going to take to do that. What I want to. I want to just kind of go through what's out there in the whole Roth conversion assistance universe, the different things that you could avail yourself up and will it give you an optimal outcome? I want to. First of all, though, let's kind of start with, you know, what's a successful Roth conversion? Remember, these episodes are really all about trying to help you with what's next in life, whatever that next step is. So you've accumulated the big IRA or 401k, and you're trying to figure out, what do I do with it. So That's a next step. You're trying to get retired and not sure what should your next steps be? Well, that's what we do episodes on. Maybe you're tired of your investment advisor and not sure whether you got the right thing. Well, we got episodes coming up with that, so there's just a lot that's out there. But when we, when we focus in today, what we're really talking about is defining a successful Roth conversion and analyzing the different options that are available for you to kind of pick what you're going to do. So let's start with a successful Roth conversion. First of all, you want to avoid the absolute most tax you possibly can. That will also maximize your potential net worth. And if you can also save Medicare premiums, well, that's a bonus, right? Yeah. So the big picture of how all that gets accomplished is that you really have to dramatically reduce or totally eliminate your future required minimum distributions or your RMDs. And to do that, you have to work on getting the pre tax accounts as low as possible, even to zero dollars at some point. Potentially not everybody, but that's the real target. That's how you get this big picture of an optimal Roth conversion game plan put in place. And anything short of this is really, is just a plan, but it's not optimal. And it's possible that you could also waste a ton of tax money without even really knowing it. So you, it's kind of like you did good by converting, so what's the harm? But the actual harm is that you really didn't even realize that you were leaving a lot of money on the table, or in a lot of instances, you were paying more Medicare than you needed to to get the same thing accomplished or even more tax than what you needed to. You know, a lot of people, we find that stay in the lower tax brackets to do their conversions. By the time you add it all up over their lifetime, they actually spent more money in income tax than if they would have just really gotten after it and gotten to more of an accelerated position to get to higher tax brackets to get it done. So look, you're simply going to have to convert more than you think, faster than you think, and at a higher tax bracket than you're probably comfortable with right now in order to hit the optimal number. So I'm going to run through kind of a scenario with you that if you're listening to this podcast, it may be difficult to follow the math by just listening to it. And so in the show notes, we're going to Put a link to a PDF document that will have just kind of the raw basics of what I'm sharing with you here. Right. So I want to run through an income tax bracket illustration from you that I do in a lot of the webinars to kind of illustrate the point that you have to do this a lot faster than what you think. So, first of all, let's just, let's just talk about. Let's assume that you got $2 million in IRAs. And this, this number, what I'm going to go through works whether you got $1 million or $5 million or 10 million sitting in your IRA. I will tell you, too, though, that I did another podcast that is totally devoted to the four situations in which you probably don't want to do Roth conversions at all. And so I'll refer you to that. So if you've got less than a million bucks in your IRA 401k accounts, you probably want to listen to that first. That doesn't mean that you necessarily don't need to do the conversions, but go listen to that first before you just embark on assuming that you need to do Roth conversions. All right, so let's say you got $2 million sitting in an Iraq, and let's say it's earning something. You've got it invested in whatever you have it invested in. It's in real estate, it's in stocks, it's in mutual funds, ETFs, bonds, CDs, I don't care, whatever it is. But let's assume for purposes of illustration here, that you're earning about a 5% rate of return on that $2 million. Simple math says $2 million at a 5% growth rate is, on average, $100,000 a year in growth. Well, if your taxable income is like 80,000 bucks, take your Social Security minus your deductions, and let's say you're at $80,000. That's solidly in the 22% tax bracket. Well, in order to get to the top of that bracket, you can only convert about $110,000. There's some change on there, but I'll let you look at the document to see what all the numbers are. But remember, you have to begin these conversions with the end in mind. So what are you trying to accomplish? Remember, you're trying to get that balance down dramatically lower so that the resulting required minimum distributions don't just bury you with this taxable income that's going to deluge your life in these form of required minimum distributions. So if you're at 80,000 of taxable income and you can only convert 110,000. That sounds like a lot. When you start doing the math on what the tax is going to be on that you think you're doing a great job with it. But if your balance grows by 100,000 a year and you can only convert 110, and if the goal is to reduce the balance, what have you gained? Well, my dear listener, you have gained nothing. You've gone through an exercise in futility of just treading water. You have not solved your problem. We find that a lot of people just don't. They don't get the conversions done quickly enough. So if your taxable income is $100,000, you're still in the 22% tax bracket. But now you can only convert $90,000, you still have the same problem. You actually had your account grow more than what your conversion could be. All right, all of that math is laid out in a PDF, so you can just kind of see how they work for you. Right? So let's just see what's out there to help you with this. If that's the problem, and that's the biggest challenge, one of the biggest challenges that we see out in the Roth conversion space right now, let's see what's out there to help you. First of all, I think it would be foolish to expect that your current relationship of yours, whose focus is in something entirely different, is going to be an expert on this topic for you. So do you expect your primary care doctor to be an expert in heart surgery? Of course not. Do you call a residential electrician to work on an industrial plant system that you have? That'd be kind of foolish. So the challenge with the financial community is that there just aren't a lot of specialties. There aren't a lot of specialists, There aren't a lot of people who just enjoy doing one sliver of things. So most of the financial community think that they have to do all of it. In fact, they think you expect them to do it all, or you do expect that they should do it for you, but that's not what they're there for. For example, your CPA. I got a great relationship with a CPA. 35, 40 years with the same CPA firm, the same guy. But they're not financial planners. They're great at what they do. I mean, I want my guy to keep me out of paying a lot of penalties. I want him to keep me out of jail. Right. But they're not long term tax planners. And most don't hold their self out as financial planners. Let's say you have a financial advisor. So the question is, are they a financial planner or are they an investment guy? Right. So whichever camp they fall in, most often if they work for a big company, they, their compliance departments won't even let them offer what they call tax advice. And they, in the large companies today call Roth conversions. Anything other than go to the top of your tax bracket becomes tax advice. And you know, they make their money doing other things, managing your investments or maybe even charging you a fee for big picture planning stuff they don't normally do the other stuff, the specialties. So relying on an existing relationship that doesn't really do this is probably not the best thing to do. That's one of the things that's out there in this whole universe of people that could help you with Roth conversions. So now let's talk about the big national investment firms, the big names. I'm talking about the ones that are all over tv, the ones that you see, all the branding, all the cute little, oh, advertisements and things like that. Right. So one in particular that I can think of is going to tell their clients that they have a CPA firm that they refer them to to do Roth conversions. Well, first of all, I'll refer you back to my prior comment about what CPAs don't do well, and we've even had conversations through our clients with the CPA firm and this other big nationally recognized investment advisor firm. And the concept of going higher tax brackets, faster conversions and more conversion in total is really a foreign concept to them. A lot of the other national firms just provide a real simple online calculator. You can log into your account, you can run a calculator, and in a minute I'll talk about what is so wrong about those calculators and we'll discuss software kind of in just a second. So we've talked about the existing relationships that don't really specialize in this. We talked about the big national firms that have some really significant limitations of monitoring and managing this whole process. And then the last group are the people that provide software and online calculators. You know, once, once you have gotten an accurate plan, your game plan may indicate a period with a low income tax rate relative to subsequent years. If you have excess income that you can pay more in income tax, you can do Roth conversions. That's what they would like you to believe. That is sounds totally logical, but it's totally wrong. I mean, I'm what I'm reading to you is an excerpt that I took from an FAQ section from a big nationally known retirement planning software that you could go out and subscribe to and be a part of and you could learn a lot of different things, you know, from them to make things happen for yourself. But you know, they, one of the things that they say is their tool is going to solve for a larger estate value projection at your age. In other words, the estate value is the trigger. No, that's not the right goal. And their software points you in the wrong direction. You want a larger tax adjusted estate, you want a larger estate after tax, not just a larger estate. I mean, if you only look for larger, you might include assets that are still taxable to your heirs. And that gives a really faulty conclusion. Another statement that I've seen in FAQs for this same company is that annual conversions, they state that if you use our software to do annual Roth conversions, they will not exceed your plan's average effective tax rate. Well, that's also totally contrary to what we see proven incorrect. Every single day of the week you have to get to higher tax rates than you currently are in in order to reduce your balances. And the overwhelming majority of the time, if you are what I call the consummate IRA millionaires. So, and then they talk about if you don't have enough funds in after tax accounts to cover the tax liability, that you don't want to do conversions. Well, so that means nobody can convert unless they have a lot of after tax assets. And most of our clients are people maybe like you, who saved pretty exclusively within a 401k most of your life. Another statement that they make, and I'm just kind of going through these because these are not, they're not new to this one company. It's just what I see in all the software that's out there is all these limitations and all these paradigms that they set in place that serve a developer well in creating an easy tool that somebody can use, but they don't create an optimal outcome. So they also, they also have written into their FAQ that they'll use recently converted funds to pay taxes first, which is really a bad idea. Once you pay taxes, that becomes like gold in the bank that you don't want to spend for as long as you possibly could. And then they also, they don't, they're not, they're not dynamic in the tax rates, meaning they don't include what's already written into the tax code about the Tax Cut Job act that sunsets and goes away at the beginning of 2026. Right. So, you know, there's just a lot of things that are wrong with most of the software. And I would just warn you about using commercially available calculators and do it yourself widgets because they, I mean, that's the reason I've invested hundreds of thousands of dollars in software is to be able to make sure that we come to the right conclusion. You just have to be careful when you're looking at some of these tools. And that's really my message is when you're looking at these tools, you have to read the fine print and you have to be savvy enough to understand why those really are the wrong set of constraints that you're really looking at. So let me review kind of the objectives for you so you can properly evaluate what your opportunity for a big tax saving is through conversions. Number one, remember I said you have to define a successful conver Roth conversion and that means you avoid the most tax possible and you maximize your potential net worth. One of the things that I probably need to create its own podcast on is this whole concept of the time value of money. That 90% of that is really just, it's an exercise that doesn't, it really holds no water and yet it sounds like it's totally logical. And there is a part of that conversation that needs to take place and we generate some of those present value numbers and tax adjusted numbers for people. But there's a lot of that that really is overblown. But if you can also, in this successful Roth conversion, if you can also save Medicare premiums, and that's also kind of a bonus win. So the big picture on how all that's accomplished, remember, is that you dramatically reduce or totally eliminate your future required minimum distributions. And in order to do that, you, you have to work on getting those pre tax accounts as low as possible, even down to zero. So you, you have to find that optimal plan and anything short of it is really just an exercise and you've missed the mark and you maybe are going to be leaving a lot of money on the table. And you never really knew it because you didn't. Nobody ever really showed you the math behind what was possible. So there are a lot of alternatives, there are a lot of options that are available. I just wanted to real quickly just kind of shed some light on the challenges with some of those. If you can find somebody that specializes in it, and I don't mean just marketing, but they can prove to you that they're doing the math on each of the different scenarios and they're. And it's what they do. I don't, I mean we obviously don't sell products and don't manage investment assets. And that's just out of my own decision that I didn't want to. Any potential conflict of interest to come into your mind of why would I be not recommending something or recommending something. And you can find somebody that you trust that can demonstrate that they're, that they're doing the math and they can prove to you what your savings is going to be or not be under a variety of scenarios, then go for it. But I will leave you with this. In order to get the Roth conversions right as just another restatement, you simply have to convert more than you think, faster than you think, and at a higher tax bracket than you're probably comfortable with before you get to see what the real numbers are on your own scenario. So you know what's next after you've accumulated a large amount of pre tax assets is figuring the most tax efficient way to distribute those over your lifetime. What happens next when you get ready to retire is you have to develop an income distribution plan that uses your assets as they have been developed. And of course, if you're still several years away from retirement and you're still saving money, then there's a totally different strategy that goes into doing the conversion. So what's next for you is a different conversation. So I hope this has been helpful. Keep in touch with the podcast schedule. If this kind of information is sometimes interesting to you and you like kind of something a little bit lighter hearted and more application focused, then subscribe to the podcast and you'll be notified when we push another one out there. And love to have you join the ranks of what we're doing. Check out our website@craigweir.com there's lots of free resources and things that you can kind of plug into at C R A I G w e a r.com and remember that helpful little handout that I've created for you will be attached to the show notes on this show. Thanks for taking your time with me today. Enjoyed it. And I'll join you on the next podcast.

Investment Advisory services offered through Q3 Advisors. This presentation is for educational and informational purposes only and is not intended to be independent, individualize financial tax or investment advice.